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When selling a small business, securing financing is often one of the biggest challenges for potential buyers.

When selling a small business, securing financing is often one of the biggest challenges for potential buyers. Many small business buyers turn to the Small Business Administration (SBA) loan programs to obtain the funding needed to purchase an existing business. As a small business owner preparing to sell your company, it pays to understand what you and buyers will face when seeking an SBA-backed loan. Follow these key steps to position your business for a smooth ownership transfer by leveraging SBA buyer financing:

Clean Up Financial Records

One of the first things any potential buyer and SBA lender will want to review is your business's financial statements from the past 3-5 years. This includes profit and loss statements, balance sheets, tax returns, accounts receivable/payable, and other documentation that provides insight into the company's financial health and performance. 

Take time to organize financial records and ensure they are complete and accurate. Correct any accounting errors or discrepancies. Consider having your financial statements audited or reviewed by an independent accountant for large transactions. The cleaner the records, the better the chances of quickly securing SBA loan approval.

Value the Business

Lenders will require a valuation of the business based on its assets, earnings, cash flow, and liabilities. Be prepared to provide all necessary documentation to establish an accurate fair market value.

A business broker can provide a “Broker Opinion of Value” which will help align the list price with a formal appraisal during the loan underwriting process.  Buyers and lenders will have confidence that the sale price reflects true market value, which is necessary for SBA loan approval.

Assess Seller Financing Options 

Some buyers may request that the seller provide partial financing for the purchase. This is common with SBA loans, which require a minimum down payment from the buyer. As a seller, consider whether you are willing and able to accept a promissory note for a portion of the sale price. 

If so, work with your accountant and advisor to structure the terms. Be clear on the percentage you are willing to finance, expected interest rate the payment schedule, and the collateral required. Specifying acceptable seller financing terms upfront can help facilitate the deal.

Clean Up Balance Sheet 

An SBA loan application requires a prospective buyer to submit a projected forecast of revenue, expenses, and purchased vehicles and equipment. The buyer's projections must demonstrate the business's financial health and their ability to repay the loan. 

As the current owner, you can help set up the buyer for SBA loan approval by "cleaning up" the company's balance sheet. Eliminate unessential assets, pay down debts and liabilities, correct overstated inventory or accounts receivable, and shore up operating capital prior to sale. This improves the outlook for the business under new ownership.

Allow Time for Due Diligence

The SBA loan process involves extensive due diligence by the lender and buyer to minimize risk before approving the substantial financing amount. As the seller, be prepared to provide the buyer and financing partners access to payroll records, facilities, books, records, and anything else requested that can impact the transaction. 

Cooperating with due diligence requests and allowing sufficient time for the process to play out (currently approximately 60 days) will help avoid derailment of the sale.

Getting a new small business owner qualified for SBA financing takes substantial preparation by both the buyer and seller. As a seller, follow these key steps well in advance of listing your business for sale. This will help clear the path to a smooth ownership transfer using SBA loan programs. With proper planning, you can leverage SBA buyer financing to tap into the largest pool of qualified buyers for your small business.