Criteria & Considerations Sought in a SBA backed Business Acquisition Loan

Dec 27, 2017

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Lisa Forrest of Live Oak Bank (

Criteria & Considerations Sought in a SBA backed Business Acquisition Loan

Middle market business buyers are faced with many considerations when preparing to buy a business. The Small Business Administration (SBA) guarantees bank loans to small businesses that meet the SBA’s criteria. These criteria vary by industry, but are notably more lenient than a bank’s typical loan standards. Terms are generous, up to 10 years for a business loan with no prepayment penalty.

As a lender who specializes in SBA loan programs to finance mergers and acquisitions, we want to help you prepare for your next business acquisition. The following six elements outline considerations and criteria lenders review in any acquisition deal.

Stable or Positive Trend

Lenders like to see positive or stable trends when examining a business’s financials. Positive trends, while generally a good sign, also require additional diligence to support that any recent growth, or margin improvement is sustainable.  It can also be challenging to value very recent improvement in EBITDA.  Underwriting is based, to a large extent, on historic cash flow analysis and historic debt service coverage. So, stability in trends are generally the easiest for a lender to have confidence in.  Additionally, revenue concentrations must be analyzed to ensure sustainability risks are fully considered and that the deal structure helps mitigate any large customer concentrations.  Revenues concentrations in certain industries, such as ties to cyclical industries like new construction, should also be fully analyzed.  A decrease in revenue is a red flag. If the business you are looking to purchase has negative trends, be sure you can identify the problems and include ways to increase value in your business plan.  Most lenders will want to stabilize, if not reverse, a negative trend before lending.

Business Plan

Buyers are required to provide the bank a basic business and transition plan for the business they are acquiring. Lenders want to see that the buyer/operator has a clear understanding of the business and industry. Plan to include ways to improve the existing business where you see fit. Details about the key transition risks, such as customer and employee retention, or any planned software system upgrades should be discussed.  It is also important to include an analysis of the downside risks to the business and how these risks might impact EBITDA.  Each business and industry has different key downside risks, and addressing these thoughtfully will demonstrate a very important operator skill to the lender.  Consideration should be given to the planned velocity of change implementation.  Lenders will be leery of a plan that may appear to change too many things, too fast.

Key Employees

When purchasing a business, remember the reputation of the company can be considered an intangible asset. The staff and community relationships play an important role in the success of the business. Secure commitments from existing managers and other key staff members. Lenders like to see key employees stay on with the new owner as it diminishes risk and makes the transition easier for customers in some cases. It is also critical to understand which employees are critical to customer retention and to consider appropriate incentives.

Seller Transition Period

Fully understanding the roles and responsibilities of the seller is critical to creating a successful transition plan. As the new owner, how are your skills going to augment the loss of the seller and/or is any replacement salary needed to back-fill critical seller duties.  Lenders want to see that the seller will make themselves available for a reasonable period of time to train and assist the new operator. The transition and training period can be anywhere from one to twelve months, depending on circumstances. Work with the seller to negotiate the training and transition up front and clearly define them in the purchase agreement.  The Small Business Administration (SBA) rules require sellers to get out of any key role after 12 months and not roll over any of their equity.

Seller Financing

When a seller finances even a small portion of the deal, it shows the lender that the seller is confident in the new owner’s abilities and leadership. The terms of the seller carry note are negotiated between the buyer and seller; however, you’ll want to involve your Lender in the discussion early-on to ensure payment terms meet debt service and cashflow coverage ratios. The seller note can also be used to protect the buyer from material misrepresentations, or even key risks such as customer retention through carefully written claw-back clauses.  Robust and carefully structured seller financing can often make the difference in overcoming critical risk factors with the lender.

Working Capital

Experienced M&A Lenders will analyze the operational and transitional working capital needs of the company.  Reviewing monthly P&Ls and balance sheets over a two to three-year period, including Year-to-Date is extremely important. The deal negotiations should consider how much net-working capital may be included in the purchase and/or how much working capital needs to be provided in the loan structure.  If there is any seasonality in company operations, that will need to be factored into the working capital analysis and potentially deal structure/price.   If seasonality exists, the closing timing should be considered to ensure the optimum working capital is available at funding.  Lenders will want the buyer to be able to articulate a clear understanding of the need for, type of (term or seasonal line, or in some cases, both), and amount of working capital needed for a successful transition and for go forward operations.

Lisa Forrest is a senior loan officer in the M&A lending division at Live Oak Bank with multiple decades of experience financing business acquisitions in the Pacific Northwest.  Ms. Forrest can be contacted for additional information about this article or the lending services offered by Live Oak Bank (425) 999-2042 or


IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.