One major change Sinclair has seen recently is that several banks have lowered their minimum deal size from $500,000 to around $350,000. This is great news for individual buyers as they now have another option where none existed before.
Once the deal size starts to increase, the percentages and amounts that banks will contribute increases commensurately. The most common form of bank financing to individual business buyers has been from those institutions participating in the Small Business Administration’s 7(a) loan program. Under the SBA umbrella, the government guarantees a percentage of the loan that a bank will make. There is very specific criteria regarding the SBA 7(a) program eligibility and collateral guidelines, and while the government essentially guarantees part of the loan, the banks must be in compliance and the buyers must meet other specific guidelines.
John Martinka, of Martinka Consulting, a Washington state mid-market mergers and acquisitions firm, was involved in a deal recently representing the buyer in the purchase of a Washington-based fabrication business. In that deal, “a competing buyer to his client could not get approved for financing and the suspicion is he would not personally guarantee the loan or put up his house” as collateral.” Martinka also explained that “relevant business experience, meaning some management experience by the buyer is a requirement.”Martinka is typically involved in deals under $10.0 million and regardless of the percentage of bank financing, he notes that a portion of all of the deals include some participation by the seller in the financing. In other words, the banks want to see the seller absorbing some of the risk as well.
While banks may be softening their stance regarding deal size, buyers cannot escape having to be qualified financially and experience-wise, and must be willing to personally guarantee the loan. This is also the case with seller-based financing although in these instances, while personal guarantees are required, the assets of the business, rather than personal ones, are usually pledged by the buyer. Similarly, when selling a business, the owners need to realize that they are going to have to participate in the financing to some extent. The smaller the deal; the more they have to fund it. While every seller would obviously would prefer an all-cash deal, those deal terms are not common. No matter how badly the parties want to do a deal, both sides need to keep an open mind regarding the financing terms because nothing gets done without funding.