Buy A Business With Bank Financing – What You Need To Know

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There are a number of factors to consider when you buy a business with bank financing. What do you need to bring to the Bank? Please note, each financial institution will have its own specific requirements and may weigh the requirements noted below differently.  

Do you have available capital to buy a business?

Financial institutions typically do not finance 100% of the sale price. On average, banks will finance +/-80% of the sales price. The down payment or unfinanced portion of the sale price can not deplete the borrowers capital. If it does, the borrower will appear risky to the lender. The borrower also needs to have three (3) to six (6) months operating expenses on hand in addition to the down payment. Depending on the sale price, this may be a significant dollar amount. If you do not personally have the cash on hand, you might explore taking on a(n) investor(s) for the capital needed to put down. This article will not discuss investors any further and will not be considered in any of the other factors. 

Do I need a business plan to buy a business?

A borrower will need to present a business plan to the bank. The SEED Corporation business plan booklet is a good rule of thumb, but your potential lender may have a preferred tool. Check with your lender first. The business plan will need to include summaries and descriptions of the following…

• What are you buying? Provide the history of the business with an outline of products and services.
• Where is the business located? Is there foot traffic? Parking for customers. This is more crucial for the existence of a retail or food business but needs to be considered.  
• What is the borrower’s business experience? Have they owned or do they currently own a business? If so, discuss their experience, business wins/losses, etc. 
• If the borrower does not have prior business ownership, you want to highlight the borrowers prior management experience and how they will relate to owning a business. 
• Who will run or manage the day to day tasks? Who will do what tasks?
• Will the prior owner stay on for a transition period? If so, how long will that transition last & what will the prior owners roll be during that transition? 
• What is the state of the existing business? What are the borrower/new owners plans for the business? Does it include an expansion? Addition of products or services? You will need to go into detail about what your plans are, financial and nonfinancial for the expansion or changes in the business plan.

What kind of financial statements do I need?

The business plan will also include historical financial statements and projected financial statements that include the new owners assumptions about potential expansion plans. You may find yourself in a situation where historical financial statements are not available. A seller may request that you have a letter of intent and offer placed before the historical information can be made available. A letter of intent is comparable to a pre-approval for a mortgage. For example – A residential real estate broker may not want to show you a home if they do not have indicated that you can get approved for a mortgage. The same can be said for a business. Sellers want to know you are serious about the purchase. If this is the case, alert your potential lender prior to commencing the loan process. You will get a chance to review the historical financial information during the diligence process. 

The projections will include assumptions of what you expect revenue and expenses to be over the period. If you are planning to expand, change or grow the business, the projections are where you outline the financial information to support your plans that have been outlined in the summary sections of the business plan. The bank will also want to see an anticipated balance sheet on day one (1) when you as the new owner take over. 

What goes into the decision making process?

The underwriters at your financial institution will take your business plan with financial projections and capital contribution into consideration along with the following…

• Does the business have good cash flow potential? 
• Does the borrower have history with large loans?
• What is the borrower’s credit history? How personally leveraged is the borrower?
• Does the borrower have collateral available?
• What is the character of the borrower?

Each individual lender will weigh the strengths and weaknesses of the borrower based on their internal guidelines. The information referenced here is not all inclusive, but a great starting point for a conversation with the lender. 

If you have questions about what you need to buy a business with bank financing or creating a business plan, reach out to your accountant, CPA or trusted business advisor. They can help you with developing a business plan and financial projections.

Learn more or share your stories with me at bodhi@bodhibusinessadvisors.com or on LinkedIn.