Correct Pricing & Appraisals:  During the application process, the lender will order a real property appraisal AND a business appraisal.  Both have to appraise to the contract price.  A shortfall in either will lead to a 'Loan Request Declined' unless Seller reduces the price accordingly. Proper pricing from the 'get go' is a must.

Debt Servicing & Cash Flow:  The business has to generate enoughcash flow to service the debt on the loan and provide buyer an income.  Cash flow is loosely defined what the business generates after all expenses are paid, including buyer salary.  

Relevant Experience:   Buyer needs to have either direct industry experience or transferable business skills, very little debt, good credit score and at least 15% in cash as a down payment. 

Sellers often focus on the buyer's ability to obtain a loan, as most people's reference point is purchasing residential real estate.  In a business acquisition loan, the burden lies actually slightly heavier on the business as the bank underwriter analyses both the business and the buyer.  Neither party independently influences the loan decision more than the other, it's the marriage of the buyer and the business that makes or breaks a loan.  The business financials are weighted heavily and even a strong buyer can't make up for serious weakness in the business and vice versa.

How to maximize your chances of obtaining financing

If you're a seller:

• Check the math regarding your asking price:  does the business generate enough cash flow (profit after buyer salary) to pay the mortgage on that amount?  Understand that the lender looks to the business as the main source of loan repayment.  If the business doesn't generate enough to cover it's own debt service, you need to find a buyer who has a secondary source of income (a couple where the other person will keep their outside job AFTER closing) to make up the shortfall.
• Clean up your financials so the lender can easily see how much money is left over after all expenses are paid.  Remove all 'personal expense' to show true profits.  Have a certified business broker or CPA help you with this.
• Have justification for your asking price.  How did you arrive at the real estate and business value; will they appraise at that amount?  Educate yourself as to how the property and business will be appraised to avoid disappointments later and the loss of a buyer.
• Have complete financials for the business for the past 3 years.  These include Profit and Loss Statements, Balance Sheets and Tax Returns.
• Be prepared to participate in financing to some degree with a Seller Note (see below).

If you're a buyer (without a bankruptcy or criminal background): 

• Determine how much you can afford to buy.  You will need 15% - 20% as a downpayment and it must be in 'liquid funds', ie. cash.  If you have $100,000 in cash, it qualifies you to purchase up to $670,000 ($100,000 / 15%).  Knowing your price range is an important point when starting to search and when applying for a loan. Retirement funds can be used as a downpayment and there is a way to access your 401K without incurring penalties and taxes; visit www.guidantfinancial.com for more information on Self Directed IRAs (SDIRA).  
• If you don't have direct, working experience in this industry, go get some.  Volunteer at a facility or a shelter, attend conferences, obtain a mentor.  The more you know, the more likely you'll obtain a loan and be successful in your new career.  Lenders want to know that you have necessary business skills and experience to operate the facility. 
• Get your credit report and clean up anything that is derogatory.
• Pay off all credit cards to have minimal debt at time of application.
• Prepare a business plan with 3 years worth of projections for the facility you're trying to buy.  Have a business consultant or SCORE counselor review your projections; it's better for them to catch any potential problems than the underwriter.
• Be prepared to provide tax returns and bank statements.

 

If you're looking to start your own facility (instead of purchasing one):

Very few banks are lending money to start-ups at this time, so your first step is to locate a bank that is willing to look at your project.  If you do find one, we highly recommend working with a business consultant or SCORE counselor (www.score.org) in creating a solid business plan with projections, including a 'worst case scenario' calculation.  Be prepared to finance the majority of the project with personal funds and with money from friends and family. 

Other forms of financing:

Conventional Commercial Loan (no SBA guarantee):

At times, if no business goodwill is being financed, a kennel property can be financed with a conventional commercial loan from your local bank.  These loans still look to the business cash flow as first source of debt re-payment, the buyer down payment is upwards from 25% to 30%, little less paperwork and quicker closing. 

Seller Financing:

More often than not, a seller will need to participate in financing to get a facility sold in today's market.  Even in the best of circumstances, when a buyer is able to secure an SBA guaranteed loan, most lenders will require the seller to finance a portion of the deal, up to 10% to 15%.   The lender understands that if the buyer gets into trouble, the seller is the best person to help them out and if they have 'skin in the game', they'll be more likely to assist.  Another consideration is that since our industry is largely a service based industry, one never knows what impact the seller leaving will have on the business, making it a higher risk transaction. 

We have all heard those horror stories of how a buyer 'ran the business into the ground in 6 months' and the seller never received their money.  Unfortunately most of the time those stories are just that, stories.  When properly structured and with attorney drafted security agreements in place, the risk can be mitigated.  Seller financing is risky, but so is buying an animal care facility (or any other small business for that matter) and if both parties do their due diligence, it can be a win-win all the way around.   The bottom line is that for a seller to successfully sell in today's market, seller financing will most likely be part of the transaction.  The stronger the business, the less a seller will be asked to participate; the weaker the business, the more the seller will be asked to finance and share in the risk.  Seller financing can have tax benefits, so discuss the option with your CPA.

Banks are financing 'solid deals' where the business has a strong historical cash flow, appraisals support the contract price and buyer is professionally and financially capable of operating the business.