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If you're considering purchasing a laundromat with SBA 7a financing, you're on the right track to becoming a business owner. However, as highlighted in a recent video transcript, there can be significant challenges to overcome. In this blog post, we'll break down the key points from the discussion and provide insights on how to tackle these challenges effectively.
The Challenge of Personal Expenses in Business
Jack, the prospective laundromat buyer, faces a common hurdle in the purchase process. The seller has been running personal expenses through the business, making it challenging to calculate the Debt Service Coverage Ratio (DSCR). This ratio is a critical factor in SBA 7a financing, as it determines your ability to service the loan.
Ad Backs: Uncovering Hidden Cash Flow
To address this issue, experts like Beau Eckstein recommend identifying and documenting ad backs. Ad backs are adjustments made to the cash flow to exclude non-business-related expenses. For instance, car payments that are not essential for the business can be backed out, improving the DSCR. Ad backs can help you present a more accurate picture of the business's financial health.
The Importance of Working with the Right Bank
One of the key takeaways from the discussion is the significance of choosing the right bank and banker for your SBA financing. Not all banks interpret SBA guidelines the same way, and some may be more flexible in accommodating ad backs. Seek out banks with an appetite for deals and aggressive bankers who are motivated to close transactions.
Navigating the Gray Areas in SBA Guidelines
SBA guidelines, while providing a framework, often have gray areas that require interpretation. Different underwriters may have varying perspectives on how to handle specific situations. It's essential to work closely with your banker and potentially even your seller's CPA to find mutually acceptable documentation and solutions.
Persistence Pays Off
In challenging cases like the one Jack is facing, persistence is key. Beau shares that he had to explore multiple banks before finding one that could facilitate the deal. Don't be discouraged if your first bank can't meet your needs; keep searching for the right fit.
Leveraging Bank Expertise
Banks specializing in specific verticals, such as franchise businesses or financial planning practices, can be invaluable partners in your journey. They have experts who understand the nuances of these industries, making them more likely to accommodate ad backs and unique situations.
Understanding the Financial Details
To succeed in buying a laundromat or a similar business, you must be a detective of sorts. Understand the financial intricacies, including cost of goods sold and other expenses. With a deep understanding of the business, you can effectively negotiate and present your case to the bank.
Building the Right Team
Lastly, Beau emphasizes the importance of assembling the right team. Surround yourself with experts who can help you navigate the complexities of SBA financing. This team might include bankers, CPAs, and financial advisors who specialize in your industry.
In conclusion, buying a laundromat with SBA 7a financing is a feasible goal, even when facing challenges like ad backs and personal expenses within the business. The key is to be persistent, work with the right team, and leverage the expertise of banks that understand your industry. With determination and the right support, you can turn your dream of owning a laundromat into a successful reality.