Podcast: Download (Duration: 7:34 — 10.7MB)
In this episode, we delve into the intricate world of cash flow and add-backs, crucial components in the realm of business acquisition, especially when navigating the complexities of Small Business Administration (SBA) financing. Business owners adept at minimizing tax consequences often find themselves facing challenges in securing SBA loans due to reported cash flows falling short. However, with the right expertise, these hurdles can be overcome, unlocking opportunities for successful business acquisitions.
Real-Life Scenario: Laundromat Acquisition
To illustrate the significance of add-backs, let's consider a real-life scenario involving a laundromat acquisition. The owner, aiming to sell the business at top dollar, faces a common dilemma—reported numbers on paper do not align with SBA loan requirements. The solution lies in identifying and documenting add-backs. These could range from personal expenses, such as running personal vehicles through the business or paying family members a salary, to non-essential costs that won't be incurred by the new owner post-acquisition.
Collaboration and Documentation
Achieving success in these scenarios often requires collaboration with the seller and their CPA to meticulously document add-backs. Despite the extra effort involved, experienced teams can navigate this process efficiently, ensuring the necessary documentation is in place to meet SBA loan underwriting requirements. This collaborative approach sets the stage for closing deals that some banks might otherwise flat-out turn down.
Investor Financing Podcast Insights
Host Beau Eckstein, in his Investor Financing Podcast, emphasizes the critical role annual cash flow plays in the acquisition landscape. He sheds light on the multifaceted aspects of the SBA loan underwriting process, emphasizing the importance of a third-party evaluation, a key step in securing SBA financing for business acquisitions.
Understanding Annual Cash Flow
Annual cash flow, a linchpin in business acquisition discussions, directly influences the asking price and profitability of a business. Both lenders and prospective buyers scrutinize this figure to ensure it covers lender repayments, leaving sufficient funds for sustainable business operations. Eckstein encourages prospective business owners to explore franchise ownership through resources like franuniversity.com, offering free training programs on all aspects of franchise ownership.
Financial Ad-Backs: Unveiling True Cash Flow Potential
The evaluation process involves considering various financial add-backs, including owner's annual salary, net income, pension contributions, health insurance premiums, amortization, depreciation, and specific business expenses like rent or mortgage payments. These add-backs provide a clearer picture of a business's true cash flow potential, but it is imperative to work with professionals during this process to ensure accuracy.
Historical Trends and the SBA Underwriting Process
In addition to add-backs, historical trends in annual cash flows play a pivotal role in SBA loan underwriting. Lenders and buyers closely analyze whether cash flow remains steady, decreases, or increases over time. These trends, combined with approximately 31 buyer-seller factors, contribute to determining the creditworthiness of a deal.
Conclusion: Navigating the SBA Underwriting Process
In summary, mastering cash flow and add-backs is integral to unlocking SBA financing opportunities in the business acquisition landscape. This episode serves as a guide for prospective business owners, emphasizing the need for a discerning eye in evaluating Main Street businesses with unsophisticated bookkeeping practices. By understanding add-backs, historical trends, and collaborating with experienced teams, investors can navigate the SBA underwriting process successfully and secure financing for their business acquisitions.
For more insights on SBA and commercial financing, book a call below and stay tuned for the next episode of the Investor Financing Podcast.