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How Can Business Sellers Pre-Qualify their Business for an SBA Loan (or Lender)?

Business owners who are planning their exit can apply to get their business listing “pre-qualified” for an SBA loan. If approved, the pre-qualification gives them a significant advantage when marketing their business to buyers who will need the financing.

It is common practice for business brokers to create lender relationships and to seek pre-qualifications from lenders for new business for sale listings. Pre-qualifying listings aids them in attracting buyers that need the financing to complete the acquisition, and to set expectations with sellers. It also helps the broker address any potential issues with the business that need to be addressed or important questions a lender may have before putting the company on the market.

Business owners who do not engage a broker to assist with the sale can approach an SBA Preferred lender to do the pre-qualification. The seller should be adequately prepared with financials and engage their CPA to be sure everything is in order.

Documentation Required to Pre-qualify a Listing:

To speed up your pre-qualification, I recommend having the following documents ready to send to the lender.:

The last 3 years of business Federal tax returns.
A year-to-date Profit and loss (P&L) and Balance Sheet, and Accounts Receivable (A/R) and Accounts Payable (A/P) aging reports if applicable.
The Broker’s Offering Memorandum which should include the asking price and what’s included in the sale.
A Seller’s Discretionary Earnings (SDE) calculation for the last three years and interim. The SDE should identify all addbacks the lender should consider with explanations for nonstandard addbacks outside of seller’s compensation, depreciation, amortization, and interest expense. i.e., non-recurring expenses, family wages for family members that do not need to be replaced, etc.
Any customer concentration details, if applicable.

What to expect from the Lender:

After a lender receives all the documents necessary to prequalify a listing, they will provide a one-page pre-qual letter.

Timing varies from lender to lender, but most lenders can turn a prequal within forty-eight hours from receipt of the documentation listed above.

It is important to note that the letter will have a disclosure that it is not a formal approval or commitment to lend.

There are a few adjustments to consider after a buyer is secured:

The owner’s draw that is needed for the buyer.
An adjustment to salaries if the buyer needs to hire someone to replace an owner.
An adjustment to rent expense if the rent will increase post sale.

Tips for a successful pre-qualification:

Submit an organized package with clearly labeled files.
Respond timely to all questions asked by the lender and provide additional documentation if requested by the lender.
Be prepared to explain all non-standard addbacks utilized in the Seller’s Discretionary Earnings (SDE) calculation and identify where those expenses were recorded within the seller’s Federal tax returns and year to date profit & loss statement.
Full transparency is key to a successful pre-qualification process.

Steps with the lender after a buyer is identified:

Typically, the broker or business owner will make an introduction between the buyer and the lender.
If a Letter of Intent (LOI) has been drafted, the broker or the buyer will provide a copy of the LOI to the lender.
The lender will connect with the buyer to discuss their interest in the business and will ask qualifying questions regarding their experience, credit history, down payment ability, etc.
The lender will request documentation from the buyer needed to pre-qualify them as the buyer/borrower.
If the lender confirms they can offer financing, they will issue a proposal letter for the buyer’s review and acceptance. Upon executing the proposal letter, the buyer will work with the lender to complete the credit file and the loan request will be submitted to underwriting.
Upon approval a commitment letter will be issued to the buyer.

Getting a business listing pre-qualified for an SBA loan gives the business owner an edge when marketing and negotiating sale terms and is part of a sound exit strategy.