Buying a Business
Data Generally Needed For Lenders

  1. Purchase agreement including a breakdown of assets that will be acquired from the seller. Must show dollar amount of fixed assets, inventory, goodwill, etc. Any amount included for "goodwill" must be justified by a business valuation. Suggestions: Include clause adjusting purchase price to actual accounts receivable or inventory as of day of closing and include clause stating that agreement is contingent upon loan approval. 
  2. Provide written explanation from seller stating reason for sale 
  3. Seller's current balance sheet and income statement with agings of accounts receivable and payable within 60 days 
  4. Seller's schedule of notes and other loans as of same date as interim statement. Provide copy of any note or debt to be assumed (if applicable)
  5. Seller's balance sheet and income statement for the past three years
  6. If the business is a corporation or partnership, copy of complete corporate or partnership income tax return for the past three years. If the business is a proprietorship, copy of the complete individual income tax return for the past three years. The tax returns will be verified with IRS. If the purchase is a stock purchase, seller must be able to reconcile capital/retained earnings in prior years and interim period on the financials statements and tax returns 
  7. List of fixed assets and list of inventory to be acquired from seller 
  8. Amount of loan to be requested and breakdown of how it will be spent
  9. Personal financial statement and cash flow within 60 days for all owners of 20% or more and guarantors. Include cash or assets to be invested or offered as collateral.
  10. Copy of complete individual tax return for the past three years for all owners of 20% or more and guarantors
  11. Satisfactory credit of purchaser. Provide written explanation of derogatory items
  12. Resume: Emphasize experience in seller's field or experience of present management or staff 
  13. Income and expense projection for three years: monthly for the first twelve months after loan is approved and then annually for second and third years. Define assumptions and plans for adding value to the business
  14. A breakdown of what you will be investing in this business and/ or offering as collateral. Source of funds must be verifiable
  15. History of seller's business 
  16. Business plan showing how purchaser will improve or expand the business
  17. Conduct a competitive analysis of the markets in which this business competes, including products, prices, promotions, advertising, distribution, quality, service. Indicate that you are aware of the outside influences that affect this business and have performed due diligence and and/or a feasibility study
  18. Copy of seller's lease, including options, for the term of the loan if lease is to be assumed 
  19. Fill out lender's application forms completely

    Greatest Problems

    1. Investment - Generally the amount of equity injection will depend on the industry risk and the lender's policy. Some types of business require a higher investment, i.e., restaurants ( high build out cost and failure rate and service business ( low collateral).

    2. Collateral - Dollar amount of collateral on a liquidation basis should be equal to or greater than the amount of the loan. The business owner may pledge personal assets as collateral, i.e., CD's, stocks, real estate, note receivable. Homestead or retirement accounts cannot be pledged.

    3. Repayment Ability - Cash flow analysis by month must show ability to repay the loan at the initial interest rate and at higher rates (most loans are floating rate). Living expenses must be covered in the repayment plan. Debt coverage ratio must equal or exceed 1.25 (monthly net income depreciation divided by loan payment).

    4. Management Ability - Business owner must show the ability to operate the business profitability.

    5. Credit - Purchaser must have satisfactory credit.

    6. Insufficient capital - The business purchaser overestimates income or underestimates operating expenses and the business fails for lack of operating cash flow.

    7. Support for assumptions used in projections