What Metrics Do Banks Look at for SBA Financing?

Many people who are starting or expanding their CPA businesses through the purchase of an existing accounting practice utilize programs of the U.S. Small Business Administration for financing. Under these programs, regular banks make and service the loans, but a portion of the loan is guaranteed by the SBA.

If you haven’t applied for an SBA loan before, you’re probably wondering what banks look for when underwriting an SBA loan for the purchase of a CPA firm.

The Basics

Good credit is absolutely essential for securing an SBA loan. It is a good idea to check your credit reports well in advance of applying for a loan. Credit reports often contain erroneous information, and it can take time to get them cleared up. The time to fix credit report problems is now, not during the loan underwriting process.

The bank will expect you to have least 10 percent of the total projected costs of the acquisition. The total projected costs include sales price, working capital, SBA fees, loan package fees and closing costs as a down payment, and adequate cash flow to cover debt service as well as your living expenses and personal financial obligations. Some lenders will allow a purchaser to borrow working capital and others will not.

Debt Coverage Ratio

Lenders use the debt coverage ratio to determine the amount and term of a loan that you can qualify for in the purchase and sale of an accounting practice. The debt coverage ratio demonstrates the adequacy of the cash flow from the acquired CPA practice to cover the borrower’s personal expenses and the debt service on the new loan.

The ratio is calculated as follows:

  • Discretionary cash flow of the acquired practice (based on the prior year results). This includes all revenues and expenses of the practice but does not include any salary to or draws by the borrower.
  • Less: Salary requirements of borrower, including existing debt obligations (house payments, car payments, etc.) and a reasonable amount for living expenses. A working spouse’s income can be factored to favorably impact the calculation.
  • The amount calculated in 1 and 2 above is divided by the annual debt service payments (principal plus interest) to calculate the ratio, expressed as a percentage.

Requirements vary by lender, and they tend to fluctuate with the economy. As a general rule, the higher the debt coverage ratio, the better the chances of underwriting approval.

Equity Injection

Under current SBA standard protocol, only 75% of the purchase price can be financed from the SBA loan proceeds. The remaining 25% is called the “equity injection”. The 15% of the equity injection that is not covered by the buyer’s down payment can often be covered by a seller-carried note that is subordinate to the SBA loan. Many lenders believe that a seller-carried note leaves the seller with some “skin in the game” and helps insure the full cooperation and performance of the seller during the transition period. There are a number of other SBA requirements regarding the structure and performance of seller-carried notes. Our knowledgeable CPA practice brokers will be happy to help explain these additional requirements.

Other Provisions

One requirement of an SBA loan is that the borrower, and the borrower’s spouse in most instances, must personally guarantee the loan for the purchase of an accounting firm. If the underlying business fails, and the borrower defaults on the loan, the bank can look to the buyer’s personal assets to satisfy the loan. When a lender is unwilling to provide working capital for a particular deal, the buyer must have sufficient working capital or outside resources for the firm to survive through the seasonality of the business cycle, changes is the timing of customer payments, and other minor “bumps” in the road. Often, depending on a number of factors, the bank is willing to include a certain amount working capital in the overall loan to leave the buyer with an adequate cash cushion after closing.

Our Lenders

Deals for the purchase and sale of CPA practices can vary widely. And some banks – especially those that have limited or non-existent experience with sales of CPA firms — often have strange quirks and lending criteria. Many banks will say they offer SBA financing, when in fact, they rarely, if ever, make SBA loans to finance the purchase of professional practices such as CPA practices. They are used to doing deals that are heavily collateralized by real estate, inventory, equipment and accounts receivable. The value of an acquired CPA firm is primarily intangible, and represents the value of projected FUTURE cash flows of the practice. Too often, a bank with little or no experience in the financing of professional practice sales ends up getting cold feet when the local underwriter sees that there is little “hard asset” collateral in a CPA practice. You may have a strong relationship with your local banker, and may have received great rates and terms on home mortgages, car purchases, and even line-of-credit financing. But before you put your trust in your local banker or bank to handle the financing of what might be the largest loan you ever do, be sure that they have significant experience in SBA loans for professional practice acquisitions in general and CPA practices in particular. We have seen many deals delayed, or ultimately lost because of problems caused by local bank lenders unfamiliar with CPA practice acquisition loans.

Also, it is important that your lender is in the SBA Preferred Lender Program (PLP). Under this program, the SBA delegates the final credit decision to carefully selected “Preferred Lenders.” This results in a much faster loan approval, underwriting, and loan closing process.

At Accounting Broker Acquisition Group, we know the right lenders to approach if you are considering the purchase or sale of an accounting practice. Our lenders are PLP qualified. They are intimately familiar with CPA firm sales and aren’t squeamish about doing SBA deals. In fact, several banks have actually established CPA firm SBA lending programs specifically for buyers of firms sold through us.

How do we have so much pull with bankers? Because we have serious financial expertise, and we have a proven track record of brokering successful deals. Accounting Broker Acquisition Group is the only national business brokerage of its type comprised 100-percent of brokers who are CPAs with significant “Big Four” merger and acquisition experience. For highly profitable practices, we are the only firm to call . . . because no other business broker has the expertise, analytical skills, and negotiating ability that will yield every ounce of value out of an exceptional practice for sale. Contact us today for a free copy of our report “Will You Leave Money on the Table? Discover the 12 Irreversible Fatal Errors You Must Avoid When You Sell Your Firm!”


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