As a business broker that specializes in the sale of accounting firms I get questions everyday about using a commercial loan to acquire an accounting firm. How much of a down payment is required? Should I get an SBA loan or a conventional loan? How long is the process? What are the terms? What will the bank want as collateral for the loan? Are there really banks that are willing to loan money for the purchase of an accounting firm? These are all good questions.
I have been putting this type of financing together for almost 15 years. During that time I have worked with many lenders all over the country. The first thing I will warn you is that not all lenders will do this type of financing. In fact, working with a lender that is not currently approving and closing these specific types of loans is a recipe for disaster if you have a deal in hand and need financing to close. The bad news is that almost every loan officer you talk to at every local bank will tell you “No problem, we can do that”. But they can’t. This may take a week to figure out or several months. Once you have your third call or email into the loan officer and they are no longer returning calls you can pretty much come to the conclusion they had problems “selling” your loan request to their credit committee. These loans are always lacking in hard collateral and that causes heartburn to lenders that are not already doing this type of lending. The good news is there are lenders that will do this type of lending with both SBA and conventional loans. You must qualify the lender on the front end and make sure this is not their first practice acquisition loan for the purchase of an accounting firm.
I am asked all the time by buyers to pre-qualify them for a loan. While this is easily done when determining how much of a home mortgage you can handle, it’s really not possible for this type of financing. Here’s why. Lenders look at all aspects of the loan request when rendering a decision. They will look at the buyer’s experience, personal net worth and liquidity, personal credit history and personal living expenses. At the same time they will perform a historical cash flow analysis on the seller’s practice to determine if there is enough cash flow to service the bank debt, allow the buyer to take out a salary that meets their needs, and make sure there is a cash cushion leftover. Any one of these areas that does not meet the banks underwriting requirements can render a negative decision on the loan request. I’ve had many buyers over the years get turned down on one or more loan requests and yet approved for another. There is, without a doubt, subjectivity that plays into a bank’s analysis of these loan requests.
Certain types of loans work better for different situations. In some cases an SBA loan may be the best approach for a particular situation. In other situations a conventional loan may be the better way to go. The only way to approach the process of putting financing together for the purchase of an accounting firm, in my opinion, is to look at the entire picture and use past and current experiences to determine which type of loan and lender it makes sense to approach first. One example is a buyer who has never owned a business. Without knowing anything else, this would typically be an SBA loan. SBA lender requirements on experience are not usually as demanding as that of conventional lenders. Another example is the size of the loan request. Loan amounts under $250K can be tougher to get done with an SBA lender. Many of these lenders have minimum loan amounts they wish to deal with. A CPA looking for a $100K will usually be better served looking at conventional options first. Today there are more conventional lender options for CPA’s than Enrolled Agents (EA’s) but specific licensing is not as big an issue with SBA lenders.
As of January 2013, here is an overview of the types of lending available to accountants. Remember, this has changed a lot over the past 15 years. When I first started putting this type of financing together in 1999 there was almost no conventional lending for these deals. By early 2007 we could put some type of financing together for just about any situation. Lending on these transactions did not completely go away in 2008-2009, as it seemed to for main street businesses, but it was very tough to get loans these two years. Overall lending to this industry has rebounded very well in the past few years but I don’t realistically expect to ever go back to what we had pre-2008.
We currently are having success putting together both SBA and conventional loans with multiple lenders in each category. Lenders like to see borrowers with some decent liquidity. At a bare minimum the borrower should have 10-15% of the purchase price in personal/business cash. Lenders won’t always require large down payments but they all seem to like to see a borrower’s ability to put this type of cash into a deal. SBA loans have specific requirements for the amount of “equity” required to be put into a deal. The SBA lenders’ definition of equity is the combination of buyer down payment and seller note. This varies depending on the loan amount. Conventional lenders will also usually require a borrower to put 10% of the purchase price into a deal but are typically a little more flexible on seller note requirements. When there is no real estate involved most lenders, both SBA and conventional, will provide up to a 10-year term. Depending on the loan amount some lenders will go as long as 15 years. Whether it’s an SBA or conventional loan all lenders will require a personal guarantee from the buyer/borrower and a 1st position blanket lien on the accounting practice and all practice assets. It’s more likely you will have to pledge your home as additional collateral for an SBA loan versus a conventional loan but nothing seems to be 100% in lending. There are plenty of SBA loans done for these types of deals where the borrower does not have to pledge their home as collateral. From start to finish these loans typically take 30-90 days to complete. Buyer, seller and broker can have a big impact on how long it actually takes to close a loan. It’s important to have someone drive the process to get it done on time.
Obviously there is a lot not being covered in this short article. At the same time every deal has its’ own unique circumstances that create a list of questions specific to that deal. My advice is to go beyond simply asking if a bank is interested in putting this type of loan together for you. Instead ask them some tough questions on the front end to interview them and make sure they are currently doing this type of financing before you waste a lot of time and end up killing your deal. One thing I have learned over the past 14+ years is that TIME KILLS DEALS. You typically only have one chance to get it done right so it is important to pick the right lender for your situation.
This artcle has been written by: Chuck Hayes, ABA Advisors LLC.