FINANCING A RESTAURANT PURCHASE

SBA LOAN

Thinking about buying a restaurant or retail business but only have 10-20% down payment?   You’ll be glad to hear SBA interest rates have dropped significantly in the past few months making a business purchases more affordable then in the past several years.  And the process is truly easier than one would think.  In fact, it’s far simpler to get a loan on an existing restaurant or retail business than trying to get one on a start-up.  Most people simply don’t realize how to do it.  But don’t think you’re going to get a business or restaurant with nothing down.  It doesn’t happen.  Of course, one can get one with 10% to 20% down. 

Many people don’t have a clear understanding of the SBA (Small Business Administration) process. One doesn’t go to the SBA to get a loan. The SBA has relationships with banks.  The SBA guarantees 75% of the loan value the bank give to customers.  The bank must comply with certain guidelines in order to have the loan qualify for the SBA.  The SBA review all the loan documents and if every thing is in order, they approve the loan. 

QUALIFYING FOR THE LOAN

There are two elements to qualifying for a loan (1) qualifying the buyer and (2) qualifying the business or restaurant.  Both have their own process and different standards.  The buyer is qualified if he/she has business experience, plenty of cash for the down payment, in some cases enough collateral to cover the loan, and good credit - more on collateral later because 100% is not required. On the business, there must be 3 years of tax returns with a good analysis of the cash flow, that’s it! 

Obviously, the business must have sufficient cash flow to service the debt payments. Exactly what the bank needs in terms of cash flow varies from bank to bank but the rule of thumb is the cash flow should not be more than 3 times the sales price.  After the loan payment and after paying a fair salary to the owner, banks like to so 20% or more additional cash flow above those items. 

All too often we get buyers telling us their bank has pre-approved them for an SBA loan.  This doesn’t happen and usually it is a loan sales person merely telling the buyer what they want to hear and it resembles nothing to reality.  Remember, loan officers are sales people.  The decision makers are the underwriters and credit managers.  The underwriter, credit manager and loan officer are totally different people with different objectives.  The loan officer merely wants to sell you something while the underwriter and credit manager want to protect the bank’s assets and make smart loans.  

In one case, we had a loan officer out-right lie to his client he could get them a loan despite the fact the restaurant had no successful financial history, the buyer had no restaurant experience, and the buyer wasn’t expanding a current successful business.  We naturally dissuaded our client from going down the road with this buyer despite the higher offer the buyer made.  In the end, our client chose the other buyer and closed the deal at an attractive price.  The moral of the story is don’t always believe the loan officer when it comes to business loans.  Ask the right questions to determine if the loan officer is telling you the truth because to be frank, only a handful of banks finance restaurants.

You’ll want to approach a “preferred SBA lender.” Most banks have this status. What it allows for is the banks to approve the loan on their own without having to submit everything to the SBA. If you choose this route be VERY specific in asking the lender for timelines to complete the transaction.

BASIC LOAN OFFICER QUESTIONS

Some of the basic questions are:

(1) How many business transactions has he/she done in the past few months?  A good lender will be doing many deals every month.

(2) How many restaurant deals has he/she done in the past few months?  A lender usually specializes in restaurants and will usually do many per month. 

(3) How much experience is needed to get an SBA loan?   The SBA requires 5 year of MANAGEMENT experience to qualify for the loan.  If a lender tells you different, he is not being truthful. 

(4) What collateral is needed to support the loan?   Some banks are called “cash flow” lenders.  Their focus is cash flow rather than collateral.  Although they’ll take the collateral too if any, it is not their primary focus in the deal.   

(5) Are you an “Preferred SBA lender?”

SIZE OF LOANS

SBA loans have a lower and upper limit.  The upper limit changes with the need in the economy with amount starting from just over $1 million up to $2 million while the lower limit is limited by the banks ability to cost effective process a loan.  Most banks have a lower limit of $150,000. 

SELLER FINANCING

The trend lately has been toward seller financing.  While the percentages vary, it’s generally 30% to 50% of the total purchase price. When you think about the situation, it makes perfect sense. First of all, by providing financing, the seller validates the viability of the business itself. Also, the seller is able to get the highest price possible by funding part of the acquisition.

From a buyer’s perspective, it serves to reinforce the business and restaurant seller is also at risk in the transaction. It’s a perfect mechanism to help ensure the seller is honest. It also serves as a mechanism to deal with situations arising later coming about as a result of their actions where you may need the ability to offset their financing. 

• While the terms vary for seller financing, you can expect to pay about 6-8% over four to five years. Plus, you have the ability to get far more creative with seller financing than any other. 

• Negotiate a holiday from any payments for three-six months after closing. 

• Allow for the first year to be all principal. 

• Have the right to make lump sum payments several times a year towards the principal 

• No prepayment penalty. 

• You can arrange for lower payments throughout the loan with a balloon payment down the road. 

• While you will have to sign personally, you will not have to personally collateralize the loan. The seller’s lien is against the assets of the business.

But expect the seller to seek protection in the form of personal guarantees, liens on real estate, sub-leases and UCC Financing statements filed on the business. 

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attended Law School at Gonzaga University.