GETTING AN SBA LOAN FOR A RESTAURANT - THE SHORT STORY VERSION
Getting a loan for the purchase of a restaurant is a challenge, but if handle by a knowledgeable broker, it becomes a very manageable process.
The purpose of this article is to give the read a high level view of how the SBA process works. It is not meant to be a detailed road map to the loan per se.
QUALIFY YOUR SELF
First step is to qualify your self for getting an SBA loan for a restaurant. There are a number of variables the bank looks at to determine if you’re qualified. The primary ones are (1) Restaurant Experience, (2) FICO or credit score and (3) cash available.
The bank wants the buyer to be well qualified to operate the restaurant. Most banks want 5 years of ownership or management experience. If you don’t have the experience, then you can add an experienced partner to the deal. That partner will have to own a serious amount of equity – meaning 20% or more and the partner will have to have solid restaurant management experience.
Your FICO score is critical as well. You’ll need a score that is north of 700. The higher the score, the better.
And finally you’ll need plenty of cash on hand to cover the purchase price plus closing costs plus working capital. Sometimes the bank will include working capital in the loan. Each bank is different.
QUALIFY THE BUSINESS
This is where most brokers drop the ball and have no idea what their doing. The business needs to be qualifies for an SBA loan. At SellingRestaurants we prepare the financial analysis to determine if the business qualifies. We use tax returns supported by profit and loss statement that tie to the tax returns.
We determine what the owner cash flow is, then we determine what the earnings multiple should be to determine the selling price – that’s the number of times the cash flow is multiplied by to get to the value of the business. Most restaurant businesses will have a multiple of between 2 and 3. For example, if the business’ owner cash flow is $200,000 the price will be between $400,000 and $600,000 depending on a number of other variables. See my other articles on valuing a business.
The bank will not accept fancy add backs, but will only accept relevant and actual add backs like owner salary, amortization and clear owner perks. If you see cell phones, vacations, auto, personal food and beverage, etc. the bank will not add those to the cash flow even though they are benefits to the new owner.
To Summarize, a good restaurant broker will know how to approach and SBA loan and will guide you through the process just as SellingRestaurants has in dozens of transactions.
We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions.
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 attened Law School at Gonzaga University. Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions.