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.Pick The Right Lender
I have been putting this type of financing together for almost 15 years. During that time I have worked with many different 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, however, 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.
These Loans Are Unique
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. It's not uncommon to have one or more lenders turn down a specific loan request only to have a third lender approve it There is, without a doubt, subjectivity that plays into each bank's analysis of these loan requests.
SBA Versus Conventional Loans
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.
One example is with 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 $250,000 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 $100,000 loan will usually be better served looking at conventional options first. Today, there are more conventional lender options for CPAs than Enrolled Agents (EAs) but specific licensing is not as big an issue with SBA lenders. Terms and total loan costs typically work out very close whether you use an SBA loan or a conventional loan. SBA loans have pretty substantial fees and closing costs while conventional loans do not. At the same time, conventional loan interest rates are typically a little higher.
The Current Lending Market
As of January 2013, here is an overview of the types of lending available to accountants. As you might guess there have been ebbs and flows in lending available to accountants over the past 15 years but even in the really tough years (2008 and 2009) financing never completely went away.
While lenders are not as aggressive as they were pre?2008, there seems to be ample resources for accountants today. Lenders are doing these deals. 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 descent liquidity. At a bare minimum, the borrower should have 10 percent to 15 percent 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 percent of the purchase price into a deal but are typically a little more flexible on how much of a seller note they require. 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. This means that any existing practice debt, including lines of credit, will have to be added to the new loan or paid off. It's more likely you will have to pledge your home as additional collateral for an SBA loan versus a conventional loan but even this is not required on every SBA loan. 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 to 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 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 more than 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.
