Structuring the Acquisition of A $1.8mm Business
In this article, I’m going to explain and breakdown a recent transaction in order to help prospective buyers better understand all of the costs, fees, rates, and requirements when purchasing a business with SBA financing. First, we start with the deal structure;
This particular Business was purchased with a bank loan of 80% of the purchase price.
Purchase Price - $1,800,000
Down-payment - $360,000
Loan Amount - $1,440,000
Earnest Deposit - $15,000 (Paid by Buyer at Letter of Intent)
Working Capital Line Drawn at Closing $160,000
Interest Rate - Prime Rate + 2.75%
Fees Charged by Lender
Lenders charge the borrower fees at closing as well as at application for an SBA loan. Buyers should always require a written commitment letter from the Lender that breaks down the projected costs of the transaction.
Buyer Deposited $5,000 with Lender upon signing the commitment letter.
Guarantee Fee Paid to Lender - 3% or $43,200
Note: SBA charges an upfront fee as well as an annual fee based on the loan balance. Currently, this rate is 55 Bps (.55).
Lender Legal Fees - $5,000
These charges are paid by the borrower to the lender for the loan only.
Lender Processing Charges:
Lien Searches $1,195.22
IRS Transcripts $25
Packaging Fees $2,500
Wire Fees $150
3rd Party Business Valuation $2,500
Site Inspection - Business $130
Total Fees $54,700.22
Note: Fees are financed within the loan
Working Capital - Other Adjustments
In most transactions, the lender will establish a line of credit for the borrower that is to be utilized by the borrower for working capital. There are no restrictions on this line of credit as long as the funds are utilized for business purposes. Rates can vary by lender but are the terms are variable and also tied to the prime rate.
Amount of Working Capital at Closing $160,000
$190,000 of Customer Deposits Credited at Closing to Buyer
In this example, the buyer closed on the purchase of the transaction with a net paid at the closing of less than $10,000 after adjusting for the line of credit for working capital and the customer deposits, however, this is before the charges for the buyer attorney fees which were never disclosed.
For more information on SBA financing or details on purchasing a business contact Jim Peddle, Business Broker, Playbook Corporate Advisory, Inc.
Learn more about SBA Financing