LOANOLOGY

QUALIFYING

BUYER’S LOAN IMPACTS ON PAYMENT STRUCTURES

The Buyer’s Loan Influence on Seller Payment Structures

The loan type a buyer secures to finance the acquisition of a business a crucial role in shaping the payment methods available to the seller. Whether the buyer qualifies for a conventional loan or one backed by the Small Business Administration (SBA) directly impacts how the transaction unfolds. Conventional loans typically offer more flexibility, but they often come with stricter qualifying requirements. In contrast, SBA loans may be more accessible for some buyers, yet they come with specific rules that influence the deal structure.

For sellers looking to transition out of their business gradually through phased equity sales or those wanting to retain a certain level of equity, it’s essential that the selected loan program aligns with these goals.

Why does this matter for sellers? Understanding the differences between loan types is vital, as this knowledge impacts the seller's liquidity and risk after the transaction. If a buyer's financing options are limited or misaligned with the seller's proposed structure, it may necessitate a re-evaluation of the transaction terms or even the search for another buyer who meets the preferred criteria.

Consequently, negotiating these elements requires foresight and a keen understanding of specific loan terms to avoid any unintended constraints on the deal structure that could jeopardize the seller's payment term.

The Importance of Understanding Your Buyer’s Loan Qualification

External financing is crucial for your buyer's ability to acquire your practice. Most buyers will likely rely on either a conventional loan or an SBA loan to finance their purchase, each coming with distinct qualifying requirements and restrictions related to acquisition or equity buyout structures. While there is considerable flexibility in structuring a deal between buyers and sellers, that flexibility has limits when financing is involved. It cannot extend beyond the parameters established by the specific loan program and lender.

How a Buyer’s Loan Affects Payment Structure Options

Typically, buyers will use either a conventional loan or an SBA loan for financing. Although there is ample room for negotiation in deal structuring, if bank financing is necessary, the options will be confined to what the specific loan program and lender permit.

Payment structures permitted under a conventional loan differ significantly from those under an SBA loan. SBA loans have clearly defined parameters regarding acquisition structure types and provisions. Consequently, the type of loan—conventional or SBA—that the buyer secures, along with the particular lender, will influence the payment structures available to the seller.

If you value an earn-out structure, prefer to sell equity in tranches over time, or wish to maintain a key role years after the sale, it is essential for the buyer to qualify for a conventional loan, which typically has stricter qualifying criteria than an SBA loan. These options are generally not feasible under an SBA loan.

If Payment Method is as Important as the Sale Price

For many sellers, the sale price is just one consideration; the payment method is equally significant. Most sellers prefer to receive as much as possible upfront at closing, while some may want part of the payment spread over multiple years.

Target or Develop Buyers Who Qualify for the Desired Loan Structure

If a specific loan program does not support the structure the seller desires, it’s vital to assess whether potential buyers qualify for a loan program that does. Unfortunately, many prospective buyers are unaware of their financing options. While many buyers are actively seeking opportunities, most haven’t taken the time to prequalify for external financing. First-time buyers, in particular, may not know if they qualify for a conventional loan, an SBA loan, or any bank loan at all.

When considering selling your practice, it’s prudent and efficient to focus on prospective buyers who are pre-qualified for financing that aligns with both the amount you want to be paid and the method of payment.