How SBA Financing Shapes Your Sale: The Third Party at Your Table

There's a Third Party at Your Negotiating Table. You Won't Meet Them Until It's Too Late

You'll spend months getting ready to sell. You'll clean up the financials, rehearse the story, take the meetings. When a buyer finally shows up with a real offer, it feels like the hard part is over. Two people who want the same thing, agreeing on a number.

Except there's a third party in that negotiation, and they weren't in the room.

Most buyers of businesses in the $500,000 to $5,000,000 range don't pay cash. They borrow, using a government-backed loan program that funds the large majority of small business sales in this country. Which means the deal you just shook hands on isn't done until a bank agrees it's a good loan.

And the bank has opinions. About your price. About your books. About how long you're allowed to stick around afterward. About whether the money you agreed to carry gets paid on the schedule you assumed.

Here's the part that costs sellers real money: almost none of this comes up before the letter of intent. By the time the bank weighs in, you've been off the market for weeks, you've told your key employee, you've started imagining what's next — and you have very little leverage left to renegotiate. That's not an accident of timing. That's how deals get retraded.

The fix is straightforward. Understand what the lender needs before you agree to anything, not after.

Your price has to survive an appraisal you don't control

On these deals, the bank orders its own independent business valuation. Not the buyer's number. Not your broker's number. Their own appraiser, working for them.

If your agreed price lands above what that appraisal supports, the bank does not simply lend the difference. Someone has to cover the gap — either the buyer brings more cash, or you carry it, or the price comes down.

This is the single most common place a signed deal gets reopened, and the moment it happens is the moment you have the least power. You've already agreed to a number publicly. Now you're being asked to defend it, or eat the difference.

The defense is not a better argument three months from now. It's pricing the business defensibly on day one, with a recast that a professional appraiser would recognize, and knowing before you list whether the earnings actually support the number you want.

The business has to be able to carry the debt

Before anything else, the bank tests whether your cash flow covers the buyer's loan payments with room to spare.

This is a mechanical calculation, and it produces a ceiling. Whatever multiple you have in your head, whatever your neighbor got for his company, whatever a listing site says businesses like yours sell for — the bank's math sets a limit on what a financed buyer can pay you.

That sounds like bad news. It's actually the most useful number in the entire process, because it tells you exactly where to focus. Every dollar of defensible earnings you add raises the ceiling. Every dollar of earnings you can't document lowers it. That's the whole game, and it's playable long before you go to market.

The money you carry may not get paid the way you think

It's common for a seller to finance part of the sale price. What sellers frequently don't learn until late is that when that note counts toward the buyer's required down payment, it goes on full standby — no principal, no interest, no payments at all until the bank loan is retired. That's typically ten years.

A seller note is a legitimate tool and often the thing that gets a good deal done. But "I'll carry a couple hundred thousand" and "I'll receive nothing on that for a decade" are two completely different retirement plans. You should know which one you're signing.

Some structures simply aren't allowed

If you and your buyer bridge a price disagreement by tying part of your proceeds to how the business performs after you leave, that structure won't survive underwriting. It has to be rebuilt as cash, as a standby note, or as a lower price.

Better to know that while you still have competing buyers than to discover it in week nine of due diligence.

What actually raises your number

Strip away the mechanics and the lender is looking for the same things a good buyer is looking for. That's the useful insight here — preparing for the bank and preparing for the market are the same work.

Books that reconcile. Your bank statements, your tax returns, and your financial statements should tell one identical story. When they don't, everything slows down and every discrepancy becomes a negotiating point against you.

Add-backs you can prove. Running personal expenses through the business is normal and perfectly defensible — if it's documented. Reconstructing three years of add-backs from memory during due diligence is where credibility goes to die.

Revenue that doesn't depend on you personally. Relationships that belong to the company, not to your cell phone. Key people who intend to stay.

Current numbers. Lenders now look at your most recent interim financials against the same period last year, on every deal. A soft recent quarter you can explain is manageable. A soft recent quarter you haven't looked at is not.

The real point

Sellers tend to treat financing as the buyer's problem. It isn't. It's the constraint that sets your price, shapes your terms, and decides whether the deal you agreed to is the deal that closes.

You don't need to become an expert in any of it. You need an advisor who understands it before you go to market, so the price we publish is one that survives contact with a lender — and so nothing in the last thirty days of a deal comes as a surprise.

The best time to have this conversation is twelve to twenty-four months before you sell. The second best time is before you sign anything.

Erik Kretschmar is the founder of Nova Exit Partners, a sell-side M&A advisory firm in Greater Boston serving lower-middle-market business owners across New England. Nova Exit Partners provides complimentary, no-obligation Broker's Opinions of Value. Reach him at erik@novaexits.com or 617.299.2232.

This article is general information about how small business acquisitions are commonly financed. It is not legal, tax, or lending advice, and requirements vary by lender and by transaction.

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