SBA loan for "distressed" business.

March 21, 2024

by a professional in Salt Lake City, UT, USA

Looking at a company that had an employee theft in###-###-#### The businesses averaged 300-400k in SDE for the past few years, but reported a 100k loss for 2023 due to this employee. Would this be lendable for an SBA lender?...(Assuming, for now, that the story of the theft is credible and the numbers back it up)... Buyer isn't super attached to the deal, but I like the brand and growth opportunities. Should I advise client to make a low-ball offer? How would I weight 2023 if I was averaging the last three years of SDE and applying a 3x multiple?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. Typically speaking lenders wants to see the debt service coverage ratio hit a minimum of a 1.25x in the last two years. You can make the debt service coverage ratio work with add-backs included. The question is whether the theft is something clearly documented that could be added back to cash flow to get a lender comfortable. If there is an insurance claim,, legal claim, police report and/or an accounting analysis or something else, it might be possible to get an SBA lender comfortable using it as an add-back. Not a slam dunk to get done, but might be possible. Happy to have a discussion and see if we can be of any help. You can reach me at redacted Good luck!

Reply by an intermediary
from Clemson University in Raleigh, NC, USA

*not legal advice* If the owner litigated and prevailed the theft can be recast. If there is not a paper trail they are out of luck. I feel weighting is a fools errand - only the trailing 12 and prior tax period matter. Why penalize a seller for growth by averaging? You should talk to Steve Mariani at Diamond Financial. His firm is the largest SBA Loan Packager and he will know what lenders are okay with theft/embezzlement and under what circumstances.

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