Separating Assets from business price

December 02, 2023

by a searcher from University of South Carolina - Darla Moore School of Business in Charleston, SC, USA

I'm looking at a very asset heavy business. The broker is proposing to sell at:

$1.5M for the business portion to be financed by SBA loan
$1.7M for the assets, which Seller will finance for a down payment of 10-15% for 10 years
$800K for real estate, which Seller will finance for a down payment of 10-15% for 10 years

The $1.7M on the assets is not equal to the depreciated book value of the assets, but are what he's calling "market value" which there's no way to know pre-LOI. The business cash flows $1M a year, and so I think all-in it's a fair deal at $3.2M total, but the pricing structure is something I've never seen.

WIll SBA bankers typically allow such a huge sellers' note on the fixed assets in such a fashion? I would think they would not like having the assets (collateral) separated out like that and would only allow a note on the goodwill portion of the deal. I assume they would also want the Seller note to be on stand-by for a few years, correct?

I guess I ought to just ask my banker directly, but wanted to see if anyone here has any thoughts on the above ideas.

Reply by a lender
from Trinity College Connecticut in Boston, MA, USA

While SBA 7(a) loans can be done without full collateral, if there are assets in the business, the lender will require a 1st position lien on those assets. It's unusual for the Fixed Assets to be priced separately, as when they are part of the business operations they included as part of the Value and the Selling Price of the business. If the seller is providing financing for the equipment, they will need to be in 2nd lien position behind the SBA lender and that Seller Note for equipment will be included in the Debt Service Coverage Ratio (DSCR) the lender calculates before they agree to do your business acquisition loan. The real estate could be owned by a separate entity and financed separately via a Seller Note, but Rent Expense sufficient to cover that loan, real estate taxes, and insurance will need to be part of the operating entity's expenses that will impact the DSCR calcs for the business.

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

Like George said, it does not appear to make sense. You could finance the entire deal through an SBA 7A loan and if you roll the real estate in you could get some benefit from an extended amortization on the entire debt load. I think most SBA lenders are going to require all of the business assets as collateral. They are not going to want the equipment financed separately where it is not controlled. They would also require the seller to subordinate to them on the business assets. The real estate you could finance separately, but I do not see any SBA lender doing the deal with the business assets separated from the goodwill value of the business. Happy to have a discussion and help you underwrite the deal and find the best path. You can reach me here or directly at redacted Good luck.

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