Tax Returns and LOI for SMBs

February 18, 2023

by a searcher in New York, NY, USA

Keeping in mind that clean tax returns from a seller / target are quite important if you are looking to use SBA to finance, how do people here typically approach this? Do you ask for these tax returns before putting in any offer / LOI? I presume that going off the word of broker that tax returns are clean can often be misleading.

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Reply by a lender
in United States

I strongly recommend to collect the last 3yrs IRS filed business tax returns, ALL pages and most recent year business financial statements with my SBA qualified borrower/buyer BEFORE LOI. I have trusted years prior from business brokers & their engaged business sellers and have been burned. The SBA underwriters base final credit decision based on the last 3yrs IRS filed business tax returns, (amongst other conditions) so why should an eligible approved business buyer/borrower waste time discussing a listing where they don't want to share the actual tax returns?? i.e. I have had some business brokers promise proof of 1x personal expense paid invoices and copy of business bank statements to add back to the business historical IRS tax return income to get the overall business debt service coverage to meet the new SBA loan project debt. If they don't want to provide this proof out of the gates -- no LOI, no SBA loan. I save my clients TIME and MONEY by not dilly dallying with being over promised, and under delivered required items that the SBA underwriter will want to review for final credit approval. ***There are numerous listings on the market today represented by some business brokers that mention 'SBA Prequalified' or 'SBA Approved' where the front end direct SBA lender provided the SBA prequalification letter based on the business brokers 'recast of financial summary.' Huge mistake friends. SBA underwriters do not provide final credit decisions based off of the business broker listing recast of financial summaries. Most often what you see is not what you get with the actual business tax returns. Get to the facts with the actual business tax returns and if not provided, move on.

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

I find most sellers will not provide the tax returns until an LOI is issued. You can definitely complete a detailed analysis based off of the financial statements. However, as soon as you get the LOI signed you will want to get those tax returns to verify the cash flow matches what was reported in the financial statements so you are not wasting time and money with due diligence. I will say the majority of the time I do not see much difference between the two. When I do see a difference it usually has to do with how the financial statements are prepared versus the tax returns. If you are working off of accrual based financial statements but the tax returns are prepared on a cash basis (of vice versa) you can see a substantial difference in cash flow from the financial statements to the tax returns. Sometimes this is not an issue if the seller is providing accountant prepared financial statements. Some SBA lenders will still use the financial statements (typically if reviewed or audited by the accounting firm) over tax returns in their cash flow analysis. But more often then not most small businesses do not have professionally prepared financial statements, which typically forces the lenders to rely on the tax returns. Please let me know if you would like to discuss further. You can ping me here or directly at redacted

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