Mundane Millionaires
Matthias Smith: Breaking Down Debt Service Ratios and Business Financing
Episode guests
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Quick takeaways
- Before approaching a bank for financing, prospective buyers should gather the necessary financial documents such as tax returns, P&L statement, balance sheet, and summary of accounts receivable and payable.
- Buyers should carefully select banks specializing in 7(a) acquisition financing, considering factors like track record and average loan size, to ensure a good fit for their financing needs.
Deep dives
Summary of Main Ideas and Key Points
1. Gathering the necessary financial documents: Before approaching a bank for financing, it is important for prospective buyers to gather the last three years of tax returns, a current P&L statement, a current balance sheet, and a summary of accounts receivable and accounts payable from the seller's financials.
2. Deal structuring and sources and uses: Buyers should have a well-structured deal that includes the purchase price, working capital, and additional financing needs. This can involve securing seller financing, equity injections from investors, and utilizing SBA loans to finance a portion of the total project costs.
3. Selecting the right bank: Buyers should research and identify banks that specialize in 7(a) acquisition financing, particularly those with a track record of supporting small business acquisitions. They should consider factors such as the total number of deals done and the average loan size to ensure a good fit for their financing needs.
4. Cash flow analysis: Banks focused on SBA lending primarily evaluate the cash flow of the business being purchased to ensure there will be enough cash flow to repay the debt. Buyers should demonstrate their skills and experience relevant to the business they are acquiring and provide a personal financial statement to showcase their financial capacity.
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