SBA Financing of a Franchise Resale
Lots of ways to do this and this will be a two-minute topic on a future episode, but for
today I want to talk about SBA financing. Sounds simple, but this can be a very
complex process as the bank is looking at 3 distinct factors involving the transaction.
Lets call these the ‘3 B’s’
If any of these elements are not strong enough it can blow the whole deal!
Obviously the Business has to have the value. Is the asking price in alignment with the valuation. But even with proven value, banks will take this a step further and demand that the business have tenure - in other words for the SBA to approve the resale it has to have a positive financial trend. But….. if the business is too new…. there’s not enough data to support a strong trend making it difficult to obtain SBA approval.
Then there’s the second B - the Brand. The SBA will look closely at several factors. Does the Franchisor have a strong 5-year retention rate, meaning are those that bought the franchise 5 years ago still in business today? Also is the brand still selling new franchises? And how much attrition did the brand suffer over the last 3 years. In other words, how many stores closed? And finally what is the SBA default rate? If it is high, it may indicate a poor franchisee support system. A brand not meeting SBA minimums will be difficult to finance.
And then our 3rd B. the Buyer. The SBA will look at much more than just having a good down payment. The buyers background is a strong component. For example, Does the buyer have experience in the industry? The bank wants to make sure that the buyer can continue the success of the business. And if the buyer does not have a lot of experience, will the existing management stay in place and does the buyer have enough working capital to support this transition period?