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Funding Your Small Business Purchase In Today's Lending Environment


Like most things, the lending environment has changed recently due to COVID-19, and it is taking buyers and sellers by surprise.  Underwriting timelines are being impacted and loans are taking longer to process.  Banks are now less likely to flex their requirements to help people qualify for a loan. Why is this happening?  There are several reasons.

1.  Earning and revenues are coming down and banks are weary.
2.  Few lenders process loans under $150,000 and those few lenders are now getting inundated with volume. 
3.  Because the same people that processed PPP loans are also processing business loans, this is impacting banks' ability to assess and close on new 7A loans.
4.  Banks now have a lot of capital tied up in PPP loans.
5.  Banks are now doing more due diligence and requiring more documentation, so underwriting is taking longer than in the pre-COVID environment. 
Staff are being impacted by COVID and distancing guidelines so there are fewer people on location to work with underwriters and get loans processed.  
7.  We now have less than 40 business days before the September 27th deadline to take advantage of the SBA principal and interest payment benefit so loans not currently in process will likely not meet that deadline.
8.  Banks want collateral in the form of equity in real estate.
9.  Banks are looking for more post-closing liquidity.
10.  Banks are looking for industry experience.
11.  Banks are looking MORE at the 5 C's: Collateral, Credit, Capacity, Character, and Cash.
12.  The strength of a buyer from a financial perspective is really important right now.

How deals are being financed

Both buyers and sellers will benefit from understanding the changing lending environment and prepare themselves by consulting an Advisor and considering other options for working together.  Across the country, we are seeing a 30% increase in seller financing.  Average down payments have increased by 63%.  In future at least 8% of deals will include a seller earn-out and only 19% of deals will include SBA financing, compared to 60% pre-COVID.  On average, businesses are now selling for 73% of asking price in an all cash transactions, and 87% of asking price with seller financing.  Percentage wise, sellers will get a lot more money for their business if they are willing to help the buyer finance the sale, and their business will also sell faster.  Seller financing shows that sellers have confidence in , and are standing behind, the business.  In situations where banks are hesitant to loan in a specific industry, we are seeing 90% of deals getting done with 100% cash or combination cash and seller financing or earn-out.

A new reality requires new thinking

Buyers and sellers must bridge the gap in their perception of the businesses' value.  Seller's have a 2019 idea of their businesses value and buyers have a 2020 idea of the businesses' value.  There are several ways buyers and sellers can partner to bridge that gap. 

1.  Higher buyer down payment.  Buyers have to have enough skin in the deal to be motivated to make the business work.

2.  Seller Financing - we are seeing deals continuing to go up in value if the seller is willing to carry paper.  Sellers benefit from interest they earn on their money, typically a higher rate than they can get investing in more traditional vehicles. Advisors can help structure the sale to lesson risk from buyer default.

3.  Earn Out - this is a way of bridging the gap between seller's expectation of value and the buyer's expectation of risk.  We recommend basing an earn-out on Gross Profit (revenue less cost of goods sold to include labor, materials and shipping) because neither party can manipulate the numbers.  We recommend the earn out to last for a one or two year period.  Earn outs allow the seller to continue to work as a consultant to help make revenue for the company.  Deal structures that allow the seller an upside work best (the higher the revenue, the more the seller will make).  Seller has to have access to the books, and buyer and seller will have to agree on a way of mediating if issues arise.

4.  401K ROB - there are third party administrators such as Benetrends, Guidant and Franfund that help buyers use their retirement funds to buy a business without paying taxes or penalties.  It is a great vehicle, but there are things a buyer has to understand when using a 401K Rob that the administrators can explain.  It's not something a buyer should do without having all facts. 

Only 20% of businesses listed for sale will sell.  Sellers -  if you want to sell your business,  you have to price it and put terms on it that will make it sell.  Otherwise you are in the 80% that are just putting their business up for sale.  


1.  Reach out to a Transworld Advisor Today
2.  Benetrends
3.  Guidant Financial
4.  FranFund

Lauren Altschuler
Lauren Altschuler
I assist buyers and sellers of privately held businesses in the buying and selling process. We help value your business for the best price, advertise it confidentially to qualified buyers, handle buyer interviews, discussions, negotiations and facilitate the due diligence investigation and the sale of the business.

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Our Sellers except us to achieve the highest and best offer for their business while taking the least amount of their time away from it as possible. That is because the absolute best use of their time is to continue to run and grow the company.  If revenue or profits begin to decline, buyers will walk away or decrease their offer. Transworld's philosophy can be summed up in a ten step, how-to strategy that culminates with the sale of a company. This proven method has been used to sell hundreds of businesses.  Here are the steps. Step1 Comprehensive Business Analysis and Feedback As your business broker, the first thing in our how-to strategy is to analyze your operation, finances, market potential and industry trends. We take that information and advise you on steps to prepare your business for sale, and  generate a business profile that represents your company in the most attractive way possible. Step2 Sale Structure We identify the best possible price range to sell your company. This is based on solid facts, the condition of the market, projected growth, sales potential and the sale of similar businesses within your industry. Transworld’s experts apply sophisticated, time-proven valuation techniques to ensure that your price is appropriate for the current market condition. The price must not be too high or too low. Yet, it must represent an attractive investment potential for the buyer. Step3 Confidentially Network The Business For Sale During the selling process, we utilize the latest technology to present your company to other business brokers and strategic buyers all over the world. This greatly multiplies the effort in your favor. With Transworld Business Advisors, you have literally thousands of industry professionals confidentially representing your company to buyers.   Step4 Confidentially Advertise To Buyers Our aggressive marketing program ensures your confidentiality and provides maximum exposure for your company. Your listing is placed in various industry databases, Internet sites, and publications which are constantly updated. We spend more money in advertising and marketing for buyers than anyone else in our industry. Step5 Control The Information Flow We organize all necessary documentation and release information only as needed. We use limited information when advertising to maintain confidentiality. Buyers are pre-qualified and required to execute a confidentiality agreement before receiving any sensitive business information. Step6 Create Competition For Your Company We attract thousands of buyers, creating competition for your business. Buyers are qualified for financial ability to meet the offer, and we engage you with only the most qualified buyers. Once you meet the best of the buyers, we urge them to prepare and present all offers. We can continue to engage potential buyers on your behalf as negotiation on an offer is in process and have another interested party ready to go should a buyer change their mind. Step7 We Negotiate For You To Achieve The Best Price Appropriate negotiation is crucial to achieving your best price and terms. We have the expertise to establish sound and resourceful negotiating techniques on your behalf. Transworld has trained all of its agents in the art of negotiating through curriculum that we have created specifically for our industry. Never negotiate without planning, expertise, or from a position of weakness. Step8 We Provide Exceptional Support To You Through The Due Diligence Process We take pride in our exceptional service. Only half of the job is finding the right buyer who will pay your price and meet your terms. The other half is getting that buyer to the closing table. We quarterback the deal, work with the accountants, lawyers, banks, landlords, and other third parties that could jeopardize the success of the transaction. We realize that you depend on us to guide you through the sale of your business. We make the transition simple and easy for you. We know when an opportunity for you may arise and are always there to take advantage of it. We also know when someone is trying to kill your deal or is being unreasonable and how to handle those situations. Step9 We Are There From Beginning To The Closing We help manage all administrative procedures, licenses, inventory counts and lease assignments that may be required. Transworld works closely with your advisors to ensure a smooth transition. Using the latest technology, we strive to be ready to work on your behalf to get the deal done! Step10 We Are There For The Transitional Phase And Beyond! Because we are in the business community, you may want to consult us from time to time after the sale. We will provide you with the assistance after closing. Transworld will always remain in your corner! Schedule Consultation Now

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