Buying a Restaurant with SBA Lending. Things to Know
Buying a Restaurant with SBA lending is a great opportunity for buyers to finance up to 90% of the total acquisition cost. Restaurant Acquisitions are eligible for Small Business Administration (SBA) 7(a) loans, but the process can be time-consuming and requires many supporting documents.
The restaurant buyer’s and the restaurant seller’s financial documents must be approved for bank lending. Both parties have different duties during the due diligence process for SBA bank lending.
Buyer Documents required for SBA lending:
-Last three years of personal federal tax returns and W-2’s
-Copy of Asset Purchase Agreement or Letter of Intent (LOI)
-Business Plan
-SBA Form 1919-collects information about the applicant
-SBA Personal Financial Statement is known as form 413
-Professional Resume
-Credit Authorization for the lender to obtain a credit report
-Business license and registration
-Copy of current commercial real estate lease(if not buying the building)
-Collateral-is needed for most loans but not all
-Proof of Buyer’s Equity Injection 10%-20% required-can be gifted funds if it doesn’t have to be paid back to the original source.
*Depending on the buyer, SBA will only require a 10% equity injection from the buyer. This injection can be made in various ways. The buyer can provide the entire 10% equity or 5% seller financing and 5% buyer down payment.
Seller Documents required for SBA lending:
-Recent three years of business federal tax returns
-Current Profit and Loss Statements and Balance Sheets
-Broker’s Price Opinion or Confidential Information Memorandum
-4506T form-request for transcript of tax return directly from the IRS
-Bank statements can be requested
The U.S. Small Business Administration (SBA) doesn’t provide business loans, but partially guarantees loans that banks and other lenders make to small businesses. By partially guaranteeing the loan, they will eliminate some risk and encourage lenders to make loans to small business owners.
Buying a restaurant with SBA lending is
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dallas Restaurant Broker Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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Steps for first-time restaurant buyer
What are the Steps for first-time restaurant buyers? This question EATS Broker gets multiple times weekly for buyers inquiring about restaurants for sale. Many interested buyers looking at restaurants for sale opportunities will be first-time restaurant buyers.
Many buyers are shocked about the difference between buying a home compared to buying a restaurant. The buying process from purchasing a home to purchasing a restaurant has completely different steps.
The restaurant sales transactions can be more complex where the smallest detail can make the difference from selling a restaurant or a restaurant for sale not selling.
Dallas Restaurant Broker Dominique Maddox says, “I enjoy educating restaurant buyers about the process of buying a restaurant. A big part of my job responsibilities is to educate and help buyers through the restaurant buying process.
The Restaurant Broker at EATS Broker provides a Five Step-by-Step overview of the First time Restaurant Buyer process:
- Research online:Restaurant buyers can get an idea of the inventory available on restaurants for sale in the local market on BizBuySell.com. The site is the internet’s largest business-for-sale marketplace.
Individuals interested in buying an existing restaurant can get preliminary information on the site like price, income, EBITDA, cash flow, gross revenue, rent, and year established.
- Have documents ready to show– When buying a home, the buyers will contact the bank and get pre-qualified before contacting a Real Estate Agent.
Many buyers are shocked when a Restaurant Broker asks for proof of funds before providing the name, address, and financials of a restaurant for sale.
Restaurant Brokers Golden Rule of Thumb
-If the listing is a franchise or over $100,000, a Restaurant Broker will want to see proof of funds (bank statement, 401K, or letter from bank). The franchise requires a certain amount of liquid funds before approving a potential franchisee.
The landlord will want to see proof that the new tenant can afford the lease. There is no need to provide financials to a buyer that can’t qualify.
-The bank statement, 401K statement, or letter from the bank should be within 60 days; close out your account number because a Restaurant Broker will only need to see your name and amount.
- Contact a Business Broker
A majority of the restaurant for sale are listed by a Business Broker or a Restaurant Broker. Buyers are required to sign a confidentiality agreement to access more information about the listing for sale.
A select number of restaurants for sale brokers will provide more information instantly once the non-disclosure is signed. Unfortunately, a large number of the listings will require a buyer to provide proof of funds.
Once non-disclosure is signed and proof of funds, the buyer will get a copy of the package. The package will have the name, photos, financials, details about the lease, and the restaurant’s location.
4. Visit the restaurant
A restaurant buyer gets to visit the restaurant as a customer. Some buyers will want to skip this step and schedule a meeting with the owner to ask questions and tour the kitchen area.
The Restaurant Broker at EATS Broker Tip:
A restaurant buyer should come to the seller-buyer meeting provided with questions. A buyer will learn more about the business and its long-term potential by asking the right questions.
- Evaluate and make a buying decision
During this step, a restaurant buyer will evaluate the information they have received from the seller. The buyer will decide whether to make an offer and the contingencies needed to feel comfortable. The buyer will start the due diligence process if the purchase agreement offer is accepted.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dallas Restaurant Broker Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com.
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The Cares Act 2-How does it help Restaurants?
The Cares Act 2 has some generous provisions to help restaurants. EATS Broker wants to share some great news about the latest $900 billion coronavirus relief bill. The coronavirus relief bill extends and modifies several provisions first enacted in the CARES Act, Congress’s $2.2 trillion pandemic relief law passed in March 2020.
Congress passed the relief bill to provide support to help people and businesses get through the next several months of the pandemic. Most people are aware of $284 billion’s renewed funding for the Paycheck Protection Program (PPP) to provide forgivable loans to borrowers. It is essential to note that this bill offers a simplified forgiveness application process for loans up to $150,000.
Dominique Maddox, a Restaurant Broker and Founder of EATS Restaurant Brokers says, “When I reviewed the details of the Cares Act 2, I was most concerned about the benefits to the restaurant industry.
The majority of the population knows about the PPP loans, EIDL Loans, and even the deduction for Business Meals, but many do not know about the 6-months of free payments for SBA loans. The free months of non-payment will help restaurant sales transactions”.
EATS Broker 3 Key Highlights from the Cares Act 2 Relief Bill
- FREE SBA Payments for six months-NO Principal or Interest required
Restaurant buyers purchasing a restaurant between 2/1/2021 and 9/30/2021 with an SBA loan will not have to pay principal or interest for six months. The non-payments are excellent news for restaurant owners that are considering selling their restaurant in 2021. Buyers have a strong incentive to buy a restaurant before the end of September. The waived principal and interest has a limitation of up to $9,000 per month.
For example, the buyer’s monthly SBA loan payment is $10,000 per month. The SBA will waive the first $9,000 owed, and the borrower would be responsible for a $1,000 charge for the first six months. Many of the deals on main street business brokerage will have lower monthly payments than $9,000 per month.
- Guarantee Fee Waived
This fee usually ranged from 2.5%-4% of the total loan amount to the buyer. Buyers can now take this savings on the closing cost to help fund their restaurant sales transaction.
- SBA Guarantees 90% of the loan amount
The SBA has increased its loan guarantee to banks from 75% to now 90%. Increased SBA loan guarantee is excellent news for restaurant buyers because now banks can take more risk and approve more lending deals.
It’s an incentive filled time to sell a restaurant or buy a restaurant using funds from the banks. EATS Broker are Subject Matter Experts in Restaurant resales. Let us provide you a complimentary Certified Business Valuation; contact us today at sales@eatsbroker.com or 404-993-4448.
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What are the Benefits of Buying an Existing Restaurant?
The million-dollar question for buyers should be,” what are the benefits of buying an existing restaurant”? The Restaurant Industry has a high failure rate, around 60 percent of new restaurants fail within the first year. And nearly 80 percent shutter before their fifth anniversary according to CNBC.com
Knowing these tremendous odds of failure, there are precautions prospective restaurant owners can take to help their odds of being successful. The biggest precaution is to limit your exposure to unknown expenses. How do you accomplish this task? The answer is to buy an existing restaurant for sale or 2nd generation restaurant lease space.
Dominique Maddox of EATS Broker says, “ I have a countless number of horror stories of new restaurant owners going broke on the build-out of restaurant space. I recommend to my buyers to look for an established restaurant to keep or convert to a new concept. I have seen restaurant owners spend over $500,000 on a build-out and sell a year later for less than $100,000.”
Eats Restaurant Brokers provides 5 Reasons to Buy an Existing Restaurant:
1. Established an Open– Why wait to open a restaurant when you can buy one and be open the same day of the closing day? When you buy an established restaurant that has been open for a significant amount of time, it comes with an established customer base and goodwill.
Why wait to build up Google Reviews when you can buy a location with great reviews and an online reputation. Some restaurants come with professional websites, great social media following, and email customer marketing lists.
To a restaurant owner the sound of the POS sales system taking orders, delivery orders coming in, and pick up orders on the 1st day of ownership is a priceless feeling.
- Staff- One of the hardest tasks for new owners is to recruit, hire, and train staff members. Established restaurants usually come with a trained employee workforce, these individuals are trained on the basic skills that are necessary for performing their roles. Inheriting experienced employees can be a valuable asset.
- Existing Business Relationships– The current owner has established relationships with food vendors, suppliers, printers, insurance companies, service companies for restaurants, and banks. Some of these relationships can easily be transferred at the time of closing.
- Price and Expenses– The current seller usually has everything in place for a new buyer to take over the operations. When purchasing an established business, the buyer knows exactly what he or she is getting for the price. The buyer in most cases can review the seller’s profit and loss statements and learn from the seller’s success and failures with expense control.
- Furniture and Fixtures– One of the biggest misconceptions for restaurant owners is that they own everything in the building. Restaurant owners can spend hundreds of thousands of dollars to install a grease trap, hood system, walk-in coolers, walk-in freezers, and sinks. Only to find out once they are ready to sell all the leasehold improvements belong to the landlord (read your lease). Building a new restaurant requires you to convert an existing space into a restaurant.
Why go thru the troubles and heartburn of a build-out when you can buy an existing restaurant, that is fully equipped with restaurant equipment for pennies on the dollar.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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Why do I need to show proof of funds
Did you know the statement “proof of funds” is not in the Merriam Webster dictionary? This information is interesting because the words, “proof of funds” are used daily in the Business Brokerage world.
Proof of Funds (POF) demonstrates how much money a person or entity has available in liquid assets. When purchasing a restaurant, you may need documentation showing your Proof of Funds to show the Seller or Listing Broker that you can cover the purchase costs of the restaurant transaction.
Dominique Maddox–Restaurant Broker and Founder of EATS Broker says, “I have experienced some serious heartburn from deals that I did not require a buyer’s proof of funds upfront. Restaurant Listings that are franchises with financial requirements, high-income listings, and SBA approved deals, I will require proof of funds before providing seller’s financials”.
A good Restaurant Broker will pre-approve buyers before sending the seller’s sensitive financial information to buyers for review. EATS Broker usually requires proof of funds in the form of a bank statement, 401 K statement, or letter from Bank. Once we have received the buyer’s financial information, we will send the restaurant name and profit and loss statements for review.
Proof of Funds should have the following information:
- Name of the account holder
- The balance of funds
- Date- needs to be within 3 months
- Letter from the bank-requires banker’s contact information
- Account Number is not needed
Proof of Funds not accepted
- Personal Financial Statement
- Copy of partner’s financials-if not involved in the deal
- Copy of mother’s or father’s 401K statement, but they are not part of the deal
- Copy of bank statement with balance amount blacked out
- Copy of a company’s Profit and Loss statement
- A verbal statement- I have more than enough to buy this business
- A verbal statement-I’m not showing my proof of funds until I see the restaurant’s financials
- A bank statement below the required liquid asset requirement
EATS Restaurant Brokers works with two different types of buyers. 1st the buyer that is willing to send proof of funds, and 2nd the buyer that doesn’t want to show proof of funds. Whom do you think a Restaurant Broker would prefer to work with and will respond to faster?
Some buyers feel entitled to view the seller’s financial information just because the restaurant is for sale. Imagine a buyer requesting a personal viewing for a home but doesn’t want to show their personal financial information.
EATS Broker advice to any buyers looking to purchase a restaurant have your proof of funds ready to show. Restaurant Brokers are looking for RAW(ready, able, and willing) buyers to convert into a closed transaction. Restaurant Brokerage is a 100% commission sales job, the buyers that are serious and ready to show proof of funds get the best customer service.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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Why Buy a Restaurant? Here are Four Reasons?
It’s a golden opportunity for buyers to buy a restaurant in today’s market. BizBuySell.com states website traffic has increased with Buyers and Sellers activity. Customer traffic on the internet’s largest Business for sale site now exceeds pre-Covid-19 levels. Traffic to the website was up 19% May 2020 compared to May 2019.
Yelp recently updated its Local Economic Impact Report to provide in-depth information on the brick-and-mortar business sectors across the nation. Yelp states in March, Restaurants had the highest number of business closures, compared to other industries, and have continued to close at high rates.
53% of restaurant closures are indicated as permanent on Yelp.
What do high restaurant closures and increased seller activity on BizBuySell.com mean? It’s a great time to buy a restaurant!
EATS Restaurant Brokers Four Reasons Why it’s a great time to buy a Restaurant?
- Cares Act SBA Loan Program
As part of the coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020.
This is a great opportunity to get six months of free financing for their business. For loans made after March 27, 2020, and fully disbursed prior to September 27, 2020, SBA will begin making payments with the first payment due on the loan and will make six monthly payments.
- Second Generation Restaurant space available.
The high amount of restaurant closures is an opportunity for another restauranteur. Prime real estate spaces are coming available due to restaurants not reopening. This is a golden opportunity for buyers to get a second-generation restaurant space in prime retail areas.
- Businesses with Growth Potential
Many businesses are well-positioned for a post-Covid-19 economy. Take Out and Delivery are in high demand from online ordering and increased digital exposure. Quick Service Franchises such as Wing Stop, Papa John’s, and Domino’s have seen business skyrocket since March when the Covid-19 outbreak happen.
The forced closures across the US have increased buyer’s ordering online. Restaurants that were in position with online ordering platforms are going strong.
- Exiting Business Owners
Many baby boomers may choose to sell or close rather than persevere through Covid-19 new guidelines for re-opening. Baby Boomers that are close to retirement are viewing the opening of the economy and increased buyer demand as the time to sell.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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SBA Bank Lending for a Restaurant
SBA Bank Lending approval for a restaurant can be a challenging task to qualify for a buyer and can make the difference of a restaurant selling or not selling. Restaurants for sale that qualify for SBA lending on the market today are far less in numbers than buyers.
The restaurants that sell for the highest and best price are restaurants that qualify for lending. Banks are willing and ready to lend money to buyers, today’s buyer can qualify for an SBA loan with only 10%-30% down.
Think about how much more feasible it’s for a buyer to have $50,000-$100,000 to put down on a $500,000 restaurant for sale, than paying all CASH for the deal. The number of buyers that can buy a listing drastically increases when a restaurant has good books and records that will qualify for SBA lending.
The U.S. Small Business Administration (SBA) doesn’t provide business loans, but partially guarantees loans that banks and other lenders make to small businesses. By partially guaranteeing the loan, they will eliminate some risk and encourage lenders to make loans to small business owners.
EATS Restaurant Brokers focus for this blog is on the U.S. Small Business Administration’s (SBA) Loan Guaranty Programs. These programs are used mostly in main street restaurant transactions that are listed for $100K-$3,000,000.
3 most common SBA Loan Programs for restaurant sales and purchases.
7(a) Loans- Maximum loan amount $5 million.
SBA Guarantees- 85% guaranty for loans of $150,000 or less; 75% guaranty for loans greater than $150,000
(up to $3.75 million maximum guaranty)
Use of Proceeds: Term Loan. Expansion/ renovation; new construction, purchase land or buildings; purchase equipment, fixtures, leasehold improvements; working capital; refinance debt for compelling reasons; seasonal line of credit, inventory or starting a business
Maturity: Depends on the ability to repay. Generally, working capital & machinery & equipment (not to exceed life of the equipment) is 5-10 years; real estate is up to 25 years. When loan proceeds are used for multiple purposes maturity may be a blended maturity.
Maximum Interest Rates-Chart Version: September 2018
Loans less than 7 years: $0 – $25,000 Prime + 4.25% $25,001 – $50,000 P + 3.25% Over $50,000 Prime + 2.25%
Loans 7 years or longer: 0 – $25,000 Prime + 4.75% $25,001 – $50,000 P + 3.75% Over $50,000 Prime + 2.75%
Misc: Must be a for-profit business & meet SBA size standards; show good character, credit, management, and ability to repay. Must be an eligible type of business. Prepayment penalty for loans with maturities of 15 years or more if prepaid during first 3 years. (5% year 1, 3% year 2 and 1% year 3) Long-term financing; Improved cash flow; Fixed maturity; No balloons;
(7a)Small Loans- Maximum loan amount $350,000- Is any 7a loan $350,000 and under, except the Community Advantage and Express loans.
Use of Proceeds: Term Loan. Expansion/ renovation; new construction, purchase land or buildings; purchase equipment, fixtures, leasehold improvements; working capital; refinance debt for compelling reasons; seasonal line of credit, inventory or starting a business.
Maturity: Depends on the ability to repay. Generally, working capital & machinery & equipment (not to exceed life of the equipment) is 5-10 years; real estate is up to 25 years. When loan proceeds are used for multiple purposes maturity may be a blended maturity.
Maximum Interest Rates-Chart Version: September 2018
Loans less than 7 years: $0 – $25,000 Prime + 4.25% $25,001 – $50,000 P + 3.25% Over $50,000 Prime + 2.25%
Loans 7 years or longer: 0 – $25,000 Prime + 4.75% $25,001 – $50,000 P + 3.75% Over $50,000 Prime + 2.75%
Misc: Same as 7(a) Loans. Plus, all loan applications will be credit scored by SBA . If not an acceptable score, the loan can be submitted via full standard 7(a) or Express.
SBA Express– Maximum loan amount $350,000
Use of Proceeds: May be used for revolving lines of credit (must have term out period not less than draw period) or for a term loan. Same as 7(a)
Maximum Interest Rates: Loans $50,000 or less; prime+ 6.5% Loans over $50,000; prime + 4.5%
Misc: Same as 7(a) Loans Fast turnaround; Streamlined process; Easy-to-use line of credit
SBA Veterans Advantage – Maximum loan amount $350,000
Use of Proceeds: May be used for revolving lines of credit (must have term out period not less than draw period) or for a term loan. Same as 7(a)
Maximum Interest Rates: Loans $50,000 or less; prime+ 6.5% Loans over $50,000; prime + 4.5%
Misc: Same as 7(a) Plus, small business must be owned and controlled (51%+) by one or more of the following groups: veteran, active duty military in TAP, reservist or National Guard member or a spouse of any of these groups, or a widowed spouse of a service member or veteran who died during service, or a service-connected disability
The SBA Loan Guaranty Programs are a good option for business owners who need working capital or want to expand or acquire a restaurant.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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