How To Write A Business Plan For An SBA Acquisition Loan

Why Lenders Want A Plan For An Existing Business

On a startup loan, the business plan is the case for the loan. On an acquisition, the tax returns are. So why do most lenders still ask for a plan?

Because the lender has to write a credit memo that covers more than the numbers. SBA requires that memo to describe the business, its history, its industry and its management structure, your industry experience, and who will run the business every day. The memo also has to analyze working capital needs over at least the next 12 months and the competition. Your business plan is where the lender finds most of that, in your words.

A good plan answers the underwriter's real question: what changes when the owner leaves, and why will the business keep performing with you in charge?

What Lenders Do With Your Projections

This is the most misunderstood part of an acquisition plan. Under SBA's rules, the lender must evaluate your post-closing projections but may not rely on them to meet the debt service coverage requirement. The business has to cover its loan payments at least 1.25 times based on its historical cash flow, using the last fiscal year or the average of the last two.

The lender can make prudent adjustments to that history for savings that come from the transaction itself, each one justified in the credit memo. The most common is replacing the seller's pay with a market salary for you. What it cannot do is count growth you plan to create.

So write projections that are believable rather than impressive. A plan showing 40% growth in Year 1 does not help the loan and can make the lender question your judgment. Our DSCR guide explains the coverage test in detail.

What To Include

Most acquisition plans run 10 to 20 pages. Use these sections:

1. Executive summary. The business, the price, the structure and why you are the right buyer, in one page.
2. The business today. What it sells, to whom, how long it has operated, its locations, staff and key numbers.
3. You and your team. Your experience and how it applies. Who else is on the team, including key employees who are staying.
4. The transition plan. How ownership passes from the seller to you. More on this below.
5. Market and competition. Who the competitors are, how the business wins work, and local or industry trends.
6. Operations. Suppliers, equipment, systems, licenses and the lease.
7. Sources and uses. Where the money comes from and where it goes. See sources and uses.
8. Financials. Three years of history, the current year to date, the adjustments you are claiming and two to three years of projections with the assumptions behind them.
9. Working capital. How much cash the business needs month to month, especially if it is seasonal, and how you will fund it.

Make Every Assumption Visible

SBA's guidance on projections asks lenders to look for three things: a justification for revenue growth, a justification for any cost cuts, and a comparison to industry trends. Write your assumptions the same way. "Revenue grows 6% from a price increase in March, in line with the last two increases" is far stronger than "Revenue grows 6%."

Write The Transition Plan First

For an acquisition, this is the section underwriters read most carefully. Cover:

• Your first 90 days. What you will learn, who you will meet and what you will not change yet. See the first 100 days after buying a business.
• The seller's role. Under SBA rules the seller cannot stay as an owner, officer or employee, but the business can hire them as a consultant for up to 24 months in total. Say what they will do and for how long. See seller transition and consulting.
• Key people. Which employees hold customer relationships, licenses or technical knowledge, and how you will keep them.
• Customers and suppliers. How and when you will introduce yourself, and how you will protect the largest accounts.
• Your daily role. Whether you will be on site full time, and who runs what.

Common Mistakes

The last one deserves a second look. Lenders want growth plans, but they want them funded carefully and phased in after you have learned the business. If your plan includes an expansion, show how the base business still covers the debt if the expansion takes longer than expected.

How Long It Takes And Getting Help

A first draft usually takes a week or two once you have the seller's financials. Start it as soon as the letter of intent is signed, so it is ready when the lender asks. It sits alongside the rest of your file; see the full list of documents needed for an SBA acquisition loan and what SBA lenders look for in a buyer.

If you would rather not start from a blank page, our business plan writer builds a lender-ready acquisition plan around your deal. Before the plan, a pre-qualification letter confirms the deal can be financed, and our SBA business acquisition loan page covers how the loan works.