CBB CBB Buyer Qualification & Acquisition Financing 2 — Questions and Answers
Question 1: What does 'equity financing' mean in the context of a business acquisition?
- Using a line of credit to purchase the business
- Funding the purchase by issuing ownership shares or using the buyer's own capital rather than borrowing (Correct answer)
- Securing financing using the business's real estate as collateral
- A government grant program for business buyers
Correct answer: Funding the purchase by issuing ownership shares or using the buyer's own capital rather than borrowing
Equity financing involves the buyer contributing personal capital or bringing in investors rather than relying solely on debt.
Question 2: What is a 'personal financial statement' (PFS) and why do brokers request it?
- A document listing the buyer's professional certifications
- A comprehensive snapshot of an individual's assets, liabilities, and net worth used to assess financial capacity (Correct answer)
- A business plan submitted with a loan application
- A credit report from a major credit bureau
Correct answer: A comprehensive snapshot of an individual's assets, liabilities, and net worth used to assess financial capacity
A PFS shows a broker and lender whether the buyer has the net worth, liquidity, and credit standing needed to complete the acquisition and sustain operations.
Question 3: When a buyer uses a combination of bank financing and seller financing, this structure is often called a:
- Double close
- Leveraged buyout (LBO)
- Layered or blended financing structure (Correct answer)
- Equity rollover
Correct answer: Layered or blended financing structure
Layered financing combines multiple funding sources—bank debt, seller notes, equity—to meet the total purchase price when no single source suffices.
Question 4: What is the key benefit of SBA financing over conventional bank loans for business acquisitions?
- SBA loans have lower interest rates than any market alternative
- SBA loans allow lower down payments and can finance goodwill, making more acquisitions feasible (Correct answer)
- SBA loans do not require personal guarantees from the buyer
- SBA loans close faster than conventional loans
Correct answer: SBA loans allow lower down payments and can finance goodwill, making more acquisitions feasible
SBA loans enable financing of intangible assets like goodwill that conventional lenders typically won't fund, opening acquisition financing to more buyers.
Question 5: What does a lender mean when they require 'collateral' for a business acquisition loan?
- The lender requires the buyer to have business insurance
- Assets pledged by the borrower that the lender can seize if the loan is not repaid (Correct answer)
- A co-signer who guarantees the loan repayment
- Proof that the buyer has industry experience
Correct answer: Assets pledged by the borrower that the lender can seize if the loan is not repaid
Collateral provides lenders security by giving them a claim on specific assets if the borrower defaults on the loan.
Question 6: Which buyer profile characteristic most concerns a lender evaluating a business acquisition loan?
- The buyer being younger than 40 years old
- The buyer having no relevant industry experience and no management background (Correct answer)
- The buyer intending to hire a general manager to run the business
- The buyer having previously owned a successful business
Correct answer: The buyer having no relevant industry experience and no management background
Lenders want confidence the buyer can successfully operate the business; lack of relevant experience increases the perceived risk of default.
CBB CBB Buyer Qualification & Acquisition Financing 2
What does 'equity financing' mean in the context of a business acquisition?