How to Sell a Private Lending Business
What buyers of a private lending company look at, how the loan book and capital sources are valued, the records they ask for, and what has to transfer.
Words by
Matan Michael
A private lending business lends its own money, or money pooled from a small group of investors, to borrowers who need to close faster or on different terms than a bank will give them. Most of these companies lend on property, through bridge loans, fix and flip loans and short construction loans, and some lend against equipment or receivables. A buyer of one is buying two things at once, a book of loans that already exists and a method for finding and underwriting new ones. Those get valued separately, and owners who see that split early usually have an easier sale.
Two things a buyer can be buying
Some buyers want the loans. They look at the portfolio the way an investor looks at a bond fund, asking what it pays, how long until it pays back, and what happens if a borrower stops. Others want the platform, meaning the brand, the referral sources, the underwriting process, the servicing system and the team that runs them. A few want both and will pay for the platform only if the loans come along with it.
This matters to you because the two have different prices and different risks. A loan book is usually priced off the balances, adjusted for how each loan is performing. A platform is priced off what it earns after the owner is paid a fair salary, which is the same logic we cover in our post on how much a business is worth. If you tell a buyer you have a business that makes a lot each year, they will separate how much of that came from interest on loans you hold and how much came from origination fees on loans you could sell on to someone else. The second number is the one that stays with the platform.
Decide before you list which of these you are offering. Some owners want to sell the company and keep running their existing loans in a separate entity until they pay off. Some want out entirely. Both can work, and each changes who the buyer is.
How a buyer looks at the loan book
The first request is nearly always a schedule of every open loan, with the borrower, the property or collateral, the original amount, the current balance, the rate, the origination date, the maturity date and the loan to value at origination. The buyer wants to see the dates as much as the balances. A loan that was due last spring and still shows as current is the first thing they will ask about.
Extensions are where buyers spend their time. Short term lenders extend loans all the time, and a good reason, such as a contractor who ran two weeks late, is ordinary. A pattern of extending the same borrowers over and over so that nothing ever shows as late is something else, and an experienced buyer will find it by comparing original maturity dates against current ones. If your book has some of this, say so on the first call and show what you did about each loan. It goes better coming from you.
They will also want your history of problem loans. How many went to default, how long each took to resolve, what the foreclosure or workout cost, and what you recovered compared with what you were owed. A lender with a short list of defaults that were each handled quickly looks careful. A lender with no defaults at all, in an industry where they happen, gets asked whether they are being recorded.
Valuations of the collateral get a close look too. A buyer will ask who orders the appraisals or price opinions, whether you have title policies and insurance on file for each loan, and how you check that construction draws match the work done. Those habits tell the buyer how the next loan will be made.
Where the money comes from
A private lender needs capital, and a buyer needs to know where yours sits. Some lenders use only the owner's money. Many raise it from investors who hold notes, take a share of a loan or put funds into a pool. Others borrow against the loans from a bank through a credit line, with the bank holding a claim on the portfolio.
Each arrangement carries its own questions. If investors hold notes or shares, the buyer will ask for every agreement, the ledger of what each investor is owed, and the payment history. They will also want to know whether those investors expect to stay with the new owner. Investors often lend because they know and trust the person running the company, and a buyer pricing the deal has to guess how much of that money leaves when you do.
If a bank line is involved, read the agreement before you list. Many of them have a clause that lets the bank call the line or require its consent when ownership changes. Rules around how investor funds can be raised and what has to be disclosed to them vary by state and by how the offering was set up, and your attorney confirms what applies to you. A buyer's attorney will check this early, and a gap in the paperwork can stop the sale.
The people and the pipeline
Behind every lender is a way of finding borrowers. For most of them it is a handful of referral sources, real estate agents who know investors, mortgage companies that cannot place a deal, contractors, and past borrowers who come back. A buyer wants to know which of those relationships belong to the company and which belong to you personally. If most of the volume comes from two people who call you by your first name, the buyer will want to meet them, and some will ask for a transition period where you stay involved. Our post on owner dependency is a good read before you start those conversations.
The same question applies to underwriting. If every loan is approved by you, from a gut feel developed over many years, a buyer sees a business that stops when you leave. If you have written criteria, a second person who reviews each file, and notes on why you said no to a deal, the buyer sees something they can run. Servicing matters as well. Who collects payments, who follows up when one is late, who handles the borrower when a project stalls. A loan servicing system with clean history is worth a good deal more to a buyer than a spreadsheet only one person understands.
Repeat borrowers are a quiet strength. A borrower who has done several deals with you and paid them all off is a better predictor of the next loan than a marketing budget.
The records a buyer will ask for
Expect a buyer and their attorney to ask for the loan file on every open loan, with the signed note, the deed of trust or mortgage, the assignment documents if you bought the loan or sold a share, the title policy, the insurance certificate, the appraisal, the draw schedule and the payment history. A file with a missing signature or an unrecorded document is a problem they will price.
Beyond the loans, they will ask for business tax returns, monthly financial statements, a balance sheet that shows loans held, reserves and money owed to investors, and a bank reconciliation. Many lenders keep their books on a cash basis, which can hide the difference between interest earned and interest collected, and a buyer will usually want the numbers restated. Our post on getting your financials ready for a buyer walks through what that cleanup looks like.
Licensing records come up in every deal in this industry. Whether you need a lending license, and what kind, depends on the state, the type of loan and who the borrowers are, and your attorney confirms what applies. Have the licenses, renewals and any correspondence with a regulator in one folder, along with the compliance procedures you follow for disclosures and borrower files.
What has to transfer
Some of what a lender owns does not move to a new owner automatically. Licenses are the largest example. In some states a license stays with the entity and survives a sale of the company, in others the new owner has to apply, and that can take months. This is one of the main reasons the choice between an asset sale and a stock sale is harder for a lender than for most businesses. A stock sale can keep the license and the contracts in place, though the buyer takes on whatever liabilities the company already has.
Loans can be assigned, since that is built into most loan documents, but a buyer will want to confirm that every note allows it and whether borrowers must be told. The servicing system, the borrower database, the website and the phone numbers all need to be sorted out. Investor agreements and any bank line need consent, as covered above, and the lease on the office, if there is one, matters less than in most businesses.
If the sale includes a book of loans, expect the buyer to want representations about the condition of each one, and expect a part of the price to depend on how those loans perform after closing. Our post on earnouts and holdbacks explains how that works.
What tends to sink a sale
The most common problem is a loan book that looks different once the buyer examines it. Delinquencies that were carried as current, properties worth less than the loan, extensions stacked on extensions, and a borrower who stopped answering the phone a few months ago. Almost any of these can be worked out if the seller raises it first and has a plan. The same issue found by the buyer late in diligence usually leads to a lower price or a withdrawn offer.
Investor consent is the second. A buyer cannot close if the people who funded half the portfolio refuse to stay or object to the change. Talk to your largest investors well ahead of time, and expect some to want a conversation with the buyer first.
The third is the owner as the entire business. If you are the only underwriter, the only relationship with the referral sources and the only person the investors trust, a buyer will ask for a long transition and tie a lot of the price to it. Funds that were mixed between the company and the owner personally, or books that do not tie to bank statements, round out the list.
How to get the company ready
Start a year out. Go through every open loan and bring the file up to date, with every signature, recording, insurance certificate and payment record in place. Write down the criteria you use to approve or decline a loan, and have someone else review a few files so the process does not live only in your head. Deal with the problem loans, even if that means taking a loss on a few, because a clean book sells better than a hopeful one. Put your books on a footing a buyer's accountant can follow, and keep the investor ledger current to the day.
Then talk to your capital partners, including any bank, and read the agreements for change of ownership language. Introduce a second person to your best referral sources. When you are ready, Business Advisors of America starts with a valuation of the company and the book built from your own numbers, then prepares the materials a buyer and lender will expect and screens buyers before they see anything that identifies you. If you would like to see how buyers look at a company like yours, our page on selling a private lending business is a place to begin, and a short call with us comes after that.
