"SBA-ability"
can be used as a tool to
position the buyer and seller!
In business sales, conventional loans usually aren’t available. The SBA guarantees a portion of the loan. The buyer pays an SBA loan fee that allows them to get funding for a loan the bank couldn’t do conventionally.
Benefits of an SBA loan
"SBA-Ability" is a tool to position the buyer and the seller. They open up the business for more buyers, because they
- reduce the amount of cash required
- give a longer loan term, reducing cash flow requirements
- give the buyer added comfort in the valuation of the business, as it is supported by a third party, the SBA lender
- can include working capital (7(a) - see below)
- For the Seller
- increases the value of the business, and seller gets more cash at closing
- increases the likelihood of a sale
- reduces amount of seller financing
- can provide up to 100% cash
- For the Buyer
- Increases likelihood of success of the business
- May only require a 10-15% cash injection
Buyers
Not only does the business need to be SBA-able, but the buyer needs to qualify as well. When looking at financials, the lenders will consider the take home salary from the business to the buyer. Note that the higher the salary, the lower the SBA loan will be!
Personal Home Info
- You will not be able to use a HELOC (home equity line of credit) to meet the equity requirements, and there is a 90 day lookback to see where your liquid capital is coming from. Be aware of this as you make a decision to purchase.
- The SBA guidelines, however, do not say that a HELOC cannot be used for capital injection. Be aware that the lending institution (the bank applying to for the SBA loan) might have a 5-15% requirement, however.
- The lender will take a position on your home, which could be a second or third position after your first mortgage, and your second if you have one.
Life Insurance Requirement
- Buyer must apply for and obtain adequate life insurance.
Business Info to Obtain the Loan
Free cash flow of the business will be calculated, the salary for the buyer will be taken into account and the SBA will build in a cushion for repayment of the loan. The SBA will ONLY look at tax returns, which is good for the buyer because the numbers will show real profits and losses based on IRS reporting.
If there is real estate being acquired with the business, it must be at least 51% USED by THE BUSINESS.
Certain types of businesses are excluded from obtaining SBA loans. Call for details.
Businesses MUST have verifiable financials.
The lender will need access rights to the property in the event of a default. Your intermediary will work with the landlord early in the process to obtain those rights in the event of a default.
Types of loans
SBA loans can be up to 8-figures, and will soon be a good tool for larger M&A (merger and acquisition) transactions. But, for the smaller businesses, making a transaction be "SBA-able" is crucial to obtaining this type of financing. Please note, the lending institutions are currently "tight" with the money as the new business model focuses on "Risk Aversion". There are NO guarantees a buyer will be able to get this loan. But, a business that is SBA-able on paper is more likely to be successful so will be a good option for a buyer, and a seller will be able to sell more efficiently.
- 7(a): Used to finance the acquisition of all assets, both tangible and intangible (e.g., goodwill and working capital)
- 504 : Used only to acquire tangible assets, including real estate and equipment, based on appraised values.
Default of SBA loans
If an SBA guaranteed loan goes into default, the SBA pays the lending institution up to 75 percent of any deficit left after liquidating the collateral.
Recent Changes
There have been several changes to the Small Business Administration's lending guidelines and standard operating procedures in 2009. You will want to speak with an advisor who is familiar with these recent changes.
