Buying an existing business can be a great way to start or grow your business, but finding the right funding isn’t always easy. The good news? Business acquisition loans, including the SBA 7(a) loan program, offer an accessible and affordable financing option!
In this overview, you’ll learn why the SBA 7(a) loan program is a great option for a business acquisition loan, how to prepare, and what to expect.
Why is the SBA 7(a) loan program great for business acquisitions?
The U.S. Small Business Administration (SBA) is the federal agency tasked with helping small business owners get easier access to funding. They have loan programs specifically designed for small businesses, including the SBA 7(a) loan, which is the SBA’s most popular loan option. It offers flexible eligibility, a wide range of uses, affordable interest rates, and high loan amounts.
Buying a business is one of the best uses for the SBA 7(a) loan program. It’s a stable and affordable strategy for entering a new market, buying out a partner, or expanding your business.
How to prepare for a business acquisition loan
The process for business acquisition loans is similar to business loans; your lender needs to know the ins and outs of you and your business before making a decision. However, there are a few more details your lender will need to know, like the acquisition deal.
What information you’ll need to gather
When lenders evaluate a potential business acquisition deal, they want to know about:
- The health of the business you’re buying
- Your financial situation
- Your industry experience
Your lender wants to ensure you’re able to pay and secure the new debt, and that your financials and experience support that.
What you’ll need from the business you’re looking to acquire:
- Most recent 3 years of financial statements.
- For an asset purchase, this will include the business’s income statement.
- For a stock purchase, this will include the business’s balance sheet and income statement.
- List or details of the assets and liabilities being transferred with the sale.
- Depending on the type of business and acquisition details, items such as accounts receivable and accounts payable aging summaries may be required.
- Any other relevant information to understand the business’s operations, such as customer concentration and payroll information.
- A healthy balance sheet, meaning the business demonstrates a history of managing debt effectively, and maintaining a balance between retaining profits and paying them to its business owners.
In a business acquisition loan, the combined funds of the loan and the equity you put in will pay out the owner that you’re replacing. Since the business will be carrying this new debt moving forward, it needs a history of profitability that’s sufficient to cover the monthly debt payments.
What information you’ll need to consider
It’s important to determine whether your business will have any interruptions without the departing owner. For some businesses, there will be a “transition period” where the previous owner slowly shifts their responsibilities to others. For others, the transition period might be more involved and require rethinking how you’ll do business going forward, such as whether you need to rebrand or develop a strategy for maintaining customer relationships.
If you’re considering applying for a business acquisition loan, do a quick assessment of your personal finances to review your:
- Net worth: How do your assets compare to your debt? Think about any investments, real estate, personal property, credit card debt, student loan debt, and mortgages you might have. Having a “positive” net worth is a big first step in qualifying for business acquisition financing.
- Outside income: Do you make any passive income? Do you have another job that provides a stable income for you? Having outside income means the business won’t have to pay you quite as much, and you’ll have more money available to make your loan payments.
What’s required for business acquisition loans?
Just like when you buy a home, buying a business requires:
- An appraisal
- A down payment
- A business valuation
If the business acquisition loan is more than $250,000, then your lender will hire a third-party business valuation service to estimate the business’s value – and you’ll be responsible for the cost. If the loan is less than $250,000, your lender will perform its own business valuation.
Make sure you’re prepared for this step of the process. The appraisal will determine the business’s true value and will impact your down payment amount. Your lender can only lend according to the business’s appraised value.
If the seller asks for more than the appraised value, you’ll need to pay the difference through another down payment. The additional down payment won’t be counted as equity towards the business acquisition. Instead, it’s seen as paying a premium for the business.
The minimum down payment for any business acquisition through the SBA loan programs is 10%. Here’s an example:
- If you’re buying a business for $100,000, then you can expect to make a down payment of $10,000 and finance $90,000 through an SBA loan. Your lender may require a higher down payment depending on your situation.
What’s a seller’s note?
If you’ve done the math on your SBA business acquisition loan and can’t afford the down payment, another option is a seller’s note. This is when some of the acquisition cost is paid off slowly over time instead of as a lump sum.
A seller’s note can be used to fund this premium or it can count as a portion of the required equity. It can also be an effective way to manage the “transition” of an exiting partner, as it ties their compensation to how well they handle their exit from the business.
Make sure to seek expert help when acquiring a business
Your SBA lender will do their due diligence on the acquisition on their part, but you need to have your own representation. This means an accountant, lawyer, or valuation expert who can provide another set of eyes on how the deal is shaping up. With the right help in place, your business acquisition is more likely to be successful.
Many small business owners have used an SBA 7(a) loan from Pursuit to buy a business and expand their ventures. We’ve worked with businesses to find the right financing for nearly any business need, and we can help yours, too!
Reach out to Pursuit today to learn more about what’s possible.