Today, there’s a great opportunity for entrepreneurs who would like to acquire a ready-made business: Small business owners who launched their own companies 20 years ago or more are now retiring and selling to the next generation.
In fact, the number of small businesses listed for sale nationally reached a six-year high last year, according to the online marketplace BizBuySell.com, and growth is expected to continue.
If you’re in the market for a small business, it’s likely that you’ll end up with a Small Business Administration (SBA) 7(a) loan. That’s because small business acquisitions are often considered high risk; sometimes so high risk that a buyer can’t get a conventional loan.
Through SBA financing, the government guarantees up to 75 percent of the loan, making financing available even when there’s a shortfall of collateral or if the buyer has a lack of specific industry experience. The purpose is to facilitate the strength of the U.S. small business economy for higher risk but worthy deals, while limiting risk for the lending institution.
As you investigate the purchase of a small business, here are several things to consider before meeting with your lender.
The SBA requires a third-party business valuation
Establishing a market price for a small business is a critical first step that can be both complicated and emotionally charged, and it’s often postponed. However, the SBA requires an independent business valuation as part of the loan closing process. The sooner that a value is determined, the faster the sale negotiations and closing process can proceed. The valuation must be done by an accredited third party with one of these credentials: Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA) or Accredited Business Certified Appraiser (ABCA).
The appraiser will take into account the company’s tangible assets, such as real estate, equipment and cash; historical performance; and all intangible assets, including goodwill, location, reputation, patents and intellectual property. The cost of a business valuation depends on the size and scale of the company and how readily available its assets are. Typically, this is the buyer’s expense, but may be included in the purchase price if previously performed.
SBA 7(a) loans: Designed to support growth and cash flow
Getting an SBA loan means getting a multi-purpose business loan. The loan will help the borrower acquire the business, and will likely also include working capital and/or money to refinance debt, buy equipment or buy inventory. You can also acquire real estate at the same time.
An SBA loan typically offers longer term and amortization periods than conventional loans. In conventional commercial lending, it’s not uncommon for a payment over the first few years to be low, creating a final balloon payment. As an example, a loan with a 20-year amortization but a five-year term means that at the end of year five, 180 payments are due in one large payoff. Payments for SBA loans, on the other hand, are equally distributed over the life of the loan.
A strong SBA partner means a seamless process
Though SBA financing is a government program, all of it is processed and documented through a conventional lender. Partnering with a strong SBA lender is important, because a lender with in-house expertise can efficiently navigate all aspects of this sometimes sophisticated, yet very worthwhile, lending program.
SBA lenders will carefully review all aspects of the ownership transition, ensuring for example, that there’s adequate working capital, that the equipment is operational and that there’s no deferred maintenance.
Simply put, a strong SBA lender will analyze every aspect of the business and the deal, guide you smoothly through the process and help set you up for success.
This column is brought to you by The Huntington National Bank, Member FDIC. Margaret Ference is SVP, SBA Group Manager at Huntington Bank. Reach her at [email protected], (614) 331-8645.
