How To Buy A Business in the $750,000 – $5,000,000 range
And Get Financing To Do It!
The number one way to acquire a business in this dollar range is utilizing the SBA 7a loan program. This loan program is utilized by SBA lenders to provide financing for acquisitions and a host of other types of business transactions. The premise of the program is that the SBA will guarantee repayment of a portion of the loan made by the bank. The intent is to incentivize banks to make loans they otherwise would not make. In other words, the SBA provides an insurance policy to a bank for repayment of a portion of the loan being made.
This is an especially important benefit for acquisition transactions. The primary reason is that is allows SBA lenders to make a loan based on cash flow and not on collateral. In the vast majority of acquisitions in this dollar range the assets that will be acquired are not sufficient to collateralize the loan. However, the SBA loan guarantee can be substituted for the lack of collateral allowing banks to gain a comfort level with making the loan.
While SBA lenders are willing to make these types of loans for acquisition the requirements are stringent to qualify. There are four key elements that banks will scrutinize to determine if you will be able to qualify. Those areas are:
- Business Management Experience
- Equity Injection
- Personal Balance Sheet
- Personal Credit
Business Management Experience
- Direct Industry Management Experience – this is defined as having at least five years of ownership or management experience in the industry for which you want to buy a business. You have had all or a combination of the following experience: Employee Management…….
Personal Balance Sheet
- Reduce your personal debt as much as possible – The less debt you have the better and the old adage is true – banks would…….
Equity Injection
You will need money to buy a business with bank financing. To buy a business you will need at least 10% of the total project cost in cash. Total project cost consists of the following:
- Purchase price of the business
- Fees and costs associated with buying the business
- Working capital included in the loan
For example – if you want to purchase a business for…….
Personal Credit
Our credit score should be at least 740 to rate as a strong candidate for a SBA loan. That being said, if you are above 700 you will still be a good candidate for a SBA loan in most cases. If you are below 700, then you need to figure out why.
- For example – I worked with a client who had a FICO score of 680. Upon further investigation, they had…….
The SBA 7A Loan Program
What is it?
The SBA 7a loan program is complicated to say the least. There is a 426 page Standard Operating Procedure (SOP) document dedicated to SBA 7a and 504 loans. The SOP covers all of the rules for any SBA loan that a bank must follow to preserve their guaranty when they make a loan under the program. Not only does a bank have to follow the SBA 7a rules, they will also create their own lending policy entirely dedicated to SBA 7a loans. As there are over 2000 SBA lenders in the US, this means that there are over 2000 SBA 7a loan policies created by the lending banks. This is the reason you will hear different banks tell you there are different rules as you pursue this avenue of financing to buy a business.
As in most things in life, you want to work with the best. For acquisition financing via SBA 7a you want to work with an individual SBA lender with the following:
- Works for a bank who is a Preferred SBA Lender which routinely finances acquisitions via SBA 7a and is actively lending despite the pandemic/economic conditions.
- An individual with a minimum of 20 acquisition transactions closed.
- An individual who responds in a timely manner.