How To Buy A Business in the $750,000 – $5,000,000 range

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:

We will cover each of these areas below in-depth with the goal being to provide a foundation so you know exactly what you will need to do to qualify as a Buyer. Keep in mind, these guidelines are specific to a Buyer and the business you are looking to acquire will need to qualify as well.

The SBA 7A Loan Program

You may or may not have heard of the SBA 7a loan program. This is the loan program that banks will utilize to provide acquisition loans. They use this loan program is it is subsidized by the United States Government in the form of a guarantee. The government guarantees 75% of their loan. So if the loan goes bad, the bank can count on recouping 75% of the loan (similar to an insurance policy on the loan). BUT, just like an insurance policy the repayment is not an automatic from the government. The bank has to prove that it followed all of the rules of the SBA 7a loan program. If the bank is found to have violated a rule, then the government will deny the guarantee and the bank will not receive the 75% guaranty funds. For an acquisition, this means the bank will most likely have to write-off the entire loan amount which can have a major impact on their profitability. This is why the requirements above are so stringent when you are looking for money to buy a business. Banks want their loans to be repaid and if you meet all of the above requirements statistically your loan will have the highest probability of repayment.

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:

If you work with a SBA lender who can check all three of the above, you can have confidence you are not wasting time with this individual.