What to Expect with Business Acquisition Financing

If you are looking to purchase an existing business, the SBA 7(a) loan product could be the perfect financing option.

Acquisitions include the following types of transactions:

• Buying a successful, established independent business or franchise
• Buying a competitor to expand your existing business’s current offerings and/or capabilities
• Buying out partners in your existing business

The U.S. Small Business Administration (SBA) outlines the terms which can be offered by lenders. If the financing is for the purchase of goodwill only, the repayment term will be for 10 years with no prepayment penalties. If real estate is involved and comprises 51% or more of the use of proceeds, then an automatic 25-year term is applied. There are no prepayment penalties after Year 3 with penalties declining by 2% annually during Years 1 through 3 (5%, 3%, 1%). Interest rates are priced based on Wall Street Journal Prime, which follows the federal funds rate set by the Federal Reserve Board. The SBA caps both the variable and fixed rates lenders are able to offer. The buyer should anticipate providing a down payment at a minimum of 10% of the total project.

Along with any goodwill and real estate for sale, the buyer should also build working capital into the loan for operating expenses following the transition of ownership. The amount of working capital varies based on the business, but typically 3-6 months are needed to ensure that there are adequate funds to operate. In order to determine how much working capital is appropriate, request prior income statements from the seller to gauge monthly expenses. The buyer should also anticipate the inclusion of the SBA Guaranty Fee and closing costs in the total project, as all expenses are consolidated into one loan.

In order to properly structure the loan, lenders need to know the terms agreed upon by the buyer and seller.

While a seller note is not always required, having one adds a layer of protection for both the buyer and the lender. By the seller having “skin in the game”, it further reinforces their non-compete and helps to ensure they fulfill the time commitment outlined in the transition plan.

As a buyer, it is important to know that a bank-ordered business valuation (and commercial appraisal if property is involved) is required prior to closing. That expense is included in the closing costs and is the responsibility of the borrower. If the seller chooses to obtain a business valuation to determine the asking price for their business, that should be their expense – not that of the buyer.

While the circumstances surrounding business acquisitions are always unique, to make the process as easy as possible it is best when the buyer and seller are fair, reasonable, and patient. After all, both parties are working towards a common goal, and everyone wins when the loan closes.