If you want the best price and terms for your business, or want to acquire a business without paying so much cash upfront, an SBA loan could be the answer. With low interest rates and friendly terms, they often beat traditional financing and minimize the need to bridge pricing gaps with seller financing.
In this month’s seller webinar, CEO Andrew Gazdecki and Acquisition Success Manager Ky Pratt delve into the mechanics of SBA loans, how to get them, and their advantages and disadvantages. Discover whether an SBA loan is right for you by watching the full webinar below or skip to the recap.
Want to explore SBA loans for buying and selling businesses? [Speak to our team for free guidance.]
Who’s Presenting?
Andrew Gazdecki, Founder and CEO of Acquire.com
Andrew Gazdecki is the founder and CEO of Acquire.com and a lifelong entrepreneur. He bootstrapped his first business, Bizness Apps, to $10 million in annual recurring revenue, which he later sold to a private equity firm in a life-changing acquisition. Since then, he’s sold two more businesses, bought one, and founded the world’s largest startup acquisition marketplace.
Having been on sides of the M&A table, as a buyer and a seller, Andrew knows how complex and difficult acquisitions can be. He started Acquire.com to fix the complex acquisition process and make it easier for founders to get acquired, and he’s excited to share his knowledge with you today.
Ky Pratt, Acquisition Success Manager
Ky understands what it takes to sell a business. With a background in coaching and client success, Ky has been instrumental in several large exits, shepherding buyers and sellers through the acquisition process and ensuring satisfaction all round. Today, he joins Andrew to breakdown seller financing and what role it plays for founders looking to take their acquisition to the finish line.
What Is Acquire.com?
Acquire.com is the best online marketplace to buy and sell SaaS startups. Combining expert M&A advisory and technology, our services help you get Acquire’d fast and maximize your exit.
Since 2019, we’ve helped over a thousand founders sell their businesses, closed over half a billion dollars in deal volume, and registered over 500,000 buyers. Live internationally? No problem – we’re active in over 100 countries and every continent except Antarctica.
Navigating Buying and Selling a Business
Before we jump into SBA loans, consider the first step to buying or selling a business: preparation. Launching into the acquisition process without first jotting down a plan is a losing strategy. The more work you do before talking to buyers (or sellers), the easier you make it for them, the smoother the process.
Highlights
- The secret ingredient of successful acquisitions is knowing what you want and how to get it.
- Start by examining your goals. Then determine how you’ll achieve those goals.
- What’s your process? What data will you need to see? How will you evaluate buyers or startups?
- How can you make yourself easy to work with?
- How will you fund the acquisition, or if you’re a seller, how can you make obtaining financing against your business easy?
Finally, push forward with your acquisition plan with help from an advisor and begin growing your reputation in the marketplace. The startup community, while large, often involves many of the same people and word gets around. Don’t let ill-preparedness become a black mark against you.
Deal Structures
Acquisitions come in all shapes and sizes. Some are all cash, others a mix of cash, seller financing, earnouts, and other conditional payments. Understanding the various configurations of your purchase price (called the deal structure) and how they impact your goals will give you an edge in negotiations.
Highlights
- An all-cash deal at 100 percent of your asking price is the best scenario.
- However, most deals close with a mix of cash, financing, and conditional payments.
- Loans can be as attractive as cash upfront with the right terms and financing candidate.
- On larger acquisitions, financing is extremely common and sellers can help buyers obtain it.
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What Are SBA Loans?
SBA loans differ from traditional financing in many ways. While they typically offer lower interest rates and more flexible terms, the approval criteria are strict and terms can vary from lender to lender.
Highlights
- Small Business Administration (SBA) is a government entity to enable entrepreneurship.
- SBA reduce risk by underwriting a proportion of each loan, enabling greater access to capital.
- The SBA loan application process can be time-consuming with strict lending parameters.
- Maximum you can borrow is $5M and repayment periods can go up to 10 years.
- There are three types of SBA loan, but the SBA 7(a) loan is the most common.
How to Qualify for SBA Loans
1. Seller Checks
If you’re selling a business, these are the questions you should ask before applying to prequalify your business for an SBA loan to increase your buyer pool.
Highlights
- Being backed by the US government, SBA loans are available for US businesses only.
- You need to have been operating for at least three years.
- You need to provide at least three years of US tax returns.
- You need to be profitable and provide at least a three-year P&L.
- Ensure the business can service the loan.
- SBA can take priority over other creditors when servicing debt.
2. Buyer Checks
If your business qualifies for an SBA loan, so must your buyer. To that end, here are some questions to ask to ensure the buyer is capable of servicing the loan and meets the SBA’s lending criteria.
Highlights
- The buyer should have a good credit history with no defaults or bankruptcy.
- The buyer should have developed a credible business plan.
- The business should demonstrate strong financial projections.
- Can buyer collateralize? What assets can they use? Will it be the business itself?
- Does the buyer have any current or outstanding loans?
- If the buyer already has an SBA loan in the same industry, they’ll likely be declined for a new loan.
- Don’t delay preparation until you’re sure your acquisition will close or you could hit a roadblock.
SBA Loan Best Practices
The SBA loan criteria is just one half of your early preparations. The other is understanding SBA loan best practices, or in other words, how can you be sure the SBA loan is right for your acquisition and stands a strong chance of approval? Much of this comes down to the buyer and their choice of lender.
Highlights
Buyer’s Probability of Approval
- Ask the buyer who the lender is.
- Check whether the buyer has worked with this lender before.
- Can the lender confirm, in writing, that the buyer is a client and it has also reviewed the business?
- If the buyer can’t answer your questions or is reluctant to do so, consider it a red flag.
Risk Factors of SBA Loans
- Time. SBA loan applications can take months, so the deal could go cold before approval.
- Feasibility. A buyer will need to convince you with evidence that their application will be accepted.
- Effort. Although the responsibility for the application falls on the buyer, you, the seller, must also invest time and effort into the SBA loan application to ensure the buyer has everything they need to apply and get approval.
Ensuring Success
- The SBA loan limit of $5M is unrelated to the asking price.
- SBA loan limits are based on buyer affordability and financial projections.
- Your business will likely need working capital to be approved.
- Given the longer application process, cold feet is normal. Work hard to keep the deal alive.
- Help the buyer in any way you can with documentation and financial housekeeping.
Q&A
What’s the average time to get approved for an SBA loan?
Usually, it’s around 30-90 days. The actual time will depend on how well you meet the SBA lender’s lending criteria and the completeness and accuracy of your application.
How can I ensure I pay the least interest on my SBA loan?
As a buyer, you want to ensure you give the SBA lender everything they need – documents, financial statements, and so on – to give the best decision on your application. You can also shop your application around to different lenders. The SBA caps interest rates so you can usually find a good deal.
Can we acquire a SaaS business or technology consulting firm with an SBA loan?
Yes, it is possible, though you’d need to refer to the SBA’s lending criteria and your specific lender may have additional criteria before lending to you. The business should check all the boxes and prove beyond reasonable doubt that it’s financially sound and capable of servicing the loan. Also, SBA loans must be collateralized, which means using a business or personal asset to back the loan. A SaaS business doesn’t tend to have many tangible assets for use as collateral, so you might need to offer a personal guarantee.
How do I select between the two SBA who are bidding on my LOI?
Choose the buyer who’s the best fit for your business and goals, has the highest probability of closing, and who can demonstrate a highest chance of success of approval for the SBA loan.
What if a buyer has various loans outside of the SBA program?
This isn’t necessarily a problem assuming they can prove themselves creditworthy and capable of servicing the SBA loan on top of their existing commitments.
I am Canadian and have just moved to the US and don’t have a credit history. Do you think I can qualify and get funded with an SBA loan?
Probably not. The SBA sets a minimum credit score as part of their lending criteria.
Do buyers need to personally guarantee SBA loans if the business isn’t successful?
Yes, in most cases you’ll need to offer a personal guarantee should the business default on its loans. For more information, refer to the SBA website.
Can the buyer collaterize against existing businesses that they own? If so, what are the high-level requirements?
Yes, you can use another business as collateral for an SBA loan, but not if that other business is being used as collateral on another SBA loan or other type of financing. For more details, please refer to the SBA website.
Can the collateral be the business itself?
No, qualifying collateral is usually tangible assets like real estate, inventory, accounts receivables, machinery, and so on. You might also need to use personal assets to meet the collateral requirements. For more information, contact the SBA.
For a first-time buyer, what can one do to best position themselves in the process considering they won’t have a history with the lender?
To boost your chances of acceptance, you may need to prove yourself creditworthy and capable of running the business and that the business itself is projected to make enough money to service the loan (in addition to the usual lending criteria).
Once the current SBA loan is paid off, are you then able to qualify for another one? Is this only applicable to having two 7(a) loans at once or all SBA loans?
The SBA doesn’t place any limits on how many loans you can have, but the SBA lenders might. Speak to a lender if you want to take out another SBA loan.
How much down payment is needed for SBA 7(a)?
Usually it’s 10 percent of the loan amount, but this can increase if cash flow and collateral value are weak.
What percentage of the sale should a buyer estimate for legal fees and other closing costs?
On Acquire.com, we take care of your escrow fee. For details on how you’ll pay in legal fees, tax, and so on, speak to your attorney or accountant. Our M&A team can help you evaluate and minimize these costs when you sell with us.
Can I get an SBA loan without selling the business, boost it, and then sell it?
Yes, you can use an SBA loan to invest into growth of an existing business rather than acquire a new business. The usual SBA lending criteria will apply.
What are current rates and other key terms like PGs, prepayment penalties, and so on?
Please refer to the SBA website or your chosen lender for full terms, rates, and conditions of SBA loans.
Should I apply for an SBA loan while I’m identifying a target acquisition or wait until after I identify a potential target?
Since you will need to share business details and projections with an SBA lender, it’s probably better to wait until you’ve identified a target business and built rapport with the seller before applying.
How do you show a business plan if you don’t know what you’re buying?
Find a business that meets your and the SBA lending criteria first before applying for an SBA loan.
Are there lenders you recommend or have experience in the industry?
Yes, please contact us at support@acquire.com for a list of approved lenders. Live Oak and Cross River banks are good options plus other regional banks.
It sounds like the SBA requires a personal guarantee meaning you could personally be held liable for the loan. Does that mean it is not possible to get approved for an SBA loan if you are acquiring a business through an LLC or other corporate entity?
Please refer to the SBA website, but it’s likely you will be asked to provide a personal guarantee even if you’re acquiring the business under a corporate entity.
How are the interest rates determined?
The SBA lenders set interest rates at any amount up to the SBA cap.
Is there more information available to the limit of SBA loans one can have in a single industry?
There’s no official limit to the number of SBA loans you can have in a single industry so long as you meet the lending requirements for each loan.
Do you recommend hiring help (brokers, accountants, etc.) for first time acquirers to help apply for an SBA loan?
Yes, and our M&A team can also help you with your application when buying a company listed on our marketplace. For more details, please drop us a line at support@acquire.com.
Can the SBA loan also be combined with alternative financing and outside investors?
Yes, subject to usual underwriting requirements and lending criteria.
Do people usually use a lender from the buyer’s state or the seller’s or does state matter?
Some states have different SBA 7(a) lending requirements, so check your local lenders and state requirements for more information.
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