There are many ways to fund a deal. Today I want to deep dive on one of the commonly pursued – albeit more complex — funding sources specific to the U.S.
The U.S. Small Business Administration (SBA) 7(a) loan process can be rocket fuel for doing a leveraged buyout (LBO) — the type of deal structure we teach at Dealmaker Wealth Society — and make almost any deal up to $5 million fundable.
According to the SBA’s website…
The 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses. The terms and conditions, like the guaranty percentage and loan amount, may vary by the type of loan.
This also means financing to acquire a business. Students in my programs have used the SBA to finance LBOs where traditional financing methods were unavailable.
The SBA process is complex and has major differences to traditional LBO financing:
- The SBA checks your personal credit since you are borrowing the money to buy the business. With traditional financing, the business’ assets and credit are important as collateral, not yours.
- Since the SBA is essentially a cash flow lender not secured on physical assets, it wants some form of personal guarantee from you. Although I’m not aware of the SBA calling in those guarantees, it does present a risk. If you are looking at an SBA loan (essentially your lender of last resort) for an LBO, ensure you get individual legal advice about signing a personal guarantee.
What’s cool is that an SBA 7(a) loan is not owned by the federal government. It’s bank money that is then underwritten (between 75% and 90%) by the government. Those small pieces of deals (the remaining 10–25%) that are not underwritten trigger the request for personal guarantees.
You may recall in my last article on financing I discussed how to get around having to personally guarantee a loan, even with the SBA.
Here’s a refresher…
- You can refuse. Although difficult to close an SBA deal without a guarantee, if the deal is a no-brainer for everyone, you may get lucky.
- Seek legal advice on how to minimize the risk to you as much as possible.
- In the U.K., there is a well-established personal guarantee insurance market. You can sign with them at will and cover yourself. To my knowledge, this market isn’t as established in the U.S., but call business insurance providers (or brokers)… There may be something they can do.
The SBA can truly be LBO rocket fuel and make the impossible deals highly possible.
Most established banks offer the SBA 7(a) loan. I have always found most of them to be highly approachable, friendly and competent.
If you are looking at a deal and it will not work with traditional financing, give the SBA a shot. You never know, it may work out for you.
And if you want to learn much more about the LBO deal structure and available financing sources, check out Dealmaker CEO. It walks you through the 10-step business buying process in great detail. (If you’re really motivated to get at it, you can even have a deal closed before summer!)
I will be back to you soon with some thoughts on negotiations and what to do when a seller throws you a curveball.
You don’t want to miss it.
Until then, bye for now.
Editor and co-founder, Dealmaker Wealth Society