You’ve heard the saying: Strike while the iron’s hot.
Well, right now in the U.S., it’s getting hotter by the day.
The Small Business Administration (SBA) is a U.S. government body that finances existing businesses for growth. It ALSO underwrites the majority of bank financing for business acquisitions.
I’ve talked about the pros and cons of its acquisition loan programs before.
An SBA-backed loan can help you generate up to 80% of the purchase price for a business (90% in extreme cases), with 10-to-25-year repayment terms depending on the deal.
The benefits of the SBA are numerous…
Yes, the SBA requires a buyer’s deposit (either you or an equity partner) and a personal guarantee. But the advantages outweigh the disadvantages.
And just recently, as part of their ongoing coronavirus relief efforts, the SBA announced two major changes that made their loan programs even MORE compelling:
This is straight from the SBA’s website:
“As a part of the CARES Act, SBA is authorized to pay 6 months of principal, interest, and any associated fees that borrowers owe for all 7(a), 504, and Microloans reported in regular servicing status (excluding PPP loans).”
Can’t argue with that — it’s HUGE!
Let’s look at an example. Assume you are buying this business:
Revenue = $4,000,000
Profit Margin = 15%
Profit = $600,000
Multiple = 4X (higher than average)
Enterprise Value (EV) = $2,400,000
Assuming there are no adjustments for surplus cash or debt, it’ll cost you $2.4 million to buy this business.
The SBA will kick in 80% or $1.92 million. You (either directly or with an equity partner) will need to come up with 10% or $240K. And the last $240K (10%) can be secured with seller financing.
A guarantee fee of 3% would have cost you an additional $58K. That’s now waived.
Using the SBA’s own calculator, the monthly payments on a 10-year loan at 6% interest would be around $23K.
But since the first six months are each discounted by $9K, what would have cost you $138K (6 x $23,000) will now only cost you $84K (6 x $14K).
Add that to the waived guarantee fee and you’re now $142K richer!
If the investor pledging $240K wanted 30% of the ownership, you could pay them back much quicker — say in six months — and reduce the dilution from 30% to 10%.
Or you could use that money to immediately grow the business. Maybe hire more sales people or increase the marketing budget — take actions that will make the business more profitable and valuable when you sell it.
This is a MASSIVE set of incentives — so take advantage of them while they last!
Remember, the SBA qualification rules still apply:
And don’t forget… the SBA CANNOT pre-approve deals because a big part of the decision is YOU, the buyer. Until you apply, the SBA can’t approve the deal.
So when a broker tells you the deal is “pre-approved,” it’s simply NOT true. Call them out on this. It will further improve your credibility and deal making savvy. (You’re welcome!)
In summary, the SBA just made the lending terms sweeter. For the right buyer and the right deal, it could just be the perfect financing for you.
Go close some deals!
Until next time, bye for now.