Financing a Business Acquisition (U.S.): 2021 SBA Incentives

Financing the acquisition is always one of the more important aspects of acquiring a business. It often seems like the deal is teetering on the edge of failure as the buyer tries to convince one or more lenders that the business – and the buyer – are worth taking the risk. This is, of course, why the vast majority of deals includes some level of seller financing. A lender is more apt to lend if the seller has some skin in the game mainly because the lender’s risk is reduced not only by a lower loan amount but also by the belief that, should the new owner run into trouble, the seller will be able to jump in to save everybody’s butt – the buyer’s and the lender’s as well as his own. The Covid-19 crisis has impacted nearly every phase of life including the buying and selling of businesses. But ironically, one of the few benefits to flow in the wake of the Covid-19 virus is the extent to which governments around the world have reacted to help assure that businesses stay afloat and that, with the notable exception of businesses whose operations usually occur in tightly-packed, enclosed areas, business in general can function in a way that retains a reasonable semblance of normalcy. One of the methods governments have used to try to keep business activity afloat has been to flood their respective economies with money. Printing presses around the world have been working overtime and government debt has been piling up. How this debt will be repaid – if it ever will – is anybody’s guess; and it surely seems like it will be a significant issue in the long run. In the short run, however, many of our clients have taken advantage of this financial tsunami to keep their doors open and their employees paid.

What’s Available to U.S. Buyers

Various governments have introduced various programs and each country has instituted policies that it feels best serves its citizens interest. In the U.S., one of the most important to us is a plan introduced by the Small Business Administration – the SBA. There is a lot of dough available through the SBA as a result of the Coronavirus Aid, Relief and Economic Security (CARES) act, a $2.2 trillion spending blowout that was passed by the U.S. Congress and signed into law by President Trump in late March 2020. Its size notwithstanding, that money may eventually run out but in any event the program expires at the end of September, 2021. Everybody in our industry – buyers, sellers and, most importantly, business brokers – should be aware of it.

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There are two significant features of this program that will benefit buyers handsomely:

• First, all loan fees are waived. That is, the borrower doesn’t have to pay any.  As loan fees generally run anywhere from 2% to 3.5% of the loan amount, this represents a sizable savings up front.

• Second, the first six months of payments are made for you by the SBA up to $9,000/month. This isn’t a deferral; it’s not tacked on to the end of the buyer’s loan. The payments are made on your behalf by the munificence of the American tax payers via the SBA.

On top of this, the SBA Guaranty has been raised from 75% to 90%. This benefits both buyers and sellers because the increased level of guarantee means that the lender’s risk is even further reduced – specifically to 10% of the loan amount. If the buyer borrows $1 million to buy the business and the SBA guarantees 90% of it, the lender is at risk for only $100,000. This greatly increases lenders’ motivation and willingness to lend making financing for the acquisition of a U.S.-based business that much easier. So, here’s an example of how all this works (all numbers are rounded for the sake of efficiency in explaining the concept): In our example, we’ll assume a buyer and seller have agreed to a purchase price for the business of $1.1 million. The buyer plans to put $50,000 down and the seller has agreed to carry back $50,000 via a seller note (on full standby, meaning that the seller doesn’t get paid until the SBA-guaranteed note is paid in full). The buyer will finance $1 million with a Preferred SBA lender, 90% of which will be guaranteed by the SBA. The note guaranteed by the SBA is self-amortizing with an interest rate of 6% for a period of 10 years.

The Math

The  first benefit is that the SBA guaranty fees of $30,000 are waived – immediate savings. The second benefit is that the first $9,000 of the $11,102/month payment is made by the SBA on behalf of the borrower for the first six months. These two benefits total $84,000, the buyer realizes them within six months of the acquisition and they go right into the buyer’s pocket – or into the business for growth. The third and less quantifiable benefit is one that accrues to both buyer and seller – and, to the extent it gets deals closed, to us as intermediaries. Specifically, this is the SBA’s 90% guarantee.  This guarantee reduces the risk of the buyer’s lender and contributes significantly to the increased willingness of the lender to provide the $1 million in funding. All else being equal, this should increase the likelihood of the deal closing and everybody going home in an excellent mood! What’s not to like?

SBA Lenders

This post has been limited to programs available that can be used for financing a business acquisition in the U.S. Other countries offer business stimulus programs and any readers who are brokering businesses outside the U.S. should make themselves aware of how those programs might impact the deals they have working. We deal with SBA lenders across the U.S. and receive emails every week from these lenders that are eager to lend. If you have a deal working that you think could benefit from these generous lending programs, contact us to discuss your situation. We will almost certainly be able to recommend a couple of lenders that will be happy to look at your deal.

The Bottom Line

Now, however you feel about the moral or economic ramifications of this program, all of us will be paying for it. We’ve had several clients that have been loathe to take money from any of these stimulus programs – PPP, cash payments from the government to pretty much everybody, increased unemployment payments, etc. – because they felt they didn’t need it. But without exception the accountants and financial advisors that were consulted by our clients made the argument that whether they took the money or not, they were going to pay for it to some degree eventually. For us, this SBA program is a tool that will help a business owner that is ready to retire to monetize his or her years of work. It will also help someone who has had the dream of owning their own business bring that dream to fruition. It also may save the jobs of all the employees of the businesses we help find new owners for. For these reasons, business brokers should be aware of and be able to explain the benefits of all programs that make the acquisition of businesses easier. If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast. I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.