Financing a Business Acquisition (U.S.): 2021 SBA IncentivesFinancing 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. BuyersVarious 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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Become a Professional Business Broker…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.