Leveraging personal or corporate financial positions through partnering with a bank or investors is a common methodology used by business buyers to increase the quality and size of achievable business acquisitions. It is common in the transactions facilitated by IBA, as the Pacific Northwest’s oldest sell side business brokerage firm specializing in companies with EBITDA’s ranging from $500,000 to $4,000,000, for business buyers to be able to leverage 10 – 25% capital injections employing SBA (Small Business Administration), conventional, seller financing, and private equity investment to successfully complete acquisitions in this highly competitive marketplace.
The current federal limit for SBA backed loans is $5,000,000, so the upper transaction limit using that tool is approximately $7,000,000 (e.g., $1,000,000 Buyer Capital, $1,000,000 Seller Financing, and $5,000,000 of Bank Financing). The value of having SBA loans should not be undervalued. It is one of the most important tools existing in the United States for encouraging entrepreneurship and facilitating business owners being able to transition business assets to cash for new projects, retirement, philanthropy, and family legacy planning. Without the federal government taking a risk position on small business loans the amount of money available in that space would be greatly reduced.
The next tier of financing, conventional lending, has much greater scrutiny of assets, credit, and relevant experience by a lender. It also offers superior origination fees and interest rates, so is worthy of exploration for those with the ability to qualify. Many banks offer both types of loans and will frequently problem solve through larger loan needs of clients by employing a combination of conventional & SBA loans to increase opportunity for borrowers and mitigate portfolio risk for the lender.
The third option for financing in a business sale transaction is a loan from the seller. It is prudent for a business buyer and encouraged by many banks to have this deal component because it provides a resource to address potential trailing liabilities that are the responsibility of the seller and ensures non-competition and transition training/consulting agreements are honored. Most retiring business owners, the dominant demographic served by IBA, view seller financing in a negative light, as it puts retirement assets at risk based on the management skill of successor ownership. IBA is currently seeing three to ten year seller financing, in deals with sufficient buyer capital injection. Buyers seeking seller financing where loans are placed on full standby subordinate to their primary lender for the life of the bank’s loan are frequently seeing their offers rejected and alternative buyers completing the desired acquisitions.
One of the values a business broker brings to a transaction for both the buyer and seller is the ability to find capital to complete the deal. This is one situation where all three parties; buyer, seller, & broker, are 100% in financial alignment in trying to achieve the same objective. If a satisfactory financing package is found, the buyer completes a desired acquisition, the seller achieves their targeted exit strategy, and the business broker gets compensated for their professional service. The motivation to find financing is significantly higher for intermediaries at sell side firms where broker compensation is 100% based on performance, like IBA.
Most professional intermediaries and business brokerage firms will have a Rolodex of bankers they like to work with to finance their deals. IBA, as the largest and most active business brokerage firm in the Pacific Northwest, is a market maker in our region annually creating more loan volume than our peers in the industry. Annually, we reconcile the number of loans we create and our composite loan value generated against bank performance figures reported by the SBA at the conclusion of their fiscal year (https://careports.sba.gov/views/7a504LenderReport/LenderReport).
This year’s SBA 7A loan rankings by quantity of loans funded found the following seven IBA preferred lenders in the top ten:
#1 Columbia Bank
#3 U.S. Bank
#4 Banner Bank
#6 Umpqua Bank
#8 Washington Trust Bank
#9 Live Oak Banking Company
IBA Preferred SBA Lenders also took the top four spots in the rankings of loans by dollar volume with Live Oak Banking Company ($65.48 Million), KeyBank ($54.16 Million), Umpqua Bank ($42.51 Million), and Columbia Bank ($35.53 Million) being the only banks to exceed $35 million dollars in funding.
We also appreciate the hard work of the professionals at Northwest Bank, SaviBank, Beneficial State Bank, and Kitsap Bank whose small SBA departments provide superior customer service and fill valuable roles in the local lending community.
IBA embraces its leadership role in the entrepreneurial community as a resource. If you are looking for acquisition financing, no matter how you identified the company, we welcome the opportunity to introduce you to several of the knowledgeable, experienced, highly skilled banking professionals we work with on a regular basis, so you can shop your loan needs. It is our recommendation that all business buyers shop their loans, as interest rates, funding timelines, performance, and customer service can vary greatly between financial institutions.
Rewards in the American economy go to those that take the risks, however it is nice when some of the capital on the table to make a deal is provided by someone else.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, and accounting communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.