IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Robin Dode of Banner Bank (www.bannerbank.com).
What Buyers and Sellers should know about SBA Financing
Around the country and here in the Puget Sound area, businesses are changing hands. We’re seeing activity by owners who wanted to sell earlier but waited, hoping for a fair price as the economy recovered. There’s also a segment of baby boomer generation owners looking to sell their companies to employees, family members or outside parties in order to retire.
Buyers and sellers considering these transactions are often surprised to learn that a change of ownership can fit well with Small Business Administration (SBA) financing, known for long amortizations, as well as reasonable rates and fees. With SBA financing, a bank makes the loan and the SBA guarantees it—typically up to 75 percent of an eligible loan.
Financing the purchase of a business can be complicated compared to financing equipment or buildings—items that can be assessed in terms of actual dollars and how they will be used by the borrower. Most change-of-ownership transactions involve a large amount of intangible assets such as goodwill, adding an element of uncertainty. That’s where the SBA’s government guaranty comes in, mitigating the risk and making the loan more viable.
SBA financing offers other benefits, too. In some cases, working capital and equipment purchases may be included in the loan. There’s no balloon payment, freeing the buyer from refinancing or expending extra resources later. And, the SBA loan’s low down payment and longer amortization help with cash flow.
Things to consider when looking at SBA financing for a change of ownership:
It’s all or nothing – An SBA loan cannot be used to partially buy into a business. One owner can buy out another, or a new buyer can purchase an entire company. An existing business can even use an SBA loan to purchase another company, provided it’s for 100 percent of that entity.
The buyer needs a business valuation – If $250,000 or less is being financed, the bank can perform an internal valuation of the business. Above that, an outside appraisal is required at the buyer’s expense.
The loan can finance up to 90 percent of the purchase price – This helps ensure the buyer is invested in and committed to the project.
The seller can carry part of the loan – If the seller is willing to carry part of the financing, the advantages may include favorable terms, a lower cash down payment and potential tax savings for the seller.
The seller must exit, but may consult – The SBA allows the seller to enter into a consulting agreement for one year only.
If you are considering buying or selling a business, rest assured there are knowledgeable, community-based bankers in our area who work frequently with the SBA. They understand the nuances of this type of financing, can guide you through the process, provide local decision-making, and structure the financing with your success in mind.
As a buyer, you’ll benefit from working with an SBA-Preferred Lender, a designation earned through experience processing SBA loans. A knowledgeable, trusted banker can offer insights on related matters, such as the value of your experience, the impact of future contracts and projected earnings, and the importance of retaining key employees after the transaction.
Take advantage of these resources. This is a big decision and you deserve robust service every step of the way. Your financial experts should work hard to help you succeed.
If you have questions relating to this article or SBA financing, Robin Dode, a Vice President, Commercial Banking Relationship Manager, and SBA Liaison, at Banner Bank would welcome the opportunity to answer questions or be a resource. Robin Dode can be reached at (206) 298-2030, or robin.dode@bannerbank.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community 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”.