If you’re in the market to buy a business, you’re not alone. The pandemic has caused thousands of people to reassess their professional life and many are looking to buy existing businesses. Corporate executives that took buyouts and early retirement are looking to realize their dream of owning their own business. This seismic and seemingly overnight shift has flooded the market. That’s good news for sellers, as asking prices have remained firm.
But that doesn’t tell the whole story.
The SBA doesn’t lend money, it simply guarantees up to 90% of the loan will be paid back to the participating bank if the lender defaults. This mitigation of risk empowers financial institutions to lend with little downside. As a result, the terms are usually very favorable. However, banks still get to choose to whom they lend money to and under what conditions.
The real world for business buyers financing
Historically, the SBA 7(a) product has been a popular choice for buyers, and that’s still true today. However, while banks are advertising, buyers can put as little as 5% down, that’s not the reality. Banks are still being cautious now, just like most businesses. Well qualified buyers with good credit scores are being required to put at least 10% down. But even at 15% down, it’s still a great deal for buyers and there are few better options.
Banks also often requiring the seller to hold a 5-10% note with the buyer. Why? It’s because the bank wants to make sure that all stakeholders in the transaction have something to lose. It’s the banks added layer of insurance that financials are accurately represented and there is appropriate training as the business transitions from one owner to the next.
It’s important to note that sellers never want to hear that part of their proceeds will be held back and put at risk. Sellers are in 2nd position after the bank. Worse, some banks are requiring that there is a standby payback period. This means the seller cannot begin collecting on their note for up to two years! If you don’t have a strong business intermediary that prepared the seller for this fact, it may be a tough sell.
Rates and other terms
It’s a great time in history to obtain a loan to buy a business. That’s not just marketing speak either. Just one year ago, the prime rate was was at 5%, and it’s at 3.25% now, the best since 2014. While SBA borrowers won’t get these rates, the SBA does cap their loan products at 2.75% over prime.
For the aforementioned 7(a) loans, they are amortized over a 10 year period. For loans that involve real estate, the amortization ranges from 15 to 25 years depending on the value of the business versus the real estate. Most of the loans we are seeing are variable, but some are occasionally fixed.
Not all banks are the same
Banks make their money through interest and transaction fees, so any bank is willing to take your loan application. However, all banks manage a portfolio and have different appetites for risk at different times. We have found that the larger banks are making loans at lower and/or fixed rates, however, they tend to have more stringent criteria and are less likely to lend than many of the lesser-known institutions that specialize in SBA financing. Keep in mind this does change, so see our office for banker recommendations. Of course, all banks will require pledged assets including your home.
Another option for business buyers financing?
Most people are not aware that you can leverage your retirement accounts for business buyers financing (401k, IRA, etc.) through a Rollover as Business Start-up” (ROBS). It’s a US Government program that allows you to use your money to fund your business. This is not a loan.
There are real advantages including;
- Don’t need perfect credit
- No payback schedule so you can reach profitability faster
- Quick 2-3 week decision process
- No taxes
As with any business buyers financing maneuver, there are risks:
- The chance of an audit could be greater
- You put your retirement at risk
- Fees up to $5,000 involved
- You must operate as a C corporation
- You’ll lose out on retirement-savings gains
Navigating which business buyers financing option you choose is no simple task. We recommend contacting our office so we can direct you to the most capable and results-oriented bankers we have worked with over the last 15 years. We also recommend looping in your financial planner so that implications for you and your family are clearly understood.
The fact remains that the conditions are favorable to own a business. As election chatter subsides and the economy regains full steam, the future is bright. Thousands of people are recognizing this opportunity. Long-term stability, freedom, and financial success are awaiting the bold few.
About Bianca Evans
Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field. She has made over 160 transactions since 2006 which makes her among the most seasoned in the area. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.
Other notable accolades and achievements:
•The Million Dollar Plus Award 2008, through 2020