The Small Business Administration (SBA) just stepped up in a big way to help you sell your business by bringing more buyers.
The SBA recently announced changes to the popular 7(a) loan program. It is expected to cause thousands more businesses in America to be sold this year.
Since 1953, the SBA has been assisting small businesses in ways like counseling, contracts, and perhaps most importantly, guaranteeing loans. A common misconception is that the Federal Government (through the SBA) loans money to entrepreneurs looking to start or expand their business. This is only partly true. Uncle Sam doesn’t loan directly. But, does partner with banks who are actively lending. The SBA shares the risk in a sense because if the loan defaults, the government guarantees the bank is reimbursed for some of the bad debt. This system provides an incentive for banks to take a little more risk than they normally would with traditional loans.
So what has changed for the SBA to bring more buyers?
In deals over $500,000, the SBA was requiring 25% equity. This means a potential buyer of a business needed to come to the table with $125,000 (for $500,000 selling price). That’s no small chunk of change for most. However, now the SBA is offering 10% -15% equity which means that same buyer needs just $50,000 – $75,000 respectively. That’s a much more manageable figure and is achievable for most reasonably qualified buyers.
“It’s a game changer, “says Bianca Evans, Senior Associate with Transworld Business Brokers. ‘Overnight, this change in standard operating procedure opened up so much opportunity for not only the buyer, but the sellers too. We expect this change to be a very good thing for sellers because with more buyers in the market, there is more competition for good businesses. Already we are seeing sellers receiving higher prices. And in some cases attracting multiple qualified buyers.” That’s really good news for sellers ready to move on due to retirement or outside interests. Now is an extremely good time to sell.
Obtaining an SBA loan isn’t difficult, but it does require keen attention to detail. Buyers usually start the process by contacting their bank. They inform them of their intentions to buy a business even if they don’t have one selected yet. It is important to note that there is specific criteria that needs to be met to qualify. Most lenders have an SBA lender specialist that can help sort through financing details.
Brokers like Evans maintain relationships with these bankers and make sure buyers are well qualified before starting any discussion.
How long will the Seller’s market last?
It’s impossible to tell, but with a pro-business administration in the White House, experts agree that these favorable conditions will likely last through at least the next election cycle in 2020. The one caveat? Rising interest rates. Federal Reserve chairman Jeremy Powell is on record saying he expects rates to continue to rise to keep pace with a strengthening economy. But caution, if the cost of money gets too costly too quickly, that could have wide-reaching negative effects on business transactions.
Pent-up demand?
Our last economic downturn known as the Great Recession from December 2007 to June 2009 put the revenue brakes on most industries. The 8 trillion dollar busted housing bubble resulted in an enormous loss of wealth and consumer cutbacks. For most business owners, the memory still gives them chills.
What that meant for some is that seemingly overnight, previously attractive businesses became unsellable. Even if there was a buyer, the actual value did not meet the seller’s expectations. For thousands of business owners, they put their life plans on hold. No retiring, no traveling, no other interests. They were stuck.
The good news is, the economy is strong again. Unemployment is the lowest it’s been since August of 2000 and these aforementioned businesses are at or above 2008 revenues.
According to Evans, all indications are that 2018 will be a banner year for transactions.