Small Business Administration loans can help preserve legacy

Exploring SBA 7(a) loan program is option for those looking to acquire companies they have a stake in

Jeff Taylor

Most business owners have a goal of preserving their legacy by passing the torch to someone who is already close to the business, while retaining jobs in the market they serve. That’s why selling their business to a family member or trusted employee can be an excellent option.

However, while many of these potential buyers have the know-how to continue the business, they may lack a financing solution for the acquisition – one that combines an attractive rate with terms that help optimize working capital. The answer is often a Small Business Administration (SBA) loan.

SBA loans: A financing solution for growing companies

SBA loan programs are specifically designed to meet the unique and evolving financing needs of small business owners. The SBA does not engage in direct lending: when a small business applies for an SBA 7(a) loan, it does so through a lender that participates in SBA programs, not through the SBA itself. While the lender provides the loan, the SBA provides a limited guarantee, giving the lender lower risk and the borrower more favorable terms.

The most common type of SBA loan program, SBA 7(a) financing, provides a guarantee for a wide variety of small business funding needs, including starting a new business, meeting working capital needs, buying owner-occupied commercial real estate, purchasing equipment and making acquisitions.

“A 7(a) loan is frequently the best solution for growing companies seeking acquisition financing,” says Jennifer Fern, vice president and senior SBA specialist for KeyBank in the Vancouver market. “It’s a myth that SBA loans are just for new businesses or struggling companies. Many profitable, established businesses take advantage of SBA loans to gain the benefits of longer terms, more flexible repayment options, lower down payments and improved cash flow versus conventional lending alternatives.”

Benefits of SBA 7(a) financing for acquisitions

Preservation of a strong working capital position for growing companies is critical, and SBA 7(a) loans can be the best acquisition financing option available for a small business. 7(a) loans can enable a buyer/borrower to complete an acquisition with a loan term up to 10 years and with a lower initial down payment than what is typically required with conventional loans. That helps the buyer keep cash where it can do the most good – in the business.

“It’s important for the lender to help the borrower/buyer get into an acquisition with as little cash out of pocket as possible for a given level of risk,” says Fern. “A 7(a) loan can help a growing company hold fixed charges down and optimize working capital. An additional benefit of 7(a) loans is that they may be used for partner buyouts as well as acquisitions. The process is similar and requires the same documentation as acquisition financing.”

To be sure, SBA loans require some extra paperwork. 7(a) applicants should be prepared to provide information that includes personal and business tax information, personal and business financial statements, aging of accounts receivables and payables and articles of incorporation and bylaws. However, the advantages of favorable terms and competitive rates can far outweigh any red tape involved.

Determining value and managing risk in acquisitions

Determining fair value is often the most challenging element in an acquisition. Buyers and sellers know the business and markets, but often haven’t done the nuts and bolts assessment of what the company is worth.

“A buyer needs to get professional representation to understand exactly what’s being bought and to avoid paying too much,” says Fern. “Attorneys, accountants and bankers can provide objective input to the business owner and add significant value in an acquisition. It’s best to get them involved early in the process to ensure that the deal is fairly priced.”

If a key employee or family member associated with a small business is looking to buy the operating company they work for, they owe it to themselves to explore the SBA 7(a) loan program. 7(a) loans offer a compelling combination of terms and a low down payment that can help give acquisitions the best chance of success.

Jeff Taylor is vice president and senior relationship manager for business banking in KeyBank’s Vancouver office. He can be reached at 360.449.8059 or at