How to Use an SBA Loan in Acquisition of a Business

When looking at businesses you might want to buy you should always keep in mind how you are going to finance the purchase of the business. Most small businesses are purchased using bank lender financing in the form of a small business SBA loan. This post discusses the Small Business Administration (SBA) loans that are available and what are the general requirements to qualify for an SBA loan. Keep in mind that specific banks may have slightly different requirements but the main issues will be the same across all banks. The SBA supports small business development centers throughout the U.S. which can provide information about the SBA Loan process.

What is an SBA Loan? What are the SBA guidelines for small business acquisition loans?

Commercial banks and the SBA agree to certain ground rules whereby if the bank adheres to the SBA loan rules, guidelines and regulations and makes a loan to a borrower under those rules, then the SBA will guarantee a significant portion of the loan (up to 90% in some cases). This SBA loan guarantee makes the loans very low risk for the banks and therefore the banks have an incentive to make these loans to small business borrowers. Not all banks participate in this program and it involves a lot of paperwork!

What do I need and what can I borrow?

Where can I find information about buying a business in a specific industry?

As we all know the web has a lot of information but often it is hard to sort through the mass to get to the finer topics.

Every Friday, on internet radio, there is a 1 hour broadcast that deals with buying a business in a specific industry. This week's show (1pm cst, noon eastern) is about trucking companies. These shows feature industry specialists who can provide true insights into the good and bad to look for in a business.

Also, on the Entrepreneurial Insights website there is a menu of many previous shows and the industries they cover. You can replay those shows at your leisure.

Take a look.......and listen to Entrepreneurial Insights , you can visit and replay the broadcast anytime but the live broadcasts are Fridays at 1pm central.

Need an SBA Loan? Here's a list of SBDC locations

Here's how to find the Small Business Administration's Small Business Development Centers nearest you.

Contact one of these offices to see if your business qualifies for an SBA Loan

If you want to buy a business go to Sunbelt Business Brokers to find an office near you.

For articles about how to Buy a Business visit our article library.

Articles:

What Do You Buy When You Buy a Business?

How to use an SBA Loan to Buy a Business.

Can Owning a Small Business Make You Wealthy?

FULL LIBRARY OF ARTICLES 

5 Reason to get a business appraisal

There are many good reasons to get a business appraisal valuation on your business. Here's a list:

1. So you can keep track of what business value you are building not just what income you are generating.
2. So you would know if someone made you an offer to buy your business that you should take. Don't rely on a buyer doing a business appraisal, you need to have one.
3. So you know what the Small Business Administration would value your business for if you applied for an SBA Loan. 
4. So you know how much life insurance you need to buy-out a partner's interest if something bad happens.
5. So you know how much you could lose by not properly segregating your personal and business risks. 

Please read number 5 again...........

Special Small Business Administration program for loans under $35,000

Take a look at an SBA ARC loan if you want/need a small loan. Very favorable terms and good flexibility read here 

When buying or selling a business....timing matters... a lot!

I am often asked when is the "right" time to buy or sell a business. Unfortunately the answer is complicated. When I'm asked that question my response is "as compared to when?".

Below is an example:
Mary wants to buy a business and John thinks he wants to sell his small business.

The Biz: In 2009 John's business struggled like many businesses. He was down about 30% in gross sales and earnings. For 2009 his sales were $600,000 and earnings $100,000. John wants to know if he can get his business back up to earnings of $125,000 can he sell it for more money in 2011 (he'll need full year 2010 results to get credit for any increased earnings).

The buyer: Now there's Mary. Mary has $100,000 for a down payment and she need's $60,000 per year in salary from the business to live on.

Let's quickly figure how much Mary can afford to pay John for his business:

Mary has $100,000 for down payment
Current interest rate used for Mary's loan 9%
Biz earnings today- Mary's salary of $60,000 leaves $40,000 ($100,000 - $60,000) left for debt service.
An SBA lender would, today, loan Mary about $197,000 based on the available $40,000 for debt service.
So Mary can pay John $197,000 + her down payment of $100,000 = $297,000.

What if John's earnings increase to $125,000 but interest rates 18 months from now are 11%
Then the bank would likely loan $237,000, add that to Mary's down payment of $100,000 = Selling price of $337,000.

So even though John's earnings increased 25%, his selling price only goes up about 11% because of the increase cost of financing caused by higher interest rates.

So when the right time, hard to say? If John waits, what happens if his earnings stay at $100,000 but interest rates increase? Then his selling price would drop!

Usually the best time to sell is when earnings are up and interest rates are down, but that doesn't always coincide with the events of the buyers and sellers lives.

Guest Post on SBA Lending

Why SBA Loan Production is Down
Sheila Spangler, CBI, Capital Strategies, Boise, ID
 
There was an article recently on CNNMoney.com that said SBA loan production is down 36 percent from 2008. As business brokers, many of us have felt that pinch first hand, but have you wondered why SBA loans have waned along with the rest of the credit market? After all, don’t those loans have a guarantee? Why won’t the bankers make them? I decided to do a little research.

As a former commercial banker, banking school graduate and business broker, I am a big fan of SBA loans. I’ve originated many in the last 20 years. Without these loans, my main street business clients would not have been able to sell their businesses to new owners or expand. We are suffering through the worst economic crisis since the Great Depression. During the Depression, interest rates were too high and no one could afford to borrow even though there was plenty of liquidity. Today, the problem is different. Rates are low yet liquidity is even lower for banks. Here’s two reasons why banks aren't willing to open the credit spigot:
1) Unhealthy balance sheet. Just because a bank may have paid back TARP, it doesn’t mean the bank is “healthy.” In many cases, problem loans are not being addressed because doing so would cause write-downs, which erode bank capital. The regulators are stepping softly in many cases encouraging bankers to term out loans for longer than normal periods to avoid losses, business closures and panic. But in many cases, the bankers are using a “head in the sand” approach and not addressing problems.
2) Fear of making the wrong decision. Bankers are running scared. The lack of capital and unaddressed time bombs on the balance sheet has made them even more cautious than normal. They are playing a waiting game: waiting for things to get better. But it’s a catch 22. Eventually, someone has to step forward and lead the charge. Of course, just like the eager lieutenant on the battle field, there is always a chance they’ll get shot in the back, too.
You’re probably thinking “Okay, but why don’t banks make SBA loans since they have a government guarantee? Aren’t they completely safe for the banks?  What have they got to lose?”
Here are my top four reasons why SBA loan production is down. These reasons are based on experience and conversations with bankers, regulators and debt buyers.
Banks:

• Laid off their experienced SBA business development officers and underwriters when the market melt down happened last year.
• Don't want to learn the program because they perceive the return to be low, and for many, what they don’t understand, they fear.
• Know that even if they get the SBA loan done properly, there is really no assurance that the bank will be able to collect on the guarantee to get “paid back” should the business fail. The loan must be properly underwritten and serviced in order to maintain the guarantee for the life of the loan.
• Don’t like unknowns and right now everything is an unknown. Is the seller’s business really able to withstand a transition now? Does the buyer really have the skills to manage and lead? Is there a hidden problem?

It’s going to be awhile before the credit market loosens. In the meantime, buyers and sellers of businesses have to get more creative and flexible. This means sellers will have to self-finance more of the transaction. That’s good for buyers but not so good for sellers that want to exit the business and not worry about it any more.
In some cases, the business owner may not be able to sell the business at all. So he or she will have to continue to work longer. This is heartbreaking for many business owners. Some have worked years to build their businesses and now see them falter just when its time to retire.
The only thing I can say is this: business owners are the toughest people in the world. Just like everything else in your business life, you’re going to have to find a way to fix this yourself. Perhaps we can form a business owner’s co-op and provide loans to each other to take the banks out of the picture. Now wouldn’t that be something?

All Small Business Owners will Leave Their Business - I Guarantee it!

The question is, will you leave your small business the smart way or leave it the dumb way?

Having an exit plan for your business is smart. A formal plan will look at your options, devise efficient tax strategies and create an estate plan that eliminates any disputes that might result if you suddenly passed away.

Here's a good article on what to consider when looking at your Exit Plan . Take a few minutes to consider how a plan can help you, your family and your business.

And I repeat.....you will leave your business one day...100% Guaranteed. If you gotta go, at least go out on your terms.

The Myth of..... "If I had more capital I could grow faster and be really, really profitable."

Here's a request we often hear from small business owners:

"Can you find me an investor? If we had more capital we could grow like crazy and make a ton of money!"

My next question to the business owner is "What would you do with $100,000 if someone wrote you that check today?"

Wow, you should hear the answers I get to that question. Here are a few examples:

"I'd pay off my debts so I could get a new loan." Huhhhh???

"I'd lower my prices so I could sell more stuff." Huhhh?

"I'd pay off some of my personal debts so my wife would stop yelling at me." That one I understand!

Even for the biz owners with answers that sound reasonable the exchange often goes something like this:

Me, "What would you do with $100,000 if someone wrote you that check today?"
Biz Owner: "I would expand my business."
Me, "How would you expand it and when would your expansion turn into additional profits?"
Biz owner, Blank stare.

The bottom line is, in all my encounters (and there are very, very many) with small business owners who say they want or need additional capital less, than 5% have a plan that makes any sense whatsoever. And then they wonder why a bank won't give them small business loans.

The vast majority of small business owners are really very bad at planning. The reasons for it are many but I think the primary reason is they have little or no idea what pieces of their businesses create the results.... good or bad.

Most small business owners are hard working, they show up for work every day and hope that working hard will result in success. Unfortunately there is very little correlation between hard work and financial success. What you need is hard and smart, not just hard work. If you own a small business spend more time on detailing out a logical and well thought out business plan. A business with a good business plan is much more profitable and infinitely less stressful than a business that wings it day-to-day. Start now, create a 1 year plan for 2010. Simple 1 year plan, week by week. Do it NOW, your deadline is to have it done by January 2, 2010. Give it a shot, what if I'm right?

Once you have a plan have someone who is successful in small business look at your plan. Don't worry about being wrong. Worry about getting better, your health and your bank account will thank you.

Have questions about what should be in your plan? Shoot me questions related to your business in the comment section and I'll try to answer them.

To paraphrase a famous business saying "A weak plan with mediocre execution will always beat no plan over the long term. A good plan well executed will always beat a great plan poorly executed."