This article highlights a brief thought process you may be experiencing when evaluating whether to start your own business or buy an existing business. Each path to business ownership is equipped with pros and cons, however buying an existing business has become increasingly popular for several reasons and SBA financing tends to be the perfect fit in many situations.
Why Not Start My Own Business?
Building a business from scratch is a journey that many aspiring entrepreneurs are not prepared to face. Start-up costs and go-to-market uncertainties are some of the reasons an estimated 2.5 million of the 30.2 million small-businesses in the U.S. change hands in some way, shape or form each year. Not only does this option allow potential small-business owners to evaluate operating history and financial performance, but it also allows these individuals to bypass time spent on the administrative burdens of getting up and running (i.e. hiring staff, implementing systems, buying licenses, etc.).
Why Has Buying a Business Become Increasingly Popular?
In 2018, more than 10,300 closed transactions were reported through the BizBuySell online marketplace platform, the highest annual total of small-business sales since the company started tracking data in 2007. Strong small-business revenues, attributed to a growing economy, have sparked interest among both those looking to buy and sell small-businesses. In addition, low interest rates have created increased buying opportunities as more and more baby boomers start to retire. Approximately 70% of business brokers recently surveyed mentioned that nearly half of closed sales were the result of baby boomers transitioning ownership to the next wave of young entrepreneurs.
What Are Initial Due Diligence Steps?
If you’ve made the decision to begin your entrepreneurial career through the acquisition of an existing business, you may have turned to online marketplaces, such as BizBuySell.com or BizQuest.com, to research and connect with small-business owners in your market prepared to sell. You may have even started to get the ball rolling with additional diligence, ranging from investigating credit history to engaging current employees or customers to better understand certain qualitative characteristics about the company. But ultimately, finding the right source to finance the acquisition is where the rubber meets the road.
Why Use the SBA 7(a) Loan Program to Buy a Business?
While there are many benefits to purchasing an existing business, it can be a costly venture. Aside from independently wealthy or privately-backed individuals, those seeking business ownership will need to research available financing options once the purchase price has been determined. The most popular way to buy an existing business, including buying out a partner or opening a franchise, is through the SBA 7(a) Loan Program. The program partially guarantees loans made by direct lenders and aims to promote economic growth by encouraging lenders to partner with small-businesses that may be struggling to secure financing on reasonable terms. Some primary benefits include long repayment terms, single digit interest rates and little to no collateral requirements. Starting an application has its complexities, so make sure to do your research on the documentation required well in advance.
What Are SBA Program Requirements for Buying a Business?
From a high-level, the business in question must be considered “small” by SBA standards. The business must be for-profit, based in the U.S., not engaged in prohibited activities and have owner equity invested. In the case of brand-new ownership transactions, the required equity injection must be at least 10% of the total project cost, while in partner buyout scenarios, the required equity injection must be at least 10% of the total purchase price. Eligible options for equity injection may include cash savings, cash from personal loans, seller notes (up to half of the required equity injection amount and must be on full standby for the life of the loan), gifts from family or friends, certain assets and retirement plan withdrawals (taxes may need to be considered). In addition, the SBA Franchise Directory offers a specified list of all franchises and other brands in the U.S. that are eligible to receive SBA loans.
What Are Next Steps?
Buying an existing business has gained significant traction as the result of a healthy economy and baby boomers reaching retirement. Updates to the SBA 7(a) Loan Program have also helped to increase business acquisition volume authorized by financial institutions, as clarity surrounding change of ownership rules has allowed lenders who were otherwise unfamiliar with the regulations to underwrite, process and close more transactions. Once you have identified a business, negotiated a purchase price with the seller and ensured certain eligibility requirements can be met, such as the required equity injection, you should connect with a Lender Service Provider or an SBA approved lender to proceed with next steps.
Starting your entrepreneurial career using the SBA 7(a) Loan Program to buy an existing business involves less uncertainty and can be very rewarding, if done the right way. Windsor Advantage’s new platform, BankLink, streamlines the path to financing for new business owners nationwide. Learn more about how we pair new business owners with an ideal SBA lender in our network of 150+ active lending institutions based on industry, credit fit, and region.
About Windsor Advantage, LLC
Windsor Advantage provides banks, credit unions and CDFIs with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.3 billion in government guaranteed loans and currently services a portfolio in excess of $1.3 billion (as of May 31, 2019) for over 85 lenders nationwide. With more than 150 years of cumulative SBA and USDA lending experience, cutting edge technology, rigid controls and consistent processes, Windsor is uniquely qualified to assist any size lender with implementing a thoughtful and profitable government guaranteed lending initiative.
Windsor Advantage has a team of 30 professionals with offices in Chicago, Illinois; Indianapolis, Indiana; Seattle, Washington and Charleston, South Carolina.
