SBA, SBA 7a

The Golden Age of Business Acquisition

Typically, when we think about business acquisitions, we envision the big merger-and-acquisition (M&A) deals publicized in national media outlets or the corporate raiders depicted in movies like Wall Street. Today, however, business acquisitions have become a meaningful growth strategy for small businesses all across the United States. They aren’t just for the big leagues.

The reality is that while it might be more interesting for media outlets to watch how two multinational pharmaceutical companies, for example, jostle for position during a big-time M&A deal, many acquisitions will be done on Main Street as one small business acquires another.

I have been in small business lending for more than 20 years, starting with GE Capital and then later co-founding a nonbank small business finance company that reached the Inc. 500 list of fastest-growing companies in America three times. During this time, which includes my current stint starting my nonbank lending company, I have never seen a better time for business acquisitions.

According to McKinsey, acquisitions as a growth strategy can be used to meet many business goals. A business owner may want to acquire a competitor and consolidate their market. It may also make sense to acquire a new product, which you can then scale. It may be faster and cheaper to acquire a competitor that has better technology, so you don’t have to build the tech yourself. Lastly, you may identify a business that you believe you could grow substantially and turn into a winner. All of these strategies should be on the radar for small business owners who want to grow their companies.

At the same time, America’s demographics are becoming more acquisition-friendly. Most small businesses in the United States are owned by baby boomers. According to findings from a 2019 study of small business trends by Guidant Financial and Lending Club, a majority of small business owners (57%) who were surveyed were over age 50. Baby boomers are retiring in droves as about 10,000 boomers are turning 65 each day.

According to the California Association of Business Brokers, retiring baby boomer small business owners will pass-down and/or sell about $10 trillion worth of assets within the next two decades. The assets, of which 70% are expected to change hands, are held in about 12 million businesses.

The stars are aligning for a Golden Age of business acquisitions. Businesses owned by baby boomers will be up for sale, and smart entrepreneurs understand how to identify the right kind of businesses to help them grow and proven strategies to use acquisitions as a way to grow business wealth.

So, who is going to finance these transactions? In my opinion, an option to consider is the U.S. Small Business Administration and its 7(a) loan program. The SBA issued a series of modifications to its standard operating procedure (SOP 50 10 5(J)), which became effective in 2018. Whether the SBA was prescient or not, I can’t say, but modified loan requirements will make it easier for businesses to make acquisitions using 7(a) loans. Overall, here’s how SBA loans can be better than ever for business acquisitions:

• Lower equity requirements. The SBA lowered equity injection requirements, so approved lenders may now be able to finance 90% of business acquisition deals. 

• Funds a variety of uses. An SBA 7(a) loan can be used to expand or purchase an existing business, purchase commercial real estate, refinance existing business debt, finance leasehold improvements, provide working capital, buy out a partner and purchase furniture, fixtures, machinery, materials or supplies.

• More franchises are eligible. A new SBA franchise directory makes more businesses eligible for SBA loans. 

• Cheaper money. The SBA 7(a) program offers a flexible structure, up to 90% financing, lower down payments compared to ordinary conventional financing, lower monthly payments, both variable and fixed rates, and loan terms of 5 to 25 years.

• Soft costs are also eligible. Soft costs, such as closing costs, franchise fees and goodwill, are eligible for financing.

• Flexibility on value. The SBA-approved lender can loan on the value of the business, even if the collateral does not fully support the loan amount. In some instances, lenders will fund loans with little hard collateral at all.

An SBA 7(a) loan is often a great option, but not always. Certain uses are not eligible, such as real estate investing, lending, speculation or gambling-related enterprises. In some cases, personal collateral and a personal guarantee may be required of the borrower, which may not sit well with acquisition-minded professionals. Also, the SBA loan “box” is from $50,000 to $5 million. If your deal doesn’t fit, then the SBA may not be right for you.

As baby boomers retire and sell their companies, opportunities abound for entrepreneurs who want to grow through acquisition. This Golden Age of acquisitions will build wealth for both baby boomers and the generations that follow.

243 thoughts on “The Golden Age of Business Acquisition”

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