What to Consider When Buying a Business & Some Recent Changes That Can Help

April 3rd, 2018

Whether you’re interested in expanding your existing business or looking to get in to an entirely new sector, purchasing a business comes with a complex set of issues, not the least of which is financing.  After most formalities have been dealt with—such as purchase price, investigating the inner-workings of the business, and so forth—the question remains as to how the necessary money needed to purchase the business will be acquired.  If the money is not on hand, or available via family and friends, you will most likely have to go through the process of getting a loan from a traditional lending institution, such as a bank or credit union.

A Small Business Administration (SBA) loan is one of the most common types of loans for acquisition financing, especially if you’re looking for a longer-term repayment contract and a low interest rate.  The process of obtaining such a loan, however, can be complicated due to rigid qualification measures and the increased amount of time it takes for the process to finalize.  With that said, the SBA recently released modifications to its Standard Operating Procedure (SOP), drastically changing some of the guidelines used in determining whether someone qualifies for an SBA loan.  Of particular importance were the following changes:

  • Equity requirement reduction from 25% to 10%. The SBA now requires that the lendee put down only 10% of the total project cost in order to meet their equity requirement.  Though the previous amount was just on the acquisition cost, the 15% reduction nonetheless makes it easier to qualify from a money-on-hand perspective.
  • Faster seller note collection. Previously, sellers could only collect on notes after two years; the new SOP allows such payments starting day one after a sale unless the note was used as part of the 10% equity requirement.  If that is the case, the note will be on standby for a period matching the SBA loan.  This effectively increases the burden of seller financing.

Though the foregoing guideline changes will undoubtedly change the SBA loan landscape over time, because banks are still free to set many of the terms associated with the SBA loans they make, the changes will neither be sweeping nor immediate.  The changes should therefore be read as simply allowing banks more room to work with in the often-ridged setting of loan processing and approval.  It is also advisable that, when considering the purchase of a business, adequate legal counsel is consulted.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.