If there’s one thing we’ve learned in the business transaction world, it’s that the rules never stay the same for long.
The Small Business Administration (SBA) regularly updates the rules governing its loan programs, and another round of changes takes effect Oct. 1. We won’t bore you with every detail, but several changes could have a real impact on business buyers and sellers so we wanted to share those with you.
What Sellers Should Know
Acquisitions may create new growth opportunities.
If you’ve owned your business for at least two fiscal years, you may be able to use SBA financing to acquire another business with little or no additional equity injection, depending on how the transaction is structured and whether it meets SBA requirements. For owners looking to grow through acquisition, that could create some interesting opportunities.
Buyers may want you around longer.
Previously, SBA rules generally limited a seller’s post-closing consulting period to 12 months. That has been extended to 24 months, giving buyers more flexibility to negotiate a longer transition when it makes sense.
Expect SBA-financed deals to take longer.
For business purchases under $3 million, planning for 90 days or more is becoming increasingly realistic. Larger transactions may take substantially longer due to new Quality of Earnings requirements.
What Buyers Should Know
Smaller SBA loans won’t necessarily mean an easier process.
Loans of $350,000 or less previously benefited from streamlined requirements and lower fees. Those advantages are being reduced, which could make smaller acquisitions more challenging to finance.
Larger acquisitions will require more planning.
For SBA-financed acquisitions of $3 million or more, buyers should expect additional scrutiny, longer timelines and potentially higher costs as there are now requirements to get a Quality of Earnings report.
Financial strength matters more than ever.
Lenders will be paying close attention to both the buyer’s personal financial position and the strength and consistency of the business being acquired. Strong cash flow, clean financials, and adequate liquidity will continue to separate financeable deals from those that struggle to get across the finish line.
SBA won’t always be the answer.
As some transactions become harder to structure under SBA rules, we expect to see buyers consider more conventional financing, seller financing, and the use of retirement funds through a Rollover for Business Startups (ROBS).
SBA Rules Aren’t the Only Thing Changing
The DNA of the business buyer is changing, too.
Not long ago, many of the buyers we worked with were local individuals leaving corporate America and buying their first business. They were often looking to replace their salary, become their own boss, and build something for themselves.
We still see those buyers, but increasingly, they’re sharing the market with a different kind of acquirer.
Today’s buyer may be searching nationally. They may already own several businesses. They may have investors behind them or a defined acquisition strategy for a particular industry. Some are owner-operators. Others are building platforms designed to acquire multiple companies in the same space.
They tend to be more sophisticated, more prepared, and more selective.
For sellers, that means how your business is presented matters more than ever. Buyers expect clean financial information, a clear explanation of what makes the company valuable, and confidence that the business can continue to perform after the owner leaves.
For buyers, it means competition for good businesses is changing. Being financially prepared, knowing your acquisition criteria, and having a financing strategy in place before the right opportunity appears can make all the difference.
The rules will continue to change. So will the buyers, lenders, and financing options.
Our job is to stay ahead of those changes so our clients don’t have to.
Whether you’re considering selling a business, buying your first one, or growing through acquisition, we’re happy to have a complimentary conversation about your goals and what today’s market means for you.