Business Purchase Loan for Buying an Established Business
The business purchase loan process can be complicated and confusing if you are buying an established business or expanding your currently successful business unless you are considering an SBA loan.
Financing a business purchase with an SBA loan can be a very straightforward process and it can be an exceptionally good value, especially if you are buying an established business with solid cash flow.
Perhaps the biggest benefit that some SBA lenders provide is 100 percent business acquisition financing up to at least $5 million for the current owners of established businesses IF they are purchasing another business like their own, with the exact same ownership structure in the same geographic area with the same 6 digit NAICS code.
If, however, you do not own a business currently and you are buying a business, you still have some flexible financing options, including a no money down option.
Business Purchase Loan – Equity Requirements
No down payment business purchase loans are available in each of the following scenarios:
- The seller of an established business is willing to hold a note on “full standby” for 24 months. A full standby seller note is a note held by the seller that you do not make payments on a for specified period of time.You do not have to already own a similar type of established business in this scenario, but a lender will want to see that you and/or your management team have the right qualifications and relevant experience.
- You are buying an established business just like one you have successfully owned and operated for a long enough period of time to get a lender comfortable that you are a good risk, or…
- You have owned an established business or franchise for long enough to be “successful” and you are looking to expand by opening a new location.
Lastly, 10% down payment business purchase loans are readily available for qualified buyers acquiring all types of SBA-eligible small businesses and importantly, the SBA rules regarding where your down payment or equity injection can be sourced from are very flexible – essentially allowing you to create “100 percent business acquisition financing.”
Acceptable Sources of Equity Injection for an SBA Business Purchase Loan
The SBA is flexible regarding the source of down payment for business purchase loans for an established business. The following are acceptable:
- Cash you have saved
- Seller-held second on full standby
- Money you borrow from another lender – but you must show that you have another source of income for repayment on the borrowed money. (This other source of income can be the income of your spouse).
- Investors – usually friends of family who provide cash in exchange for a small percentage of ownership in the business
- Gifts
- Retirement account rollovers – this can be a little complicated, but it is very popular as it can be done tax and penalty free in many situations
- Current Employer Retirement Account loans – the same guideline re: having income from another source or from your spouse would apply here, but in this case, the income to pay back the loan would obviously come from your current employer where you have the retirement account. This is frequently used by borrowers who are purchasing a business but not leaving their current job. Some SBA lenders will only be comfortable with this scenario for “low maintenance” businesses like self storage, RV or boat storage, car washes, laundromats, certain online businesses, etc. where less time needs to be devoted to the business or where you have capable management or an acceptable third party management company in place. It is a judgement call for a lender, but if they feel like you can effectively operate the business while keeping your current job, it can work.
- Non-Cash Assets – the SBA allows the use of non-cash assets, but it is rarely allowed by lenders for borrowers seeking a business purchase loan since it can create complications that do not exist when a borrower is putting cash down. The SBA cautions lenders to carefully evaluate the value of property or assets that a borrower would use instead of cash and they must order an appraisal or other valuation by an independent third party that shows the value of the asset(s) is greater than the Net Book Value.
The crucial fact with all of the above is that the SBA lender must feel comfortable that you have enough of your own cash or assets invested or at risk. However, some lenders are okay if all of down payment is coming in the form of a gift or from “investors” and it can help if they are family.
Bottom line, each situation is evaluated “case by case” and is dependent on how much risk the lender sees with the loan request.
100 Percent Business Acquisition Financing
The 7a program allows lenders to provide up to $5 million in financing for a business purchase whether you are buying an established business or expanding your current business to new locations.
Lenders can also use the program to finance real estate, equipment, working capital or any other needs of a business if they can get comfortable with the loan request.
The truly unique benefits of this type of loan is that for the right transaction, the loan can be approved without collateral. In other words, if you have the right level of experience/capable management and you are buying a solid business with stable cash flow, there are lenders who will lend $5 million (or more – see below) on a transaction that does NOT include real estate or other hard assets. i.e. the entire purchase price can be allocated to business value or goodwill.
$5 to $10 Million Business Acquisition Funding
A few SBA lenders will also allows much larger transactions by providing a second “unguaranteed” mortgage behind a $5 million 7a first mortgage. This is only for the strongest of transactions, but it happens more than most borrowers (and lenders) realize.
There is also another way to acheive over $5 million in financing – the lender can elect to take a reduced guaranty from the SBA. The SBA guarantees (effectively insures) up to 75% of the loan amount for a typical SBA 7a loan of more than $350,000
The maximum SBA 7a loan is generally considered to be $5 million based on how the guaranty is calculated. The SBA will guarantee 75% of a 7a loan up to a maximum of $3,750,000, so if you divide $3,750,000 by 75% you get maximum loan amount of $5 million. However, a lender can elect to take more risk for truly solid transactions with good borrowers/guarantors by accepting a reduced amount of guaranty from the SBA.
For instance, if they felt comfortable with a 65% guaranty, they could lend a borrower up to $5,768,230. ($3,750,000 divided by .65). This is a great way to finance transactions where the sales price and loan amount might seemingly put a high leverage transaction just out of reach.
Again, there are not many lenders who will take this additional risk, but there are enough that will IF the transaction is strong enough.
Equity Injection
For further clarification, the following types of business purchases are eligible for a small business acquisition loan with no down payment:
- An independent business acquiring a competitor or “complimentary” business of similar type
- An independent business growing by adding a new location
- A successful franchisee buying a competitor
- A successful franchisee expanding by adding an additional location
- A successful medical practice, dental practice, veterinary practice and numerous other medically-related practices and businesses acquiring another practice (or complimentary practice/business) or adding a location
All of the above can be financed with no down payment with some lenders.
Business Purchase Loan With Real Estate
For business purchase loans that involve real estate, loans are available whether you own or lease the real estate.
100 percent business acquisition financing is offered with terms up to 10 years if you are leasing the property your business will occupy.
If you are buying a business that includes real estate then terms of up to 25 years are possible. The real estate value must be more than half of the total purchase price and your business or practice must occupy at least 51% of the space. For more in-depth guidelines for this type of transaction, you should visit our commercial real estate with no down payment page.
Eligible Businesses
FYI: Almost any type of SBA-eligible business could possibly qualify for this program and your business does NOT have to be a franchise or medically-related.
Online Business Acquisition
In fact, SBA loans can be used to purchase an e-commerce business with no down payment, again, if you already own a successful online business.
For a good rundown on what is possible for online businesses, you can visit this post on our blog: SBA e-commerce financing.
Franchises
Successful franchises are evaluated differently than independent businesses as lenders are more likely to allow the use of projections to decide if they qualify.
Loans for franchises are more likely to be approved if the franchise has a lot of locations and low default rate. Loans for newer franchises with fewer locations may not be available from all lenders, but if the transaction is solid and the franchise is approved prior to closing, then you should be okay.
Existing independent businesses with one or more locations seeking a 100% business purchase loan for opening a new location – not purchasing someone else’s established business – are also possible and it is helpful (but not necessarily necessary) if the current business/location is profitable enough to cashflow most of the loan for the new location.
Franchise Financing
Examples of franchises that are eligible for 100% financing as part of a business expansion include, but are not limited to:
Restaurants:
- Domino’s
- Zaxby’s
- Sonic
- Golden Corral
- Jimmy Johns
- Church’s Chicken
Preschools:
- Goddard Schools
- Kiddie Academy
- Primrose
Auto Repair and Care:
- Midas
- Meineke
- Midas
- Grease Monkey
- Big O Tire
- Jiffy Lube
- Maaco
- Aamco
Pet Boarding:
- Dogtopia
- Camp Bow Wow
Business Purchase Financing Terms
The rates and terms available for these loans depend on the strengths of each transaction. The stronger the borrower and business, the better the terms.
Please note: Most SBA lenders that offer financing with no down payment typically will NOT entertain loans smaller than $350,000 and some have a minimum of $500,000.
Both fixed rates and floating rates are available when buying an established business. Best case scenario is a 10 year fixed for larger loans and very qualified borrowers. Most SBA lenders, in fact, will not offer a fully fixed 10 year loan, but there are a few and they generally prefer to lend to medical practices or very established businesses.
Next best is a 5 year fixed with a 10 year loan term where the rate adjusts once every 5 years. Worst case, is a floating rate that would adjust either yearly or quarterly with the Prime Rate. (There are times when a floating rate can be more advantageous – for instance, in a declining rate environement).
Some lenders will occasionally offer rates below Prime, but most price their loans at a margin over the Prime Rate and it can be anywhere from Prime +0% to Prime + 3% depending on the lender, the overall quality of the borrower and the transaction, and economic conditions at the time.
SBA Minimum Borrower Qualifications
Since these are SBA loans, at a minimum they require:
- Personal Guarantee from all owners/guarantors at or above 20% ownership
- Good (recent) credit and credit scores for all owners/guarantors, but your credit does not have to be perfect for an SBA business purchase loan. You might review our blog post: SBA loan after bankruptcy for more in-depth info about how SBA lenders consider past credit issues.
- No recent “character” issues for any guarantors
- Strong, stable cash flow for established businesses or a solid business plan and projections if a business expansion/acquisition
- Possibly additional collateral for a business purchase with no real estate or hard assets. Ask us about this as there are situations where this is NOT required and at least 2 ways to avoid having a lien against your home equity should you own a home.
- Terms of 10 years or less will have no prepayment penalty
- Loans for more than 15 years have a very reasonable and short prepayment penalty
- Debt service coverage could be flexible depending on the type of business or practice
- Most closing costs as well as the SBA loan fee are financeable
Also, FYI, small business acquisition loans for businesses in leased space are typically limited to 10 years. It is possible that if the loan is being used to finance a significant amount of “long-life” equipment that this could be extended.
Please contact us at 1-800-414-5285 if you require more info re: business purchase loans or 100 percent business acquisition financing.