You’d like to own a business but aren’t sure whether to buy one that exists or start your own. While each path to business ownership is equipped with pros and cons, obtaining an SBA loan to buy a business has become increasingly popular for several reasons and SBA financing can be the perfect fit in many situations.
This article highlights a brief thought process you may be experiencing when evaluating whether to start your own business or buy an existing business.
1. Why Buy An Existing Business Rather Than Start One?
Building a business from the ground up is a journey that many aspiring entrepreneurs are not prepared to face. Steep start-up costs and unpredictable go-to-market uncertainties are just a couple of reasons. Some online sources estimate that nearly 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 gives them the ability to bypass time spent on the administrative burdens of getting up and running, like hiring staff, implementing systems, buying licenses, and more.
2. Why Has Buying a Business Become Increasingly Popular?
Last year, 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 those looking to both 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.
3. What Are Initial Due Diligence Steps?
If you’ve decided 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 for many looking to buy a business.
4. Why Use an SBA Loan to Buy a Business?
While there are many benefits to purchasing an existing business, it can be a costly venture. If you’re not independently wealthy or privately backed, you may 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 of the best 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 required documentation well in advance.
5. What Are SBA Program Requirements for Buying a Business?
At 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, and 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.
6. What Are Next Steps?
Using an SBA loan to buy a business has gained significant traction, with some factors being 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 the 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 an SBA approved lender to proceed with the 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.
To see if you qualify for business acquisition financing, contact West Town Bank & Trust at (855) 693-8290 to speak with one of our experts today.
About West Town Bank & Trust
At West Town Bank & Trust, our most important goal is to understand what’s important to you, what’s getting in your way, and what you hope to achieve, so we can help you get there. Since 1922, we’ve been creating long-lasting relationships with our customers based on old-fashioned values and future-thinking ideas. Whether solutions come from surprisingly innovative tools or trusted products you’re familiar with, our single-focused purpose is your financial well-being.