Login
SBA business acquisition financing can be especially valuable when a strong operating business generates healthy cash flow but does not have enough hard collateral to support a conventional acquisition loan.
First National Bank of Oklahoma recently closed a $3.1 million SBA 7(a) guaranteed loan to finance the acquisition an established commercial glass contractor in Oklahoma City, Oklahoma.
The financing was structured with a 13-year term and 13-year amortization, giving the borrower a longer repayment period designed to support the economics of the acquisition. The amortization period was determined by taking a weighted average of the real estate collateral vs the blue-sky assets and adjusting the amortization period to the longest allowed for each under the SBA 7(a) guidelines.
Why SBA 7(a) Financing Was a Good Fit for this Borrower
The acquired company had an established business with a 50+ year operating history, and generated meaningful operating cash flow, but the business did not have enough hard collateral on its balance sheet to support a $3.1 million acquisition loan under conventional lending standards. This can be a common occurrence in certain types of businesses like contracting and other similar service businesses, and often creates financing challenges. A company may be profitable and capable of supporting debt service, but the value of the business is not always represented by hard assets that a bank can readily collateralize.
The SBA 7(a) program is designed to help bridge that gap.
By using an SBA guarantee, First National Bank of Oklahoma was able to structure financing around the strength of the operating business and the underlying cash flow generating potential, rather than relying exclusively on traditional collateral coverage. These loans are considerably riskier than traditional commercial balance sheet loans, and as such many banks won’t do them without additional credit support like the SBA 7(a) guarantee. Even with the guarantee, the loan needs to perform or else the lender risks losing its ability to utilize the SBA 7(a) program, so the lender must be very confident in the character and relevant experience of the operator to get comfortable with the loan. In addition, under most SBA 7(a) loan structures the lender will retain 25% of the loan as a non-guaranteed residual exposure on its balance sheet, an important structural tenet of the SBA program to ensure the originating lender has “skin in the game” on any SBA loan they originate.
Why Business Acquisitions Can Be Difficult to Finance Conventionally
Acquiring an established company can involve different financing considerations than purchasing real estate or equipment.
A meaningful portion of the purchase price may reflect:
- Existing customer relationships
- Contract backlog and future work
- Trademarks or brand value
- Workforce experience
- Operating history
- Goodwill
- Other intangible business value
These assets can be very valuable to a buyer, but they are not always acceptable for a commercial bank to use as traditional collateral. When these sorts of intangible assets make up a meaningful portion of the purchase price, the regulators that oversee commercial lenders encourage their banks to either pass on the deal or seek credit enhancement through some other means.
Structuring Nuances
Business-acquisition loans require careful review before closing.
For this transaction, several third-party reports were needed as part of the SBA 7(a) underwriting process, including:
- An independent business valuation
- A real estate appraisal
- An equipment appraisal
- A Phase I environmental report
From this due diligence exercise the business valuation ultimately identified a financing gap that needed to be addressed before the transaction could close. In summary, the valuation of the business was less than the agreed upon purchase price. SBA would only lend on a discounted percentage of the business valuation amount. Both parties wanted to close the transaction at their original purchase price, so the final deal structure included additional borrower equity along with a seller note representing approximately 20% of the sales price. The seller note was subordinated to the SBA financing and placed on standstill, helping complete the capital structure while preserving the senior position of the SBA loan.
Why Seller Financing Can Matter in an SBA Acquisition
Seller financing can play an important role when the purchase price and available senior financing do not fully align. In this transaction, the subordinated seller note helped bridge the gap between the acquisition price, borrower equity, and SBA-supported bank financing.
When structured appropriately, seller financing can help:
- Complete the acquisition capital stack
- Reduce the amount of senior debt required
- Align the seller with the long-term success of the transition
- Provide additional flexibility in complex acquisition transactions
SBA Business Acquisition Financing
This acquisition is a strong example of why the SBA 7(a) program can be valuable for established businesses with strong cash flow but limited collateral.
The financing helped address several common acquisition challenges:
- A purchase price larger than the available hard collateral
- The need for third-party valuation and appraisal work
- A timing-sensitive closing process
- A gap requiring additional equity and seller participation
- The need for a repayment structure suited to a long-term acquisition
The result was a financing structure that allowed the acquisition to move forward while giving the borrower a longer repayment period.
Considering an SBA-Financed Business Acquisition?
This transaction is an example of how SBA 7(a) financing can help qualified buyers acquire established businesses when cash flow is strong but collateral coverage is limited.
First National Bank of Oklahoma has experience structuring SBA business acquisition financing and working through the valuation, collateral, equity, and seller-financing issues that can arise in these transactions.
If you are considering purchasing a business and want to understand whether SBA financing could fit the transaction, contact our team to discuss the opportunity.