Business Acquisition
Are you buying a franchise or small business?
Expansion Acquisition
Business Expansion is when an existing business starts or acquires a business that is in the same industry, will have the same identical ownership, and in the same geographic area as the acquiring entity. See Expansion Acquisition.
Business Acquisition
A business acquisition is when 100% of the assets or equity/stock of a business is purchased. The buyer may be a business or an individual.
SBA Equity Injections for
Business Acquisition (non-expansion)
Equity Injection If Cash Payment
The equity injection can be paid by the borrower in cash, preferably wired to the lender a week or two before the loan closing. The money can come from savings, investments, a Home Equity Line of Credit (HELOC), or as a gift (with a gift letter as proof). Lenders usually require the most recent account statement for verification.
Full Standby Note
The SBA made a big change to the full standby seller note. Now the seller can finance the full ten percent of the equity injection requirement.
No principal or interest can be paid during the first two years standby period.
This option enables the borrower to purchase a business with no money down.
Partial Standby Note
A partial standby is where interest only payments can be made for the first two years but not principal payments.
The seller can finance up to 7.5% in a partial standby note.
The SBA requires 2.5% to come from a source other than the seller.
Adequate cash flow has to support the partial standby option.
Complete Asset or Stock/Equity Acquisition
Comparing SBA & Conventional Equity Injections
An equity injection can be provided by the buyer through a cash down payment or from the seller by providing a seller promissory note (subordinated to lender) or satisfied through a combination of buyer down payment and a seller note. Conventional and SBA loans have completely different rules for equity injections, with conventional being more consistent for all loans but also significantly higher than what SBA loans allow for.
0% SBA EQUITY INJECTION
EXPANSION ACQUISITION
0% injection required if expansion requirements met.
Expansion Loans
When an existing business purchases another similar established business. There is no down payment requirement for one business purchasing another business if three conditions are met.
The target business to purchase is in the same industry (same six digit NAICS code)
The target business to purchase is in the same geographical area as your current business (footprint for advisors)
The exact same current ownership structure will be applied to the purchased business.
If all three of these conditions are met then no equity injection is required. If all three conditions are not met, then the ten percent equity injection rules apply.
10% SBA EQUITY INJECTION
NON-EXPANSION
COMPLETE ASSET OR EQUITY ACQUISITION
10% injection required which can be satisfied in one of three ways:
1 - Cash: Paid in cash by the borrower.
2 - Full Standby Note: Seller promissory note for the 10% whereby no principal or interest can be paid during the first two years standby period.
3 - Partial Standby Note: A partial standby is where interest only payments can be made for the first two years but not principal payments.
The seller can finance up to 7.5% in a partial standby note.
The SBA requires 2.5% to come from a source other than the seller.
Adequate cash flow has to support the partial standby option.
25% CONVENTIONAL EQUITY INJECTION
25% is the typical equity injection for conventional loans.
While a borrower's personal financial situation, experience and competency, and credit scenario impacts if a bank may require an equity injection, all loans will have a primary equity injection policy and for conventional lenders it is based on Loan to value - LTV. Conventional lenders have maximum LTV requirements typically at 75% but one or two will go to 85%.
For acquisitions, LTV is calculated by combining the value of the buyer's and seller's practices, resulting in most conventional acquisition deals meeting the LTV requirement. If a $1M value practice acquires a $1M value practice then $1M loan/$2M value = 50% LTV. When a $333,000 value practice acquires $1M value practice then $1M/$1,333,000 = 75% LTV. Rule of thumb if both practices valued at same multiple, the buyer’s value needs to be at least 33% of the seller’s value to meet a 75% LTV.
See equity injection section for more details.
SMALL BUSINESS & FRANCHISE ACQUISITION LENDING GUIDE
Acquisition Loan for Buying a Business
Conventional Lending Considerations
Terms:
10/10 TERMS
10 Year term and amortization.
10/15 TERMS
10 Year term and 15 year amortization.
RATES
Current Range 7.5% to 9%.
PREPAYMENT
Yes, varies by lender, usually 1% to 2% for life of loan or first 5 years, or a higher penalty but only lasting the first few years. Each lender is different but most all will allow up to 10% to be prepaid out of free cash flow each year without penalty.
LIEN POSITION
Lender in First Lien Position.
LOAN AMOUNTS
$250,000 to $50 million. Many lenders get heartburn at the $10 million level. Most lenders will participate a larger loan exposure (over $10M) with other lenders.
Criteria:
CREDIT
Typically over 700.
LTV
Most have LTV maximum of 75%.
DTI
Debt-to-income maximum is from 30% to 40%.
DSC
A historical 1.5 DSC for two years is typically required.
AUM
Direct or indirect minimum AUM is typically about $50 million.
REVENUE
Typically needs to cashflow based on recurring revenue.
EXPERIENCE
Typically 7 years and 3 years being independent.
LIFE INSURANCE
Life insurance assignment for the amount of the loan.
Complete Buyout Considerations
DEAL GUARD RAILS
There are few guard rails in deal structure for qualifying deals as long as they make sense to the (experienced) lender.
SELLER CONSULTING
Ongoing seller involvement either in a W2 or 1099 capacity is generally encouraged and generally leave the limitations to the borrower and seller.
GUARANTORS
Sellers do not guaranty when 100% of the entity is sold as either an asset or equity purchase. The borrower plus any 20%+ partner of buying entity is a personal guarantor.
COLLATERAL
No personal property collateral but there is a UCC lien on all current and future business assets.
DSC CASH FLOW
Typical acquisition analysis is taking combined buyer and seller annual profits and dividing by annual debt service applied over each of the previous two years.
SBA Backed Lending Considerations
Terms:
10/10 TERMS
10 Year term and amortization.
RATES
Current Range 9.5% to 11%.
PREPAYMENT
Not for terms 15 years or more.
LIEN POSITION
Lender in First Lien Position.
LOAN AMOUNTS
$100,000 to $5 million. Up to $7 million w/$2M conventional pari passu.
Criteria:
CREDIT
Typically over 640.
LTV
Equity Injection “equates” to a 100% to 90% LTV.
DTI
Instead, SBA uses a 1:1 personal DSC minimum.
DSC
SBA has a 1.15 DSC minimum, most lenders at 1.25+.
REVENUE
No minimum other than the loan needs to cash flow.
EXPERIENCE
Less than 3 years experience is difficult to get done.
LIFE INSURANCE
Life insurance assignment for the amount of the loan.
Complete Buyout Considerations:
DEAL GUARD RAILS
Key guard rails are earn-out structures are ineligible and there is thee inability to maintain seller as an employee post-sale.
SELLER CONSULTING
Ongoing seller involvement must be in a 1099 capacity and not full-time longer than a year.
GUARANTORS
Sellers do not guaranty when 100% of the entity is sold as either an asset or equity purchase. The borrower plus any 20%+ partner of buying entity is a personal guarantor.
COLLATERAL
Personal property can be required for loans over $500,000 and when having 25% equity in the property.
DSC CASH FLOW
Typical acquisition analysis is taking combined buyer and seller annual profits and dividing by annual debt service applied over each of the previous two years.
FINANCE
YOUR WAY
DO-IT-YOURSELF BUSINESS LOANS
Complete application and loan package
See matching lenders
Select one or all matching lenders to access your loan package
Receive loan proposals from interested lenders
Select the winning lender and e-sign their loan proposal
Use the tools and intel available, follow the process, receive alerts at every stage along the way, and utilize LoanBox human support as needed.
LOANBOX ADVISOR SUPPORTED LOANS
Complete applicant summary form
Have consultation
Upload the docs requested
Receive, discuss, and approve your LoanBox Advisor plan
Provide needed docs as requested as your Advisor navigates everything for you
Your loan is still managed on the LoanBox platform, so you still have access to the same lenders and receives the same alerts.