In May of 2023 the SBA (Small Business Administration) announced new updates to the SBA 7(a) and 504 programs. These changes were a pretty big deal and make it easier to buy a company. We have summarized the major changes and how they could affect you.
You don’t have to buy 100% of a business anymore
- SBA now allows loans for partial ownership changes, eliminating the requirement for a complete change in ownership.
- Sellers can retain a stake in the business while selling a portion, enabling them to stay involved as part-owners or employees.
- Buyers can expand their reach by investing in businesses through partial acquisitions.
- Provides opportunities for unique deal structures and succession planning loans.
Pro Tip: I think this section is probably the most important and kind of a big deal. Previously, the SBA really did not want the seller of the business involved at all once the company has been sold. This change will give you a bunch of flexibility on how you can buy a business.
Changes to the life insurance requirement
- Hazard insurance is no longer mandatory for SBA loans under $500,000, simplifying the loan process.
- Life insurance is not required for 7(a) or 504 loans.
- Reduces barriers to entry and paperwork for loans under the $500,000 threshold.
Making it easier to get the loan
- Simplification of criteria for loans under $500,000, reducing due diligence and paperwork.
- Individual lenders can use their own process to determine an applicant’s creditworthiness, including credit scoring and consideration of income and collateral/assets.
- Facilitates a more efficient underwriting process, making it easier to access SBA loans.
Broader Affiliation Rules (still not sure what this one means)
- Modification of affiliation rules for granting loans, making them less exclusionary.
- Lenders now have fewer factors to consider for affiliation, such as Common Management, Identity of Interest, and Franchise/License Agreements.
- Affiliation will be determined based on a percentage of ownership, simplifying the process.
- More businesses, including franchises, can now access SBA funding.
Changes regarding how much money you have to put up
- Start-up businesses no longer have an equity requirement, with each bank determining how much money you need to start with on a case-by-case basis.
- Buyers buying pre-existing businesses need to put up a minimum of 10% of the total acquisition.
- Financing from the seller can count towards the amount of money the buyer has to put up.
- Provides lenders with more discretion in determining equity requirements.
Read more about lending and the SBA
If you are thinking about a bank loan, How to Get a Business Loan: Insider Help from a Veteran Loan Officer book may be able to help you. This book was written by a banking insider and can provide some good tips and ideas on what will be required. It is worth a look.
The BIG takeaway from all of this
The recent updates to the SBA loan programs have significantly reduced red tape, presenting entrepreneurs with enhanced opportunities to buy and sell businesses. If you have ever dealt with the US government you know they love red tape.
With fewer limitations and greater flexibility, entrepreneurs can now get more creative in structuring deals, making buying a business more accessible and appealing than ever before. Stay informed about these changes to leverage them effectively in your acquisition strategies.
