Business Acquisition

Typically, the SBA 7(a) loan product is used in this type of transaction.

The SBA allows the lender to offer up to a 10-year term on business acquisition loans. At FNB Small Business Finance, we normally do a full 10-year term, fully amortizing, without prepayment penalties.

For SBA 7(a) loans, we offer all borrowers a quarterly variable, three- or five-year fixed interest rate structure and let you choose the option you feel works best for you.

The SBA rules require an equity injection of 10 percent of the total project cost on a business acquisition transaction. Total Project Cost includes:

• Purchase price of the business.
• Working capital in the loan.
• New equipment or other assets required to run the business.
• All loan costs and fees.

The SBA requires a full 10 percent Equity Injection based on total project costs, not just the purchase price.

We can look at any of the below options depending on the nature of the transaction. Your Business Development Officer can advise you about how these structures may be used.

• The buyer can bring the full 10 percent in cash to the deal.
• The seller can help provide up to 50 percent of the equity to meet the requirement with a seller note on full standby for the life of the SBA loan.
• Some or all of the equity can come in the form of a gift with needed proper documentation. Our policy requires that this gift come from a parent or other close relative of the borrower.
• Some buyers want to bring in minority investors as a source of equity. Our policy is that whoever provides the majority of the equity must personally guarantee the loan, even if they own less than 20 percent of the business. In these types of transactions, we often encounter various potential ownership structures.

The SBA rules consider this a business acquisition, so the 10 percent equity for total project cost requirements apply for a 7(a) loan.

If the loan’s use of proceeds is 51 percent or more for real estate, the SBA enables the lender to offer up to a 25-year term on one 7(a) loan for the entire transaction. If real estate proceeds are less than 51 percent, the SBA requires the lender to do a blended term based on the total use of proceeds.

A transaction of this type can be structured with a 7(a) loan for the business acquisition (10-year term, 10 percent equity) and an SBA 504 loan for the real estate (up to 25-year term, commonly 15 percent equity).

Your Business Development Officer can advise you about how these structures can work so you can decide the best option for you.

SBA rules now require that any seller note being used to satisfy equity injection requirements must be on full standby for the life of the SBA loan. No payments of interest or principal will be made during the full standby period; however, interest may accrue throughout this period.

Seller notes may be structured with a rebate to the buyer(s) based on business performance (reduction in principal) if the seller note is not used to meet equity injection requirements. Seller earnouts are prohibited by the SBA rules.

Most often, we see buyers wanting to use a Home Equity Line of Credit (HELOC) for this purpose. SBA rules now say this is eligible as long as the borrower has sufficient outside income, not associated with the business being purchased (including proposed salary), to support the payments on the borrowed money.

Yes, either through a Rollover for Business Startups (ROBS) plan or by cashing out funds net of all taxes and penalties that may be due.

We look for a cash flow coverage ratio sufficient to support the living expenses of the buyer and to repay the loan for the past two years and interim period for the subject business. Minimum requirements may vary depending on the details of the transaction. Your Business Development Officer can review your transaction and advise you.

Typical cash flow calculations include the net of:

• Business net profit per the company's financial statement
• Seller's salary
• Depreciation, amortization and other non-cash charges
• Interest expense
• Rent expense if real estate is included in the deal; rent adjustment if projected rent is more or less than historic levels, as evidenced by the lease or other agreement
• Charge for buyer’s salary to cover living expenses
• Charge for capital expenditures (CAPEX) for businesses with historic annual CAPEX needs
• Other add backs (expenses a business incurs, but a new owner likely wouldn't) for non-recurring expenses may be considered on a case-by-case basis with sufficient documentation.
• Direct industry experience or transferrable management experience for the buyer(s)
• Personal credit score minimum of 650 for all guarantors 

A thorough business plan with two years of projections (first year: monthly and annual projections; second year: annual projections) and assumptions (detailed explanations of the factors, estimates and conditions used to build the financial projections) is required.

A Business Valuation Report from an FNB-qualified firm is required, showing value of at least the selling price. All seller tax returns must be verified by the IRS.

All SBA rules apply.