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Using SBA Lending to Put the ‘Success’ in Business Succession

A business sale is the end of one chapter of a business and the start of a new owner’s journey. Owners should plan for succession before it becomes a matter of urgency. By working with seasoned business advisors, they can avoid many common pitfalls and hiccups.

Having the right financing in place is a critical part of any succession plan. The U.S. Small Business Administration (SBA) has become an increasingly popular choice to help with small business sales. Here are some key things to know about SBA financing and tips for a successful succession:

SBA lending is a good fit when selling your small business

Many small businesses don’t own major assets such as real estate or machinery that can be used as collateral to help obtain a commercial loan for financing acquisitions. SBA lenders, however, can use other factors to determine loan eligibility. They can focus on cash flow,

the transition of business knowledge and the skills of the buyer to evaluate if the business is likely to succeed, making SBA loans a viable option for many service business transactions.

Take the noise out of pandemic-era financial reports

Since the onset of the COVID-19 pandemic, many businesses have been affected by abnormal business conditions. Make it easier to secure fair financing (and a fair price) by documenting unusual trends. Some well-run businesses may show a downward trend that is really the result of the pandemic. Others may show huge year-over-year gains, but only because one year was pandemic-affected. Buyers, sellers, and banks need to study and weigh financials carefully. (A tip: Make sure PPP loans are forgiven so they aren’t counted as debt.)

SBA loans may improve cash flow and flexibility

For buyers, an SBA loan offers several advantages over most commercial loans, including better terms and the ability to include working capital in the loan to ease cash flow during the transition.

Another important difference is the 10-year term available for most non real estate SBA loans, compared to 5- or 7-year terms for many commercial loans. More time to repay means lower monthly payments, leaving the business with more monthly available income and better cash flow, increasing their ability to adapt and reinvest in the business as needed.

Working with an SBA preferred lender eliminates guesswork

It’s smart to work with an SBA preferred lender when financing a business sale. These lenders have been recognized by the SBA as having expertise in its loan programs and can complete SBA loans more efficiently than common SBA lenders. SBA preferred lenders can help navigate rules which can impact business strategy and planning, such as borrowing limitations, the long-term role of the seller, or the potential implications of company stock sales versus asset acquisitions.

For an SBA loan (or any financing): Document, document, document

For any transition plan, it’s important to start early and pay special attention to documenting what makes a business work. In addition to financials, buyers and sellers should share details on key employees, proprietary business knowledge, and the role the owner plays in operations. Lenders will expect to see that knowledge documented and transferred.

If you are considering buying or selling a business, whether it’s a partner buy-out, family transition, or third-party buyer, talk to the SBA loan experts at Alerus. As an SBA preferred lender, Alerus is ready to help you explore and develop your succession plan, including taking advantage of all the benefits SBA loans have to offer. Talk to us today to see how we can help you prepare for your next chapter.

Written by Alerus Financial

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