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Changes to SBA 7(a) Loans Spark M&A Activity in 2018

SBA
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Changes to SBA 7(a) Loans Increase the Odds of Buying or Selling Your Manufacturing Business in 2018

If you’re considering selling a manufacturing business or making an acquisition this year, you’ll want to read this article.  Big changes to the SBA for 2018 stand to benefit both buyer and seller!

Historically, on acquisition loans with more than $500K in goodwill, the SBA was willing to finance up to 75% of a business purchase with the remaining 25% coming from buyer equity and a seller’s note.  The seller’s note is always subordinated to the bank and put on full standby for a minimum of two years.

If the proposed legislation is passed, SBA approved lenders will be able to finance up to 90% of an acquisition.  This is GRRREAT news for both buyers and sellers.  If you’ve been suppressing your entrepreneurial spirit, it is time to open your mind to the possibilities of owning your own business, calling the shots and managing your own P&L.  If you’re a seller, there is about to be a spike in buyers seeking an acquisition, and we at Accelerated Manufacturing Brokers, Inc., can help you get ready and prepare to sell!

So, back to the changes.  Of the remaining 10%, at least 5% must come from the buyer in the form of cash, and the balance, funded by a seller’s note, is put on full standby for the life of the loan.  So, if the life of the loan is 10 years, that is the length of the standby period.  Oops.  Bad news, Mr. Seller; right?  WRONG.  Here’s why.

Keeping the math simple, on a purchase price of $1M, the bank finances $900K, the buyer kicks in the required 5% equity, or $50K, and the seller holds a note for the remaining $50K.  Under the current guidelines, we at Accelerated Manufacturing Brokers, Inc., often see sellers holding a note for 10-15% of the purchase price or, $100K - $150K.  So, Mr. Seller, if the proposed changes are passed, you walk away from the closing with more cash in your pocket.  YAY!

That said, there will be times when a lender perceives a greater risk due to certain circumstances such as high customer concentration, minimal collateral, industry trends, the strength of the borrower, to name a few.  In those cases, the lender will require more equity.  More bad news, right, Mr. Seller?  WRONG, AGAIN!  And, here’s why.

On that same $1M purchase, the lender will now only finance $800K.  Buyer equity remains at $50K with the full standby for the $50K seller’s note.  But, the remaining $100K can be financed as a second seller’s note with payments beginning on day one.  YAY!

So, again, this is great news for both buyers and sellers.  With these changes, we anticipate an increase in M&A activity in 2018 and beyond – with more buyers able to make acquisitions they previously thought not possible.

If you are considering a career change or retirement in 2018, please contact Accelerated Manufacturing Brokers, Inc.  As a potential seller, we would be happy to start a conversation, discuss the process and provide a valuation of your business at no cost to you.  Additionally, we are skilled at working with first time buyers, offering education and guidance along the decision-making continuum.

Looking forward to hearing from you in 2018!

About Frances Brunelle

Frances Brunelle is the founder of Accelerated Manufacturing Brokers, Inc., which specializes in the sale of lower middle-market manufacturing companies nationally. Fran and her team help to ensure the continuity of U.S. Manufacturing by transitioning ownership to the next generation of entrepreneurs. Recently Fran was named to 2020 Most Influential Women in Mid-Market M&A (Mergers & Acquisitions). Fran is also the host of the WAM (Women and Manufacturing) podcast, a Jacket Media production. Fran writes on topics that help manufacturing business owners prepare their companies for sale and navigate the sale process to ensure a positive financial result in support of their retirement.

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