Hello Entrepreneurs at the I4BA. We try to stay on top of all the news as it relates to your ability to purchase a profitable business. On October 13th, the SBA (United States Small Business Administration) released an update to it’s programs and lending regulations.
We haven’t fully digested all of it, and are in the process of meeting with various bankers and experts for clarification. However, one particular portion caught our immediate attention, and is definitely a good thing for all of you out there looking to acquire a business and preserve as much cash as possible. On page 6 of the information notice paragraph 3 reads as follows:
Removed the requirement for 25% equity injection when intangibles exceed $500,000 in change of ownership loans in order to process under a Lender’s delegated authority. Delegated Lenders may process any change of ownership under their delegated authority, and must comply with the minimum equity requirements as stated above (Paragraph I.C).
This has always been a sticking or stopping point for many interested buyers, particularly the folks who are trying to buy a strong cash flow company which also has limited physical assets (Note, we really like those kind of companies…cash flow is king).
For example, if you find a company that is cash flowing $350,000 per year, it’s likely that the asking price will be around $1,000,000. That’s an excellent price and an excellent return on investment. However, if that company has limited physical assets…maybe they just have a few service vehicles and some basic office equipment, the bank, per old SBA guidelines, would require that you pony up 25% in cash on the deal. That’s $250,000 out of pocket, that many buyers either don’t have or just don’t want to part with.
According to this release, that very prohibitive restriction has been removed, which is GREAT NEWS to would-be buyers of companies like this. SBA will still have other equity requirements and we are sorting through some of their other recent updates to see if they have softened as well… but at a minimum, just that one provision would save someone $150,000 (or more) out of pocket in the example company we gave above.
If you have any questions on this or any other business acquisition topic, we are glad to help. Please join our Business Buying Support Forum for free at https://www.facebook.com/groups/buyabusiness/. We hope to see you there!
Institute for Business Acquisitions