SBA loans are government-backed loans provided through participating lenders (typically banks and credit unions). For business acquisitions, the SBA guarantees a portion of the loan (usually 75-85%), which reduces the lender's risk and makes them more willing to approve financing for business purchases that might not qualify for conventional loans.

The SBA 7(a) loan program is the most common option for business acquisitions. For larger acquisitions, the SBA 504 program might be used in conjunction with conventional financing. The 7(a) program typically allows for the purchase of business assets, real estate, and goodwill associated with an existing business.

The SBA typically requires a minimum down payment of 10% of the purchase price. However, many lenders prefer 15-20%, especially for larger acquisitions or businesses in higher-risk industries. The seller can potentially finance a portion of this down payment through a seller note, but there are restrictions on how this is structured. The SBA however does allow the Seller to finance up to 5% of the required 10% deposit required meaning you may only need 5% of the total purchase price.

Eligible businesses must:

• Be for-profit and located in the United States

• Meet SBA size standards for small businesses

• Demonstrate sufficient cash flow to support debt service

• Not be engaged in prohibited activities (such as lending, gambling, or real estate investment)

• Have a business valuation that supports the purchase price

As a buyer, you typically need:

• Good personal credit (preferably 680+ score)

• Industry experience or transferable management skills

• Sufficient personal funds for the down payment (can't be 100% borrowed)

• No recent bankruptcies, foreclosures, or tax liens

• U.S. citizenship or permanent residency

While experience in the specific industry is highly preferred, it's not always mandatory. Buyers without direct industry experience may still qualify if they:

• Have transferable management skills

• Demonstrate a solid understanding of the business

• Present a detailed business plan addressing their experience gap

• Retain key employees who have the necessary operational expertise

• Partner with someone who has relevant experience

The entire process typically takes 60-90 days from application to funding, but can vary based on:

• Complexity of the business being acquired

• Lender's efficiency and workload

• Completeness of your application package

• Speed of third-party reports (business valuation, environmental assessments, etc.)

• Any unique circumstances requiring additional review

You'll typically need to provide:

• Personal financial statement

• Last 3 years of personal tax returns

• Resume or CV showing relevant experience

• Business plan and projections for the acquisition

• Last 3 years of the target business's financial statements and tax returns

• Details of the proposed transaction (purchase agreement or LOI)

• Business valuation supporting the purchase price

• Current business debt schedule (if applicable)

The SBA doesn't specifically prohibit most legitimate business types, but they do exclude certain categories such as:

• Businesses primarily engaged in lending

• Real estate investment firms

• Gambling businesses

• Businesses promoting religious objectives

• Businesses where the owner is not actively involved in operations

• Businesses engaged in illegal activities

• Businesses with excessive owner-benefit structures

The SBA requires an independent business valuation for transactions over $250,000 or when a close relationship exists between buyer and seller. The valuation typically considers:

• Historical financial performance and adjusted cash flow

• Fair market value of tangible assets

• Industry multiples and comparable sales

• Future projections and growth potential

• Business risks and opportunities

SBA loans offer several advantages for business acquisitions:

• Lower down payment requirements (10-20% vs. 20-30% for conventional loans)

• Longer repayment terms, resulting in lower monthly payments

• No balloon payments or prepayment penalties (on most loans)

• Inclusion of working capital in the loan structure

• Ability to finance goodwill and intangible assets

SBA loans come with several fees:

• Guarantee fee: 2-3.75% of the guaranteed portion (can be financed)

• Packaging fees: $2,000-$5,000 (varies by lender)

• Appraisal and environmental assessment fees: $1,500-$5,000

• Business valuation: $2,500-$10,000+ (depending on business size/complexity)

• Other closing costs similar to conventional loans

Yes, SBA financing can be used for asset purchases rather than stock purchases. In fact, most SBA business acquisitions are structured as asset purchases to limit liability and provide tax advantages. The loan can cover equipment, inventory, real estate, and goodwill associated with the business.

If you default on an SBA loan:

• The lender will first attempt to work with you on a solution

• Personal guarantees will be enforced, potentially putting personal assets at risk

• Collateral (including your home if used) may be liquidated

• The SBA may pursue recovery of their guaranteed portion

• Your credit score will be significantly impacted

Yes, but the franchise must be on the SBA Franchise Directory or receive case-by-case approval. The SBA reviews franchise agreements to ensure they don't contain excessive controls that would make the franchisee ineligible for SBA financing. Most established franchises have already gone through this process.

The SBA and its lenders typically look for a Debt Service Coverage Ratio (DSCR) of at least 1.15-1.25, meaning the business's cash flow should be at least 15-25% higher than all debt payments. They calculate this using the business's adjusted historical cash flow and projected financials after the acquisition.