The SBA 7(a) loan program is the single most important financing tool for small business acquisitions. Here's how it works:
Key SBA 7(a) Terms for Acquisitions: - Maximum loan amount: $5 million - Down payment: typically 10% (minimum) - Term: 10 years for business acquisitions - Interest rates: Prime + 1.75% to Prime + 2.75% (variable) - SBA guarantee fee: 2–3.5% of guaranteed portion - Collateral: business assets + personal guarantee required
Qualification Requirements: - Business must have 2+ years of operating history - Buyer must have relevant industry or management experience - Debt Service Coverage Ratio (DSCR) must be 1.25x or higher - Buyer must inject at least 10% equity (can include seller note) - Business must be for-profit, US-based, and under SBA size standards - Clean personal credit (typically 680+ FICO) - No recent bankruptcies or criminal history
How the money flows in an SBA acquisition: 1. Purchase price: $800K (example) 2. SBA 7(a) loan: $720K (90%) 3. Buyer equity injection: $80K (10%) 4. Monthly payment: ~$8,300/month on a 10-year term at 8% 5. Required cash flow: Business must generate ~$10,400/month net (1.25x DSCR)
What SBA loans can cover: - Business purchase price (including goodwill) - Working capital needs - Equipment included in the sale - Real estate (with 25-year term for real estate portion) - Debt refinancing in some cases
Common SBA deal structures with seller notes: Many acquisitions combine an SBA loan with a seller note. The SBA allows seller notes on full standby (no payments for 2 years) as part of the buyer's equity injection. Example: $1M purchase price = $800K SBA loan + $100K seller note (standby, counts as equity) + $100K buyer cash.