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Acquiring a business through the SBA 7(a) loan program is a powerful way to take ownership of an established business, even with limited upfront capital. In this blog post, we’ll explore key insights into structuring SBA 7(a) deals, working with equity partners, and leveraging resources to navigate the process successfully.
Why Consider SBA 7(a) Loans for Business Acquisitions?
The SBA 7(a) loan program is one of the most popular options for small business acquisitions. It offers:
- Flexible Financing: Allows funding for acquisitions, working capital, or debt restructuring.
- Low Down Payment: Often requires only 10%-20% equity injection.
- Attractive Terms: Provides competitive interest rates and repayment terms.
For entrepreneurs looking to buy businesses like laundromats or other cash-flowing assets, SBA 7(a) loans can make ownership possible with the right structuring.
Structuring Equity Partnerships in SBA 7(a) Deals
When involving equity partners in an acquisition, it’s important to structure the deal to benefit all parties while adhering to SBA guidelines. Here’s a breakdown of how this works:
Key Guidelines for Equity Partners
- Ownership Percentages: Partners who own less than 20% of the business are not required to personally guarantee the loan.
- Equity Contributions: For example, in a $1 million acquisition requiring $100,000 in equity, two partners could each contribute $50,000 and own 19% each, leaving the remaining ownership to the lead buyer.
- Non-Loan Contributions: Equity contributions must be investments, not loans, to comply with SBA rules.
Fair Terms for Partners
- Determine a risk-reward structure that aligns with the partners’ expectations.
- Some partners may seek steady returns (e.g., 7%-8%), while others may want a larger equity stake.
Professional Support
Always have legal professionals review partnership agreements to ensure they meet legal and SBA requirements.
Evaluating the Deal’s Financials
For any SBA 7(a) acquisition, understanding the financial health of the target business is crucial. Here’s how:
- Obtain Tax Returns: Secure three years of tax returns to verify cash flow.
- Debt Service Coverage: Ensure the business’s cash flow supports loan payments.
- Work with Experts: Platforms like bookwithbeau.com provide deal sizing services to evaluate financial viability.
Resources for Continued Learning
Business Ownership Academy
To support entrepreneurs, the Business Ownership Academy provides a dedicated platform for education and networking.
Features:
- Case Studies: Learn from real-world business acquisitions.
- Guest Speakers: Insights from SBA lenders, business operators, and franchisors.
- Workshops: Interactive sessions on financing, partnerships, and running businesses.
The Academy focuses on fostering connections among entrepreneurial spirits while equipping them with actionable tools to succeed.
Taking Action with SBA 7(a) Acquisitions
Acquiring a business through the SBA 7(a) program is an achievable goal when approached strategically. By structuring fair equity partnerships, leveraging professional resources, and engaging in educational communities like the Business Ownership Academy, entrepreneurs can confidently navigate the acquisition process.
Visit businessownershipacademy.com to join this growing community and access resources to accelerate your business journey.
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