Business Brokers Should Know SBA 7a Loan Business Acquisition Criteria

blog_mouse_pc_400_clr_2729On his blog posting dated 2/18/13, Josh Patrick wrote an article titled “Why Selling Your Small Business Is A Risky Affair”, which addressed the perils of seller financing. Josh (@AskJoshPatrick) and I (@jlstauder) exchanged 8 tweets in response to his article. The essence of my response tweets were that sellers can reduce seller financing by working with brokers who are very familiar with SBA financing. Josh doubts there are many brokers who provide significant help to buyers in pursuit of SBA financing. I hope he is wrong.

For those brokers who understand SBA 7a loan criteria and can find a preferred SBA lender that handles a lot of business acquisition loans, the process is not at all that onerous. Preferred lenders are authorized by the SBA to participate in the Preferred Lender Program (PLP). The SBA delegates the final credit decision and most servicing and liquidation authority and responsibility to carefully selected PLP lenders. That means the underwriters of preferred lenders are able to make much quicker approval or denial decisions because the underwriting evaluation is occurring internally and the loan application does not have to be sent to the SBA for review. The SBA does review loans after approval to be sure preferred lenders are operating in compliance with loan eligibility criteria.

Many of the horror stories regarding length of time and the convoluted process for obtaining an SBA loan result from working with non-preferred lenders who are not all that familiar with SBA regulations and are learning themselves – while they process loan applications. On the other hand, many preferred lenders have developed a high degree of efficiency in the evaluation and processing of SBA 7a loans for a business acquisition.

As a business broker, I worked closely with several SBA preferred lenders. Although all preferred lenders operate under the same SBA loan eligibility criteria, they are free to make their approval criteria more restrictive than SBA criteria. SBA preferred lenders usually have a defined “box” of criteria, and if a prospective transaction fits their “box”, the loan has an excellent chance of approval. If it doesn’t fit their “box”, it is not likely to be approved. (For instance, some lenders simply will not finance restaurant transactions based on their previous default experience.) Preferred lenders aren’t interested in spending an excessive amount of time evaluating loans that are not likely to be approved, so if asked, they will usually disclose the specifics of their approval “box”.

Preferred lenders also develop a list of the documentation required for SBA loan approval. Neither, the preferred lender’s “box”, nor their required documentation is secret. If asked, SBA loan officers will share the information. In fact, many of the better SBA loan officers may be able to provide some indication as to whether a proposed transaction has a reasonable chance for underwriting approval. They can never state affirmatively that a loan will be approved – that’s the underwriter’s job, and a loan is always subject to a lender’s due diligence reviews. But the loan officer may be able to indicate a transaction has no chance for approval based on known obstacles, or other criteria that are outside the lender’s approval “box”. That saves a lot of time for all involved parties, so you can move on to the next lender, or if all options are exhausted inform the owner of the need to provide significant seller financing.

I believe it serves the business broker’s best interests (commission protection) to become extremely knowledgeable regarding SBA loans. If a broker can help a buyer through the SBA process, it definitely serves the seller’s best interest because seller financing may be minimized to the maximum extent. My experience is that some preferred lenders are actively seeking opportunities to finance business acquisitions with SBA 7a loans. Keep in mind the loan officers are being paid based on their ability to identify and close on “good” loans. But, it has to fit their “box” and many of those 66 obstacles to a business sale that I keep referring to, have to be addressed and minimized.

An estimated $3 trillion dollars will be “left on the table” by small business owners due to failure to plan their business exits

blog_mouse_pc_400_clr_2729My previous blog posting, Reconstructing Avery’s $10.4 Trillion in Business Transfers, details the assumptions and calculations supporting my estimate that the total business valuation for small businesses (which I define as 49 or less employees) is just short of $4 trillion dollars ($3.775 trillion based on my calculations).  That valuation number assumes all small business owners do whatever is necessary to prepare to have a saleable business.  We all know that is not the case.  In fact, an ROCG study of 502 respondents with revenues between $1 million and $100 million found that only 9% had a formal, written transition/succession plan.  For the businesses that interest me – 49 employees or less, I’d guess the existence of formal exit plans may be under 5%, possibly closer to 1%.

It is generally accepted that only 20-25% of small businesses ever sell.  Some would argue the true number is not even that high.  The number one reason small business are not saleable is the business owner’s failure to plan for the sale of their business.  Most owners don’t even realize the necessity to plan for their business exit.  Many think selling a business is like selling a home, but they couldn’t be more wrong.  They have no idea of the number of obstacles they might face.  In fact, in future posts, I will detail and address 66 obstacles I’ve identified that owners must be prepared to address and overcome or minimize.

So, here’s the really bad news that can be deduced from all these statistics.  Assuming only 20-25% of small businesses ever sell and the value of all small businesses (49 or less employees) is approximately $4 trillion dollars, one can deduce that 75-80% of all business owners are likely to leave a total of approximately $3 trillion dollars on the table through failure to plan for their business exits.

I am very interested in your feedback and comments.  Do you agree with the assumptions? What can we do about it?  How can we reach small business owners with this distressing information?

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