Reader

Were you aware that Small Businesses really face a shortage of options when it comes to financing a small business sale, merger or acquisition? Essentially, there are 2 options:

1. Third Party Financing
2. Seller Financing

Third Party financing includes anybody or entity providing the money to acquire the business. When dealing with small businesses most of the time that entity is the bank.

And the bank really only uses one way to finance a small business deal. The SBA (7a) loan program. So, in a very real sense there is only ONE way that small business deals obtain financing - and that is the local bank utilizing the SBA 7(a) loan guarantee. Why the SBA loan and not a conventional?

Because banks are asset based lenders, and most small businesses do not possess large asset bases - especially if there is no real estate. Thus buyers may be required to put down 25% or more in an attempt to pursue a conventional loan. The SBA guaranty covers up to 90% of the deal's goodwill value - thus the taxpayer is on the hook rather than the bank.

Without wading into the math this minimizes the bank's exposure to a minimum. The tradeoff is, like any government program, red tape galore accompanies the process. In addition, banks are shying away from the SBA because of the SBA's tendency to over audit in an attempt to disqualify the guaranty. One regional bank slashed its SBA department overnight.

If, for some reason, the SBA guaranty for Small Business acquisitions went away, there would be a massive void. Seller Financing would become a primary mean of financing, rather than a bridge or ends to a mean. While many sellers shy away from the idea - if handled properly the benefits can be great for the seller.

We'll cover that topic another time. For now, it leaves something to think about if you own your business and are preparing to sell. Or, if you are a buyer looking to acquire. The Fed's drop in the interest rate yesterday will help with debt service.

However, for those who acquired 4-5 years ago with an adjustable rate, while the reduction helps, in many cases the damage has already been done. Their debt service skyrocketed, tightening their margins, and their cash flow suffered as a result.

If you are planning to sell, talk to somebody that can help you plan. Deal Street offers tips and insight that can be invaluable. Below are some recent articles that may be of interest .

Recent articles & information

Selling a Tech Company This is part 1 of a 3 part series on selling a tech company. It is Issue #3 of the Deal Street Digest paid monthly newsletter. Read article

DealStreetDigest.com Click to visit our website and get plugged into everything you need to become the EXPERT in Small Business deals. Click to Visit

Strategies for Effective Negotiations Our partner firm gives YOU access to a professional insight on all things small business M&A. Read this article from the MAS blog on negotiation tactics & strategies. Read article

Don't hesitate to reach out to the Street with any questions or comments at: info@dealstreetdigest.com.

Thanks for your time.

Sincerely,

Shep Campbell

Editor

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