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Blog Post

How to Buy a Business: Working with Brokers and Lenders

  • October 23, 2024

Brokers and lenders bring extensive knowledge and options to entrepreneurs working to acquire a business. But how exactly do they enhance an acquisition opportunity?

Our last article covered how private deals generated through networking can often be the most advantageous in terms of pricing. Working with a seller with whom you’ve developed a relationship can make finalizing a deal more straightforward. However, not all deals are found that way. And even when they are, you have to answer a few critical questions before closing:

  1. What is the business worth?
  2. Where will the capital come from to acquire it?

Finding professionals who know the industry of your target company and who’ve seen deals like yours before can remove significant unknowns from the equation. They can save you from dealing with skeletons in the closet that weren’t made clear before closing. And they can help define a clear path to funding the acquisition.

A Broker in Your Corner

Buyers need a sounding board that knows the potential financial, operational, or other issues common for their target business. The transaction can also be unique depending on what type of business you are acquiring. Here, brokers can be invaluable, but not just any broker.

Some brokers specialize in restaurants, others in Main Street or core downtown businesses, and others in commercial or industrial companies. You should interview different brokers to determine how many transactions they have completed in your target industry. Brokers who serve an industry also tend to gather sellers interested in finding an acquirer.

You should also assess a broker’s operating style, even when they have the expertise you’re looking for, to ensure you’re not disagreeing on how to approach negotiation in the middle of a deal. You also want a broker who has no emotional ties to a deal. They need to look at the business squarely and communicate candidly the pros and cons of buying it.

Each of these factors helps ensure you are not overpaying for the business.

Assembling Financing

About 99% of business purchase transactions utilize U.S. Small Business Administration financing obtained through a lender, such as Coastal Community Bank. Often, the transactions utilize the 7(a) loan program to acquire the business and the SBA’s 504 program to finance purchasing any real estate.

How can you use 7(a) loans to buy a business?

SBA 7(a) loans are available for up to $5 million and repayment terms of up to 25 depending on what is being financed. Loan rates are set by the SBA. You can check the base rates by loan amount here.

A 7(a) loan will be the shortest appropriate term, depending upon the borrower’s ability to repay. Ten years is the maximum allowed term unless the loan finances or refinances real estate or equipment. In that case, the term can go up to 25 years, depending on the circumstances for real estate financed.

Depending on deal timing and the price to be paid for the business, a buyer may choose SBA’s Express Loan (also a 7(a) loan) for financing up to $500,000 — lender-approved applications receive a response from the SBA within 36 hours.

SBA 7a loans typically require a 10% cash injection into the purchase. At times, the seller may want to carry a note for all or a portion of the sale. This approach allows the seller to defer the full capital gain from the sale over the term of the seller’s note.

It is also important to note that SBA loans must be fully collateralized. Banks are required to take all available collateral, which at times may include a lien on the buyer’s personal residence.

A loan officer can be indispensable in walking you through your options. Together, a proven broker and experienced lender can guide you through the nuances of a well-structured deal with a clear path to financing and a solid future for your expanding business.