Business Acquisition

FAQs

Navigate the ins and outs of business acquisition financing like a pro. Check out the answers below to frequently asked questions from borrowers.

• What type of SBA loan is used to finance a business acquisition transaction?

  Typically, the SBA 7(a) loan product is used in this type of transaction.

  The SBA allows the Lender to offer up to a 10-year term on business acquisition loans. At FNB Small Business Finance, we normally do a full 10-year term, fully amortizing, no prepayment penalties.

• What interest rate structures do you offer?

  For SBA 7(a) loans, we offer all borrowers a quarterly variable, 3-year fixed or a 5-year fixed interest rate structure and let you choose the option you feel works best for you.

• How much money do I need to have to acquire a business?

  The SBA rules require an equity injection of 10% of Total Project Cost on a business acquisition transaction. Total Project Cost includes:

  • The Purchase Price of the business
  • Any working capital in the loan
  • Any new equipment or other assets that need to be purchased to run the business going forward
  • All loan costs and fees

• How can the equity injection be structured?

  The buyer can bring the full 10% in cash to the deal.

  The seller can help provide a portion of the equity to meet the SBA requirement with a seller note on full or possibly partial standby for a period of time. Your Business Development Officer can advise you on options for an equity and seller note structure for your transaction.

  The seller can hold a note for the full 10% on full standby – no payments of principal or interest. At FNB Small Business Finance, we will consider this option on businesses that fall under our Professional and Senior Care guidelines – ask your Business Development Officer for details.

  Some buyers want to bring in minority investors as a source of equity. Our policy is that whoever provides the majority of the equity must personally guarantee the loan, even if they own less than 20% of the business. In these types of transactions, we often encounter various potential ownership structures. Your Business Development Officer can advise you on how the loan guarantees might be structured on your transaction.

  Some or all the equity can come in the form of a gift with needed documentation. Our policy requires that this gift would come from a parent, grandparent, or other close relative of the borrower.

  We can look at any of these options depending on the nature of the transaction.

• Are there any exceptions to the 10% Equity requirement?

  If you are currently in business and want to buy another business just like yours, presumably a competitor, then the SBA considers that a business expansion and allows 100% financing if:

  • Both businesses have the exact same six-digit NAICS code
  • Both businesses serve the same geographic area
  • Post transaction, both businesses have the identical ownership
  • Please note, there are reasons you may not want to hold the business you are buying in a transaction like this in the same corporate entity you currently operate from. We recommend you consult your attorney and accountant to determine the optimal structure for your situation.

• Do I have to acquire 100% of the target business?

  Effective November 15, 2023, the SBA changed its rules to allow for partial change of ownership.

  The SBA rules require that BOTH the entity being acquired, and the individual buyer(s) be co-Borrowers on the SBA 7(a) loan.

  The SBA rules require that any owner of 20% of the business entity post transaction provide an unlimited personal guarantee on the loan.

  The seller may stay on as an owner, officer, director, stockholder, Key Employee, or employee of the business post transaction.

  All equity injection requirements for a full change of ownership apply to a partial change of ownership.

• What if I want to buy the business and the building(s) it operates from?

  The SBA rules consider this a business acquisition, so the 10% equity on Total Project Cost requirements apply.

  If the purchase price of the real estate is 51% or more of the total transaction, SBA allows the lender to offer up to a 25-year term on one loan.

  If the purchase price of the real estate is less than 51% of the transaction, SBA rules allow for a blended term on the loan. However, SBA rules also allow the lender to do two separate loans – one 7(a) loan for the Business Acquisition at a blended term and a separate 7(a) loan for the real estate with a 25-year term or an SBA 504 loan with a 25-year term for the real estate. Different SBA equity injection rules will apply on the 504 loan if this option is chosen, usually 15% of the real estate deal.

• How can seller notes be structured?

  In most cases, if seller note is being used as part of equity, we require these notes to be on either full or partial standby for five years. The SBA rules prohibit seller notes used for equity to have a balloon payment in the structure.

  Seller notes may be structured with a rebate to the buyer(s) based on business performance (reduction in principle) if the seller note is not used to meet equity injection requirements. Seller earnouts are prohibited by the SBA rules.

• Can I use borrowed money for my required equity injection?

  Most often, this involves a Home Equity Line of Credit (HELOC). The SBA rules do allow for this if there is sufficient cash flow in the business to support the owner’s draw to cover this repayment or if there is sufficient income outside the business to support the HELOC.

• Can I use retirement funds for my required equity injection?

  Yes, either through what’s commonly called a ROBS plan or by cashing out funds net of all taxes and penalties that may be due.

• Do you have any industries or types of businesses you don’t lend to?

  This list currently includes:

  • Hotels and Motels
  • Gas Stations and C-Stores with gas
  • Firearms Manufacturers and Retailers
  • Nursing Homes and Assisted Living
  • Family Entertainment Centers
  • Golf Courses

• What are your primary Credit Underwriting requirements for a Business Acquisition loan?

  We look for a Cash Flow Coverage Ratio sufficient to support the living expenses of the buyer and to repay the loan for the past two years and interim period for the subject business. Minimum requirements may vary depending on the details of the transaction. Your Business Development Officer can review your transaction and advise you.

  Typical Cash Flow calculations include the net of:

  • Business Net Profit per Books
  • Seller’s Salary
  • Depreciation, Amortization, other non-cash charges
  • Interest Expense
  • Rent expense if real estate is included in the deal, rent adjustment if projected rent is more or less than historic levels as evidenced by lease of other agreement.
  • Charge for buyer’s salary to cover living expenses
  • Charge for Capital Expenditures (CAPEX) for businesses with historic annual CAPEX needs.
  • Other add backs for non-recurring expenses may be considered on a case-by-case basis with sufficient documentation.

  Direct industry experience or transferrable management experience for the buyer(s).

  Personal credit score minimum 650 for all guarantors.

  The SBA rules require borrowers to pledge all available collateral to secure the loan. This includes all business assets and all personal assets of guarantors up to 100% of Loan to Discounted Collateral Value (LTDCV).

  A thorough business plan with 2 years of projections and assumptions is required. First year projections by month with annual totals, second year annualized.

  A Business Valuation Report from a FNB qualified firm is required showing value of at least the selling price. All seller tax returns must be verified by IRS.

  All SBA rules apply.