From Search to Success: Buying a Business with SBA Financing - A Real World Example
How to Structure a $1.8mm Transaction with an SBA Loan for Business Acquisition
Further Reading:
Author - Jim Peddle, Business Broker
Are you considering buying a business but unsure where to start? Understanding the nuances of acquiring a business, from finding the right opportunity to securing financing, is crucial for a successful transition. Every purchase journey is unique, yet there are common steps and considerations that all prospective buyers should know. In this article, we delve into these critical aspects, using a real-world example to illustrate the process. We'll also provide a detailed breakdown of the costs, fees, and commitments involved in securing a lender, ensuring you have all the information needed to navigate your business buying journey confidently
The Deal Structure
First, a breakdown of the transaction;
Purchase Price - $1,800,000
Buyer Down-payment - $360,000
Loan Amount - $1,440,000
Earnest Deposit - $15,000 (Paid by Buyer at Letter of Intent)
Working Capital Line Drawn at Closing $160,000
Interest Rate - Prime Rate + 2.75%
Fees Charged by Lender
Lenders charge the borrower fees at closing as well as at application for an SBA loan. Buyers should always require a written commitment letter from the lender that breaks down the projected costs of the transaction.
Buyer Deposited $5,000 with Lender upon signing the commitment letter.
Guarantee Fee Paid to Lender - Typical 3% or $43,200
Note: SBA charges an upfront fee as well as an annual fee based on the loan balance. Currently, this rate is 55 Bps (.55).
Lender Legal Fees - $5,000
These charges are paid by the borrower to the lender for the loan only.
Lender Processing Charges: (Bank fees will vary from bank to bank)
Lien Searches $1,195.22
IRS Transcripts $25
Packaging Fees $2,500
Wire Fees $150
3rd Party Business Valuation $2,500
Site Inspection - Business $130
Total Fees $54,700.22
Note: Fees are financed within the loan
Working Capital - Other Adjustments
In most transactions, the lender will establish a line of credit for the borrower that is to be utilized by the borrower for working capital. There are no restrictions on this line of credit as long as the funds are utilized for business purposes. Rates can vary by lender but are the terms are variable and also tied to the prime rate.
Amount of Working Capital at Closing $160,000
Customer Deposits
$190,000 of Customer Deposits Credited at Closing to Buyer
Summary
In this real-world example, the buyer successfully completed the acquisition with a net payment of less than $10,000 at closing. This amount was achieved after accounting for a line of credit for working capital and adjusting for customer deposits. It is important to note that this figure does not include the buyer's attorney fees, which were not disclosed in the transaction details.
For more information on SBA financing or details on purchasing a business contact Jim Peddle, Business Broker, Playbook Corporate Advisory, Inc.
Further Reading: