Buying the American Dream
It’s often said that starting a small business is part of the American Dream. Here at Small Business Administration (SBA), we’ve noticed a recent trend among entrepreneurs interested in buying an existing small business.
When it comes to buying a small business, financing through SBA’s guaranteed loan program is available just as it is for startups. In fact, SBA considers a change of ownership to be a startup for all intents and purposes. The business you’re buying may not be new, but it’s new to you. The same maximum loan amounts (up to $5 million), interest rates and maturities are available for a change of ownership as they are for any other eligible use of proceeds. There are, however, some important additional requirements that we want to make sure entrepreneurs interested in using SBA to finance a change of ownership are aware of.
[Find out how SBA’s Lender Match Tool helps small business owners get financing.]
SBA Requirements for Financing a Change of Ownership
As we do with new business startups, because again, SBA considers a change of ownership to be a new business, SBA requires a minimum 10% equity injection.
[Read on to find out why you should consider a franchise.]
SBA also requires the last three years of business financial data. This includes tax returns and tax transcripts for the business you are purchasing. If the seller is unwilling to provide all of the required information, then SBA cannot finance the purchase.
The purchase price of the business, and therefore the amount you borrow using SBA, must be justified by a business valuation prepared by or for the lender you’re working with. Understandably, a seller may not always be objective in establishing a selling price, but SBA can’t approve a loan for more than a business is independently valued at.
There may be other requirements depending on the type of business you’re purchasing and the amount you need to borrow. Your SBA lender can help guide you through these.
In addition, the SBA’s Learning Center has a 30-minute online course that can help guide you through the process of buying a small business. Topics include: how and what to research, how to determine the value, what goes into a purchase agreement and how to transfer ownership of a business. You can access this free course at: sba.gov/course/buying-business/.
Read more SBA blogs and learn more about starting and growing your business at sba.gov.