How to Leverage Key Employees to Obtain an SBA loan?

How To Leverage Key Employees To Obtain an SBA loan

I think there is an amazing opportunity for acquisition entrepreneurs to find companies where there has been a key employee or general manager for several years to acquire, using an SBA loan.

With the recent change in the equity injection requirements, sellers can hold a note for 10% as long as the loan is on full-standby for 24 months. The 10% can count towards the required equity injection for the loan. However, most SBA lenders require an injection form the buyer. This does vary from lender to lender, but the majority of lenders want 5% to 10% cash injection from the buyer.

In cases where there is a key employee some banks may go down to 2.5% cash injection and 7.5% seller note. This will depend on the strength of the deal.

Most key employees are not aware that they can acquire the business because they may think that they need several thousands of dollars to acquire the company.

However, that’s the not case at all. It’s very much in reach but it will take planning and the seller’s involvement to make it work.

In an ideal situation, the acquisition entrepreneur can partner with the general manager or key employee to acquire the business. If the key employee is willing be a guarantor on the business and they have demonstrated their commitment to the business, partnering with them will open up more opportunities for a higher LTV on an SBA loan and present a stronger deal to the bank.

In most cases, the seller is more likely to sell at a lower mutiple, because he or she wants the key employee to benefit from their sweat equity that they put into the business.

Benefits of partnering with the key employee

1. Key employee has an intimate knowledge of the business
2. Key employee in some cases may have a license or special skills that is essential for the business
3. Key employee in some cases has a great relationship with the staff and he or she can be the eyes and ears for you
4. The key employee may be underpaid and increasing their compensation will boost productivity and further solidify their loyalty to you.

If I was a searcher, I’d include this as part of my thesis.

If you would like to explore this as a pathway to acquire a business or if you are a seller thinking about selling to one of your key employees, message me.