Sba traditional vs partial ownership
September 24, 2024
by a searcher from University of California, Riverside in Rancho Cucamonga, CA, USA
I had a thought. I understand there is no free lunch. I was just curious why in a full ownership transfer the minimum equity contribution is 10 percent of project cost. When compared to a partial ownership change, the equity contribution is still roughly 10 percent. Wouldn't owning slightly less in a business theoretically require less down. Just a thought?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
When you do a partial business acquisition under the SBA 7A loan program, the required down payment is still 10%, but that is based on the portion of the business you are buying. So if you value the business at $1 million but are only buying 85% of the business, you are buying $850,000 and you would be putting down 10% on $850,000 or $85,000. So you are not putting equity down on the portion you are not buying. Now you cannot have seller notes represent part of your required equity in a partial business acquisition. However, the SBA does allow you to use equity already on the business balance sheet to offset some of or potentially all of the required down payment. If the balance sheet at the most immediately fiscal year-end and most recent month before provides for a debt to net worth ratio of 9 times or less after layering in the new debt being funded as part of the acquisition, then technically you can finance 100% of the action via an SBA 7A loan. However, most lenders are still requiring some minimum amount of borrower equity of 2.5% to 5% to be sure the new buyer has skin in the game, and of course the cash flow needs to work with the higher leverage amount.
If you have additional questions about equity requirements, seller notes, etc., we are always happy to answer them. You can reach me here or directly at redacted
from Bryant University in Los Angeles, CA, USA