Why do some sellers dislike the SBA?

August 26, 2021

by a searcher from Towson University in Portland, OR, USA

Recently saw a business for sale where the owner is willing to carry up to a 50% note, but would not accept an SBA loan for any portion of the purchase. And this is a hard sticking point....

Being that I've never actually closed a deal, I'm hoping someone with SBA experience on the buyer/seller side can help me figure out what is the sellers motivation here. Is it to avoid a lengthy closing? Does he want an annuity from the sale? Is this typically a red flag?

I'm early in my underwriting days and just trying to understand the big picture here, so any thoughts or musings are welcome.

What are some creative ways to either make a cash offer, delay financing, or structure something more palatable with the seller to get past this?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Here are the reasons I often see, in no particular order: 1) They have had a previous buyer trying to get SBA financing take a very long time or they had an experience in the past that took a long time so they don't want to go SBA; 2) The SBA process usually takes more paperwork than the conventional option and they do not want to deal with that; 3) there is something in their business that they think is going to make it a struggle to qualify for an SBA loan; 4) some individuals are of the opinion if someone needs SBA financing they might not be as strong financially; 5) they are worried about the required business valuation; 6) if there is a seller note as part of the transaction they are worried about that seller note being fully subordinated to the SBA; and 7) there broker has convinced them for one reason or another not to take SBA 7A offers. My recommendation would be to dig into why they are against the SBA option if that is your preferred method. Certainly if you can get attractive seller financing, that is always good as well. Outside of things being a bit slower right now due to the Cares Act program expiring at the end of September, in general the SBA process is much quicker recently than it has been in the past with delegated authority, meaning once the deal is approved by most lenders it is approved with the SBA. Please let me know if you want to discuss further at redacted

Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

For most businesses valued under $5,000,000, the only option for a buyer is to use an SBA loan for the business acquisition. SBA preferred lenders make a decision with delegated authority so closing time shouldn't be an issue. Yes, lenders are busy but what is the other option? With the seller willing to carry 50% of the transaction, the SBA/lender would likely be very eager to finance the deal provided that the seller's financials make sense. The SBA lender will take first lien position on the collateral and the seller would have to be in second position behind the bank. That MAY be the seller's issue. If the seller is willing to carry 50% of the deal, can the buyer put down 50% cash? If not, will the seller carry more? How much cash does the buyer have for a down payment? Maybe the seller hasn't kept proper financial records? Or perhaps didn't file tax returns? Or have lots of add-backs? Is the seller represented by a broker? Sounds like a conversation needs to be had with the seller to find out the reasons. I think there is more to the seller's story.....

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