Riding the Grey Tsunami: How SBA Loans Can Help Entrepreneurs Capitalize on Aging Demographics

SBA Loans Can Help Entrepreneurs

You’ve likely heard the term “Baby Boomers”, but how about “Grey Tsunami”? The “grey tsunami” refers to the wave of aging business owners (Boomers) who are reaching retirement age and looking to sell or transfer ownership of their businesses. This trend is expected to accelerate in the coming years, creating a unique opportunity for younger entrepreneurs to acquire established businesses and grow their own enterprises.

One way for younger entrepreneurs to take advantage of this opportunity is through the Small Business Administration’s (SBA) 7a loan program, which provides financing for the acquisition or expansion of small businesses. With SBA 7a loans, entrepreneurs can obtain funding with lower down payments and longer repayment terms than traditional bank loans.

In particular, the SBA 7a loan program can be an effective tool for younger entrepreneurs looking to acquire a competitor who may be retiring. By purchasing an established business, entrepreneurs can gain access to an existing customer base, established relationships with suppliers and vendors, and experienced staff. Additionally, acquiring a competitor can provide opportunities for cost savings and economies of scale that can benefit the new owner’s business.

Overall, the “grey tsunami” presents a unique opportunity for younger entrepreneurs to grow their businesses through acquisition. By leveraging programs like the SBA 7a loan, these entrepreneurs can take advantage of the experience and knowledge of retiring business owners to grow or build successful enterprises of their own.

Traditional banks are generally hesitant to provide loans to individuals interested in purchasing a business due to the risk involved. The SBA 7(a) loan program offers a solution to this problem by providing loans for a reasonable fee.

AMP Advance helps individuals interested in purchasing a business using SBA financing, and works directly with SBA lenders to ensure smooth deals. The article aims to inform prospective buyers about the SBA 7(a) loan program, its rules, and provides an example acquisition scenario.

Let’s get started….

What Is The SBA 7(a) Loan Program?

The SBA 7(a) program is a government-guaranteed loan program aimed at helping small businesses get financing for various purposes. It encourages banks to lend money to small business owners by offering to reimburse the bank if the loan defaults. The program is applicable to various small business needs, including purchasing an existing business.

The SBA 7(a) program is funded through fees charged to those who get SBA loans, including a primary fee called the guaranty fee. This fee is included in the loan amount and is necessary for the program to exist, although it can be significant for larger acquisitions. The government guarantees up to 75% of the loan amount for loans over $150,000, reducing the lender’s exposure. SBA Guaranty fees can range from 2% to 3.75%, depending on the guaranteed portion and repayment terms. 

There are a couple of other rules to note if you’re considering using a 7(a) loan to acquire a business:

To qualify for an SBA loan, the business must have a debt service coverage ratio of at least 1.25 to support loan payments and the buyer’s salary. The debt service coverage ratio can be calculated by subtracting the buyer’s salary from the Seller’s Discretionary Earnings (SDE) and dividing by the annual loan payments. 

The previous owner cannot retain any ownership or employment after the sale, but a negotiated amount of training will be included in the purchase price. The buyer must provide a down payment of approximately 15% of the total project cost, including SBA fees. The SBA also has specific eligibility requirements for businesses, which can be found on their website.

Example Business Acquisition Using SBA 7a Loan

To help with understanding, we have prepared an example of acquiring a business using an SBA loan. Please note that this is just an example, and it’s recommended to consult with an SBA loan broker or lender for customized calculations. 

While we strive to provide accurate information, the numbers presented here may differ from the actual calculations done by a lender. The figures used in this example are based on our experience with completed transactions using 7(a) loans.

A Roofing Installation Company 

SBA Acquisition Loan

Assuming that you’ve always dreamt of owning a business that involves working outdoors, and it happens to be in line with your current business offering, you come across a roofing company on BizBuySell in your locality. The business has a solid reputation, well-maintained equipment, and an efficient team of employees. 

This looks like an ideal opportunity for you, but the question that arises is how you can finance this purchase.

The SBA 7(a) program could provide a solution for financing the purchase of a roofing company. Here’s a potential loan scenario for this type of acquisition:

Let’s say the roofing company has had an average revenue of $2,000,000 for the last three years, and the seller’s discretionary earnings are approximately $500,000 each year. Seller’s discretionary earnings refer to the net income on the tax return, plus depreciation, interest, amortization, the seller’s salary, and any other benefits they receive from the business.

After negotiating with the seller, you agree to purchase the roofing company for $1,750,000, which includes $350,000 worth of equipment and training from the seller. 

To finance the acquisition, you enlist the help of a company that specializes in SBA loans. They assist you in filling out the necessary paperwork and submit the business’s information to various SBA lenders. After reviewing your application, the lenders propose the following loan scenario:

  • Purchase Price of $1,750,000
  • Working capital loan of $100,000
  • Estimated SBA fees and closing costs of $66,500
  • Down payment of $287,500
  • Loan request of $1,629,000
  • Loan term of 120 months and a 6% interest rate
  • Monthly payments of $18,085

It’s important to note that the SBA fees and working capital are included in the loan, which means you won’t have to pay the $66,500 out of pocket and will receive $100,000 to operate the business. 

However, you will need to provide the $287,500 down payment out of pocket. If you’re unable to do so, there are options like raising money from others or having minority investors bring capital to the table. 

In this scenario, your monthly loan payments would be $18,085, which may sound daunting, but it’s essential to keep in mind that the business has historically made $500,000 in SDE. This means you’ll have $400,000 left after taking a $100,000 salary to cover all family expenses, which can be used to make loan payments.

With a total annual loan payment of $217,020, you can enjoy a debt service coverage ratio of 1.84, leaving you with $182,980 available for investing in the business, saving for emergencies, or distributing. 

It’s important to remember that this is just an example, but we specialize in deals of this size, and they are an ideal match for the SBA 7(a) program.

Next Step To Using an SBA Loan to Purchase a Business

Now that you have a clear understanding of what an SBA 7(a) loan entails, the eligibility criteria, and the repayment terms, you can make an informed decision about whether it is a suitable option for you. 

As an individual buyer, this type of loan can provide you with funding that may be difficult to obtain without SBA assistance. However, if you are a financial buyer, such as a private equity group or a strategic buyer, or require a loan exceeding $5 million, an SBA loan may not be the most appropriate choice for you. If you are considering an acquisition and would like to learn more about the process, we encourage you to contact us today for further assistance

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