Listen To Our Most Recent Podcast Episodes As Soon As They're Live: Here!

Cash Buyers vs. SBA Buyers

Posted by Matt Perkins in Articles

Cash Buyers vs. SBA buyers. While it might seem somewhat obvious to most that the best buyer in an Internet or Technology Company sale would be a cash buyer, we believe that is an incorrect way of looking at deal structure and will leave a lot of money on the table.

Yes, it is a wonderful dream we all have as entrepreneurs – for a buyer with deep pockets to swoop in and offer you full price at some exorbitant multiple for your company. In this scenario, you wouldn’t have to worry about bank underwriting and the time associated with the underwriting process – you’d probably close in 30 days.

While we certainly have closed many cash deals, they almost always have sharp edges and they are never, ever full price. Private Equity Groups and wealthy individuals like to offer cash deals, but the reason isn’t primarily to avoid a bank or its fees, but rather to get a better deal on the transaction. They like to structure deals so that sellers obtain a certain percentage of the purchase price in cash and the rest in a promissory note or performance-based earn out. These entities also usually like for the seller and/or her key staff to stay on board after the sale to continue operations.

But now let’s talk about what SBA transactions look like. First, it’s important to note that the SBA doesn’t generally lend money in the sale of a business. The SBA actually “guarantees” a certain percentage of a transaction loaned by a bank. In other words, if the new owner of a company that purchases a business via an SBA loan fails to pay back a bank loan, the bank will have the opportunity to recoup the lost funds from the SBA since it guaranteed the loan. This percentage changes from time to time, but it is generally a 75/25 split – 75% of the deal is backed by the US Government via its Small Business Association. So, buyers of technology and internet companies need to generally be prepared to put 25% into a deal (although for good buyers, we can show you how to do it for as low as 10% of a deal).

We generally work with SBA lenders that are in the Preferred Lenders Program, which is part of the US government’s effort to streamline the procedures necessary to provide financial assistance to the small business community. Under this program, the SBA delegates the final credit decision and responsibility to carefully selected preferred lenders. This has the effect of speeding up the process as long as the loan request is in line with SBA and bank guidelines, although even if a particular deal is outside of such guidelines, it is always possible to go direct to the SBA to request an exemption from such guidelines, which are often granted.

While the SBA lending process takes a bit longer than a theoretical cash buyer (but usually only by 2-3 weeks), the opportunity to earn more cash at the closing table is far better because SBA loans are paid back over the course of 10 years. This helps move the purchase price higher in deals because it takes less down payment to get a deal done and opens up the buyer pool to many more people.

We have an expert staff of professionals that know how to properly package SBA deals and get them closed. We have a very high close rate on these SBA deals, so there’s very little reason to ever take a lower price from a theoretical cash buyer when waiting a couple weeks can earn you more money at the closing table. Again, that’s where we can help based on the experiences we’ve had in selling hundreds of companies, many of which were SBA deals. Don’t shy away from the SBA – it’s actually a great way to fund a deal.