If you’re thinking about selling your business anytime soon, read this.
Effective June 1st, 2025, getting an SBA-backed loan just got a lot harder for 99% of buyers.
The SBA just changed its underwriting procedures, making it very hard for buyers to get a loan to buy you out. The biggest mistake you can make as a seller is to assume that a lender will place as much value on your business as you do. Just because your business pays YOU a bunch of money does not mean that it will perform the same with someone else at the helm. The SBA was created to force banks to lend to owner-centric businesses that otherwise would not qualify for conventional financing.
One complaint I have about government is that people who go into government are often unqualified for the business world. The US government is notorious for hiring people for jobs with no experience doing the job that they were hired to do. In walks Kelly Loeffler. Kelly has a big business perspective with no personal small business experience, yet she feels qualified to revamp the loans financing Main Street, America’s backbone. Just because Kelly has friends and family who own small businesses doesn’t mean she has experience owning a small business.
Before I go into the changes, it’s important to understand why the SBA is so critical. When Wall Street or mid-market companies go up for sale, big banks and private equity groups are ready, willing, and able to fork over massive amounts of cash to sophisticated buyers. However, small businesses don’t make the cut because small businesses have some fleas and ticks, making it harder for buyers to qualify for financing.
SBA was created to help qualified buyers acquire small businesses that otherwise might not be able to get conventional financing.
Let me explain.
Recently, I spoke with Keith, who’s getting ready to retire. Keith is a plumbing contractor who spent his entire adult life working in the trade, and for the last 30 years, he’s owned a local plumbing company. For anonymity, we’ll call Keith’s company XYZ Plumbing. XYZ has 14 employees who stay busy most of the time. XYZ doesn’t advertise because they can hardly keep up with all their current workload. Keith works about 45 hours a week, but he’s tired and wants to retire and enjoy the next 30 years of his life without getting up at 5:00 am to go to the office. He makes a good living and pays himself $150K per year plus bonuses. XYZ pays its employees well, and on paper, XYZ makes around $100K per year in net profit. With his truck, insurance, and retirement benefits, Keith takes about 300K out of the business per year. Not too bad.
How much a seller takes home attracts buyers, so with the low profit, Keith has few choices when it comes to potential buyers. Mid-market companies aren’t interested until a company makes at least 1 million in EBITDA. So, what are Keith’s choices?
Keith can sell to:
- A Trade Buyer
- An Employee of his
- An Entrepreneur
Keith’s other option is to close the doors.
Trade buyers tend to be competitors who are successful in the space and may be able to pay cash for the business, but why should they when they can use leverage to acquire competitors? Trade buyers grow through acquisition because they already have the infrastructure in place to make XYZ more profitable. Trade buyers are often owned by small family offices or small private equity groups because they have a formula for profitability. For many, like Keith, selling to a competitor is too risky. Trade buyers often cut key personnel in accounting, finance, or operations because they already have people in these positions. When you’ve spent years working with someone, they can become like family, and the last thing you want to happen after you sell is for your friends or family to be out of a job. Regardless, if a trade buyer wants to acquire XYZ, they will likely go to an SBA-backed lender for financing. The new rules provide an advantage to trade buyers because they are established companies with good cash flow and profitability. They can easily qualify for an SBA-backed loan because they have the assets and cash flow to pay for XYZ regardless of its profitability.
But if an employee or an entrepreneur comes to buy XYZ, the loan qualifications will be more related to XYZ than to the buyers’ credit and assets.
Until recently, that is.
SBA wants to see a buyer with at least a 10% – 20% down payment. Naturally, not all employees or buyers have enough money for the down payment. I’ve owned companies for 33 years and pay my employees fairly well, but very few have 100-500K sitting around to buy their own company. Until recently, sellers could carry a note for the down payment, or the buyer could raise the money from friends or family. In addition, some sellers like to retain equity after the sale when they believe a new buyer will be successful in growing the company.
Now, the SBA has made the seller note, seller equity, or family/friend investor a barrier to entry.
It used to be that any shareholder with less than 19% ownership did not have to guarantee the loan. This way, a friend or parent could invest in or lend the down payment to the buyer, secured with a small amount of equity.
Here’s the problem:
Most buyers have assets but may not have cash.
I know lots of wealthy people who are cash-poor. We use leverage to buy assets, and those assets create cash flow and equity, but you can’t pay bills with equity.
SBA is saying that we don’t want to loan money to buyers who don’t have the cash needed to acquire the business. Sometimes, the buyer’s cash is tied up in their 401K, IRA, equity in their home, or other investments. So, the SBA now requires buyers to bring at least 10% to the transaction. It may not seem like a big deal to many sellers, but the vast majority of buyers don’t have the cash, and therefore, if they’re not allowed to get it from someone else, there are going to be a lot fewer buyers.
One caveat the SBA threw in, which could be helpful, is that the seller can finance the down payment provided the entire balance is on hold until the SBA loan is fully repaid, which is normally 7 – 10 years. This rule could be impractical if real estate is part of the financing because the term of the note can be 25 years. No one wants to wait that long although if you don’t have a broker in the transaction, it might be good because you’re not paying 10% to a broker. In addition, seller debt can’t account for more than 50% of the required buyer’s equity injection. No matter what, seller debt is not eligible for repayment in the first two years and may require debt forgiveness if the company doesn’t hit certain milestones.
But get this.
If a seller wants to retain equity after the sale, the seller will have to personally guarantee the loan along with the buyer. Are the people in Washington this stupid? Don’t answer that we already know. What seller on earth is going to sell off 90 or 95% of their company and then guarantee that the new buyer will repay the loan?
Do you see how stupid this is?
One rule I somewhat agree with is The Citizenship Rule – If you aren’t an unconditional, lawful, permanent resident of the US, you are not eligible for loans backed by the SBA. Since green cards are conditional, they are not eligible. The SBA is set up to help American citizens. In the past, non-citizens could partner with US citizens for SBA-backed loans; the new rules prevent that. The downside is that people from the UK and Canada invest in companies in the US, so now they are no longer eligible for SBA-backed loans. In addition to the citizenship requirements for owners, the borrower cannot have any illegal alien employees, which could present a problem for trades and service companies. The buyer must certify that all employees are US citizens, which must be verified during due diligence.
Most business owners never consider that to get the price they want from selling their business, 99% of buyers need financing. If you want to sell, it’s a fact either a bank is going to finance the business, or you are. If your attitude is, I’m not financing the business; you may be in for a rude awakening when bank underwriters determine the value of your business is much lower than what you think it’s worth. Every day, over 3,000 business owners retire, and over 1,500 of them shut their doors because they cannot find a buyer who can qualify for bank financing. Either you prepare your business for lender financing, prepare yourself to be a lender, or prepare to close the doors.
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About the Author: David Mulvaney moved to Florida from Wisconsin in 1987. In 1992, he acquired a home services company with 98% seller financing. By 1994, Dave converted the company to 75% commercial services and sold the company in 1998 for over 10 times the original acquisition cost. Since then, Dave has owned or owns controlling interest in profitable companies in the following sectors: manufacturing, engineering, global distribution, home services, commercial services, e-commerce, SAAS, residential, and commercial real estate. His companies have grossed over 250 million in top-line revenue over the past 33 years.
Dave buys and builds great companies and advises entrepreneurs on how to exit profitably on their terms. To Book A Call, Go Here.