Today, we’re discussing the structure of most business acquisition transactions when using SBA financing. If you’re looking to acquire a business, understanding these financing components is critical.

Let’s break it down.

SBA Loan Structure Overview Most SBA-financed business acquisitions involve three key components:

1. Bank Financing – 90% The majority of the deal, up to 90%, is funded through the SBA loan. This includes the purchase price, working capital, and closing costs. This structure minimizes the buyer’s initial cash outlay while maximizing financial leverage.
   

2. Seller Financing – 5-7% Typically, sellers are asked to finance 5-7% of the transaction. This is a subordinated loan, meaning it’s repaid after the bank loan. Seller financing not only helps structure the deal but also signals the seller’s confidence in the business.
   

3. Buyer Equity Injection – 3-5% Buyers are generally required to contribute 3-5% of the purchase price as equity. This is significantly lower than the down payment required in traditional financing, making SBA loans an attractive option.
   

This three-tiered structure is designed to align the interests of all parties involved while ensuring the deal is well-capitalized.

Financing Larger Transactions

For acquisitions exceeding $5 million, additional mechanisms like Pari Passu arrangements may be utilized. In this structure, additional lenders provide funding on equal terms with the SBA loan. This allows buyers to pursue larger opportunities while maintaining similar financial leverage.

Interest Rates and What to ExpectSBA loans are known for their competitive interest rates, which are tied to the Prime Rate. The range typically falls between Prime + 0.75% and Prime + 2.75% for SBA loans above $500,000.

Where you fall within that range depends on two primary factors:

1. Business Cash Flow: A strong and predictable cash flow may qualify for more favorable rates.

2. Buyer Profile: Your experience, creditworthiness, and financial strength also play a role in determining the rate.

To secure the best terms, it’s essential to present a well-prepared business plan and demonstrate your financial and operational capabilities.

Key Advantages of SBA Financing SBA loans are structured to support buyers in acquiring businesses efficiently. Key benefits include:

• Lower Capital Requirements: A 3-5% equity injection makes ownership more accessible.

• Flexible Structuring: The inclusion of seller financing and the ability to utilize Pari Passu for larger deals provide adaptability.

• Preserved Cash Flow: Competitive interest rates help maintain financial stability and growth potential post-acquisition.

Conclusion:SBA financing is an excellent option for structuring business acquisitions, offering flexibility, accessibility, and competitive terms. Whether you’re acquiring a business for $500,000 or over $5 million, understanding these components is vital to your success.

Host Introduction:

In today’s episode, we’ll focus on SBA financing for franchise startups. If you’re thinking about starting your own franchise location, this is the roadmap you need to follow to secure financing and set yourself up for success.

Let’s dive into the process.

Understanding SBA Financing for Franchises

SBA loans are an excellent option for funding franchise startup locations. They provide flexible terms, competitive interest rates, and the ability to finance many of the costs associated with launching a franchise. However, like any business loan, there are steps and upfront costs you need to address before submitting your application.

Steps to Prepare for SBA Loan Submission

To secure SBA financing, you’ll need to follow a series of essential steps:

1. Qualify with the Franchise

Before anything else, you need to ensure you meet the franchise’s qualifications. Most franchises have specific requirements for financial stability, business experience, and operational readiness. It’s critical to get their approval before moving forward.

2. Buy Your Franchise Territory

The next step is to purchase your franchise territory. This formalizes your agreement with the franchisor and lays the groundwork for your startup.

3. Find a Location

Location is key to your franchise’s success. Once you’ve identified a viable site, you can proceed to the next step.

4. Execute a Letter of Intent (LOI)

The LOI is a non-binding agreement that outlines the terms for leasing or purchasing your selected property. It’s an important document that lenders will want to review.

5. Hire an Architect & Apply For Permits

At this stage, you’ll need to engage an architect to prepare detailed drawings and develop a preliminary construction budget. This budget should include all soft costs including permitting fees, materials, labor, and furniture, fixtures, and equipment (FF&E).

Preparing Your Loan Application

Once you’ve completed these steps, your SBA loan application is ready to be submitted to lenders. These items demonstrate to lenders that you have a clear plan and a viable business opportunity, both of which are essential for loan approval.

Important Considerations for Borrowers

It’s important to understand that many of these steps—such as paying for franchise fees, architectural drawings, and initial soft costs—must be completed before you’re guaranteed funding. This means you’ll incur some upfront expenses, which can feel risky.

However, working with a trusted partner like ThinkSBA can make all the difference. We guide you through the process, ensuring that your efforts are focused, your expenses are justified, and your financing is positioned for approval. Our expertise gives you the peace of mind that your hard work will pay off.

Conclusion:

Launching a franchise startup is an exciting venture, but it requires careful preparation and strategic planning to secure SBA financing. By following the steps we’ve outlined and partnering with a trusted advisor like ThinkSBA, you can confidently navigate the process and position yourself for success.

Join Ryan Smith, Principal and Founder of ThinkSBA and Attorney Scott Oliver with Lewis & Kappes as they delve into the intricacies of the SBA loan legal closing process, recent SOP changes, and the crucial role lender legal counsel plays in ensuring lender compliance. Gain valuable insights into Landlord Lien Waiver and Collateral Access Agreement, attorney negotiations, and the overall loan closing process. Whether you're a seasoned lender or a prospective SBA loan applicant, this podcast offers essential knowledge for successfully navigating the SBA loan application process from start to funding. Stay tuned for actionable tips and expert advice from Scott throughout this entire episode. If you liked this content, let's connect on social media: Instagram: https://instagram.com/mysbapro Twitter: https://x.com/mysbapro LinkedIn: https://www.linkedin.com/in/ryanpatryck/ Chapters: 00:00 - Introduction 00:55 - Scott's Bio 03:42 - Closing Process Overview 07:12 - Landlord Waivers and Negotiations 08:56 - Good vs. Bad Buy-Side Attorneys 11:23 - Uncommon Requests and Scenarios 14:15 - Flexibility of SBA Loan Documents 17:15 - Recent Changes to SOP Manual 20:37 - Process After Commitment Letter 26:10 - Partial Change of Ownership 36:22 - Forgivable Seller Note & Expansion Loans