The SBA’s Playbook for Business Acquisitions

From zero-down financing to 10-year repayment terms, here’s how to make the agency’s rules work in your favor.

From time to time, I talk with business owners who are exploring growth through acquisition. It’s an exciting way to expand, but the financing rules—especially when the Small Business Administration is involved—are not always intuitive.

The first thing to understand is that the SBA will lend only up to the appraised value of the business you are buying. No matter how optimistic the seller or broker might be, the SBA will require that your lender bring in its own SBA-certified appraiser. And that appraiser’s number will set the ceiling. Significantly, these appraisals are based on the company’s cash flow. If the appraisal doesn’t cover the purchase price, you’ll either have to renegotiate or come up with the difference yourself.

Next, pay attention to NAICS codes. If you’re buying a business in the same NAICS code as your existing company, the SBA may classify the deal as an expansion loan. In that case, you could qualify for 100-percent financing—no down payment required. If the business falls under a different NAICS code, though, you’ll need to put down at least 10 percent.

Another point: the new business can actually be bigger than your existing business. The SBA doesn’t require the acquisition to be smaller or “bite-sized.” If it makes sense strategically and financially, a smaller company can acquire a larger one.

It’s also essential to get your own house in order before pursuing a deal. Lenders won’t scrutinize just the financials of the company you’re buying—they’ll also comb through your current books and tax returns. If there’s a significant overlap between personal and business expenses, or if your records aren’t clean and reconciled, this will raise red flags that could jeopardize the financing.

One of the primary advantages of utilizing SBA financing is its repayment structure. An SBA acquisition loan will typically give you 10 years to pay it back, with much lower down-payment requirements—possibly zero if it qualifies as an expansion loan. Compare that to conventional financing, where lenders often want 30-percent down and repayment within five years. That difference in terms can make or break the viability of a deal.

Finally, lenders and the SBA will closely examine cost savings and synergies. If you can demonstrate that combining the two companies will reduce overhead, improve margins, or open up new opportunities, that strengthens your case significantly.

Acquisitions can be powerful growth vehicles across industries. But they’re also tricky, with plenty of moving parts. If you’re considering going down this path, make sure you understand the financing rules—and that your books are buttoned up—before you sign a letter of intent.