Since the economy has rebounded from the ‘Great Recession’, several changes have taken place in the way small business acquisitions are funded. With increased transaction activity and improved access to commercial financing, seller financing has become less frequent. The SBA reported a 12 percent increase in the number of government-backed loans in 2014, making it a record year.
Moreover, a combination of buyer equity and senior debt is becoming more common in small business acquisition financing – accounting for 84 percent of deal structure for company valued at $500k or less. This increase correlates with the increased willingness of commercial banks to finance buyers with a healthy down payment and collateral or SBA backing, or a likely sign that lenders are becoming more confident in the economy and the growth potential of small companies.
Another change is the growing popularity of 401(k) rollovers to fund small business acquisitions. This change may be due to reduced availability of seller financing or a lack of down payments for commercial loans. Yet, it may also be due to buyers having a more positive outlook on the small business economy, motivating them to take the risk on their companies’ success.
Overall, personal savings is still the most reliable funding resource and it plays a strong role in a buyers ability to secure funding from lenders. Other programs, such as SBA 7 (a) loan guarantees can make it easier to secure commercial financing, while equity loans and loans from family and friends can make up the difference.
“Securing the necessary capital and financing is a key part of buying a small business. As the business-for-sale market heats up, there are increasing options prospective buyers can research to see which is the right fit for them.”