When selling your business, attracting the right buyers is crucial. Many potential buyers will rely on SBA loans to finance the purchase, so ensuring your business is SBA-eligible can significantly boost its marketability and increase the chances of a smooth, profitable sale.
As a seller, you want to position your business as an attractive investment, particularly for buyers using SBA loans. To do this, your business must meet the necessary SBA eligibility requirements and be seen as a secure and profitable lending opportunity for banks and lenders. Here’s how you can make your business SBA-financeable and improve its appeal to prospective buyers.
1. Meet SBA Eligibility Requirements
For buyers to use SBA loans, your business must meet several key SBA criteria. These include:
- U.S.-based and for-profit: The business must operate in the U.S. and generate profit.
- Size standards: Your business must fall within the SBA’s size requirements, which vary by industry.
- No prior federal loan defaults: The seller (you) must not have any history of federal loan defaults.
- Excluded industries: Certain industries like gambling, passive income businesses, and speculative investments are not eligible for SBA financing.
Read our newsletter Episode 9 to see more details. If your business doesn’t already meet these criteria, consider making changes before listing it for sale to ensure it qualifies for SBA-backed loans. This could make your business much more attractive to buyers who rely on financing options.
2. Showcase Strong Profitability and Cash Flow
SBA lenders prioritize businesses that can consistently generate sufficient cash flow to cover loan payments. To make your business more appealing to buyers:
- Show consistent profitability: Buyers and lenders want assurance that the business has been profitable for the past 2–3 years.
- Maintain a healthy debt-service coverage ratio (DSCR): Ideally, your DSCR should be at least 1.25, meaning the business generates 1.25 times the amount of the loan payment in cash flow on an annual basis.
Tip for Sellers: If you’ve been running personal expenses through the business, this could hurt its perceived profitability. SBA lenders typically won’t allow personal expenses (like family cell phone bills or personal travel) to be added back when calculating cash flow. To enhance your business’s marketability, start cleaning up personal expenses in your business financials several years before listing it for sale.
3. Demonstrate Industry and Market Stability
SBA lenders favor businesses in healthy, stable, and growing industries. If your business operates in a declining sector, you may need to show that it has a plan for growth or a pivot to a more profitable market. Here’s how you can enhance your business’s appeal:
- Competitive advantage: Buyers are looking for businesses with a clear edge over the competition.
- Growth potential: Demonstrate a growth trajectory to show the business’s future potential.
- Emerging markets: If your industry is struggling, consider pivoting to or diversifying into a high-growth sector.
A business in a growing industry with a strong competitive position is far more attractive to SBA buyers than one that appears stagnant.
4. Be Aware of Personal Guarantee Requirements
Recent changes to SBA guidelines allow buyers to purchase less than 100% of a business, but if you retain 20% or more ownership, lenders may require you to personally guarantee the buyer’s loan. This can present a risk for you as a seller. To avoid this, consider structuring your sale so that you retain less than 20% ownership in the business, limiting your personal liability.
5. Prepare Your Business for Sale
Maximizing your business’s SBA eligibility isn’t just about meeting specific requirements; it’s about making your business as attractive as possible to buyers who will rely on SBA loans for financing. By taking proactive steps to ensure your business is SBA-financeable, you significantly increase your chances of a successful sale, attracting a wider pool of buyers and potentially getting a higher selling price.
Need Expert Guidance?
At Accel Business Advisors, we specialize in helping business owners like you prepare for a successful sale. We can help you structure your business for maximum SBA eligibility, ensuring a smooth and profitable transition. Contact us today at [email protected] to learn more about optimizing your business for sale.
