When buying a CPA firm, many people turn to lending programs backed by the Small Business Administration (SBA). When compared to many conventional lending programs, SBA-backed loans offer flexibility, longer terms, and potentially lower down payments. Many buyers of CPA practices can take advantage of the SBA’s most popular loan program, the SBA 7(a).
Preferred Lenders
While many lenders offer SBA-backed loans, some are easier to deal with than others. Even though the loan is backed by the SBA, the lender retains a portion of the risk. Because of this, requirements vary by lender. In fact, some lenders actually have tighter lending and underwriting requirements than the SBA’s standards.
Some lenders participate in the SBA’s Preferred Lender Program (PLP). The SBA allows PLP lenders to make credit decisions on SBA backed loans, rather than having to send them off to the SBA for approval. This results in a much faster underwriting, approval, and loan closing process.
When a buyer utilizes an SBA loan to purchase a CPA practice, it is important that the lender is very experienced with SBA lending and participates in the PLP program. A local banker may indicated that his bank in an SBA Preferred Lender, but his bank may only occasionally make SBA loans. Such a bank might have never made a loan for a CPA practice acquisition. Such lenders are often overly cautious by imposing more stringent demands on the borrower than the SBA requires.
At Accounting Broker Acquisition Group, we work with a selection of PLP lenders who have proved time and again that they understand the SBA lending process, the understand CPA firm transactions, and they’re serious about getting deals done.
Basic Terms
Small businesses can apply for up to $5 million on an SBA 7(a) loan. Terms vary, as negotiated by the borrower and the SBA-approved lender. For SBA-guaranteed loans, the lender pays a fee which is generally passed on to the borrower. The normal fee is 3 percent on the SBA-guaranteed loan portion for loans of $150,000 to $700,000. For bigger loans, the fee is 3.5 to 3.75 percent, depending on the amount of the loan.
The interest rate on a 7(a) loan may be fixed or variable, although most are variable. Variable rates are adjusted quarterly based on prime rate. Maximum allowable rates equate to prime plus 2.75% for typical CPA practice acquisition loans. Lenders sometimes allow interest-only payments during the first two years.
Seller-Carried Notes
SBA loans typically require a 25 percent equity injection that can be split between the buyer and the seller. That can mean as much as 25 percent down from the buyer. It can also mean as little as 10 percent down from the buyer and as much as 15 percent in the form of a seller-carried note. Some SBA lenders will not allow an adjustment to a seller-carried note that relates to client retention if that seller-carried note is being used for any part of the 25 percent equity injection requirement. But others will. Most SBA lenders will not allow any kind of traditional earn-out provision. In addition, SBA lenders don’t allow an upward contingent adjustment of the purchase price even if revenues increase once the buyer takes over. The seller-carried note cannot have a term that is shorter term than that of the SBA loan.
Because terms can vary greatly among PLP lenders, it’s crucial to let us help you determine the best lender for your situation.
Collateral/Guarantees
SBA lenders often require a personal guarantee from the purchaser and the purchaser’s spouse.
As long as you have the down payment and good credit, not having collateral assets will not typically prevent you from getting an SBA loan. However, if you have available assets the SBA lender will require that these assets collateralize the investment. The lender will require a lien on all unencumbered assets including home equity and other investments. This requirement excludes 401K assets and retirement plans. Some states have homestead laws that preclude the SBA from placing liens on home equity.
Let us help you find the best lenders for your situation when you buy a CPA firm. Accounting Broker Acquisition Group is the only national business brokerage of its type comprised 100-percent of brokers who are CPAs with significant “Big Four” merger and acquisition experience. Contact us today and we’ll help you find the perfect lender for your situation.