Closing SBA Loans Sucks But It's Worth It
Navigating the Most Painful Part of Self-Funded Acquisitions
The SBA 7a loan program is the backbone of self-funded searchers. Without it, the deals would require way more equity and lower the equity stake searchers get to keep. But boy do they make you work for it.
Everyone that has gone through the process will caution you that it’s painful. This is not bank specific, but across the board. Until closing our SBA loan, I thought my US visa application would forever remain the most painstaking process I would ever go through. I was wrong.
There are two factors that make the SBA loan closing process so painful. First, the SBA is a government organization, so you are dealing with way more documentation requirements than for a conventional loan. Second, the main goal of the bank is ensuring SBA compliance. If the loan goes bad and the bank did not exactly adhere to the SBA guidelines, the bank loses the 75% reimbursement from the SBA guarantee. This can create odd situations where it’s in the bank’s interest to advocate for a worse deal for the buyer and the bank in legal document negotiations (purchase agreement etc.). Doing so makes the 25% of the loan that the bank holds more risky, but it’s still better than being out of compliance and risking 100% of the loan amount for the bank.
Unfortunately, as painful as the process is, you don’t really have any power in this process as a self-funded searcher once you enter the closing process and just have to roll with the punches. It’s the price you pay for cheap, high leverage.
However, there is one thing that would have helped us going into the closing process, which is a complete checklist of all the items that would eventually be needed. Having to tell the seller that closing will be pushed by 2 weeks because nobody requested some local tax document is not a situation you want to be in. This list obviously varies from bank to bank, so they might not need some of the documents and require others, but hopefully it’s covers 90% of what you will need in your deal.
The list is for an asset deal with a newly formed acquiring entity.
Business Information:
Credit application: SBA Form 1919 (potentially bank equivalent)
Business Plan and Financial Projections
Internal Financials (3 years + year to date) - Profit & Loss and Balance Sheet
Business Tax Returns (3 years)
AR / AP Aging
Bank Statements (1-3 years)
Business Debt Schedule and loans to be paid off
PPP loans received and PPP loan forgiveness
Certificate of formation for the acquiring entity
IRS SS4 as evidence of Federal Tax ID for the acquiring entity
Any required licenses and local tax permits (sales and use tax) for the acquiring entity
Recorded Fictitious Business Name Statement, if you continue using the selling business’s name as a “doing business as”
Vehicle Payoff Letters
Business Appraisal
Personal Information:
Credit application: SBA Form 1919 (potentially bank equivalent)
Identification of buyers and sellers (drivers license)
Buyer resume
Personal tax returns (3 years) buyers and sellers
Form 4506C buyers and sellers
Life insurance for the loan amount - If you want to take out a multi-million life insurance policy, you are likely required to have a health check appointment. This process can take 6-8 weeks, so start early
SBA Form 413 - Personal Financial Statement
Seller statement
Equity Funding:
Bank statements showing funds are seasoned for two months - This is a topic for a separate post, but essentially all investors including the searcher have to have prove that they have had the funds for their investment for 2 months
Transaction screen prints showing the funds were wired and received
Explanations for any transaction amounts in excess of $5,000 - This can be painful for your investors if they make the investment out of an account that has a lot of large transactions flowing through
Legal Documents:
Operating Agreement for the new entity
Subscription Agreements for investors
Purchase Agreement, including the full list of assets to be acquired and their valuation (SBA Form 4a) and purchase price allocation
Seller non-compete
Employment agreement with key employees - Note that key employee is a defined term for the SBA that they will require to sign their own SBA 1919 forms, so make sure to avoid the term unless necessary
Seller Note
Office / Warehouse Lease
Office / Warehouse Lease Assignment
Landlord Waiver and Consent
Vehicle Lease Assignments
Closing Documents (Escrow Agreement, Buyer & Seller Entity Resolution, Assignment & Assumption Agreement, Bill of Sale, IP Assignment)
Titles / Certificates Insurance:
Tax Clearance Certificate
General Liability Insurance - in asset deals, you have to get new insurance policies. You can’t transfer the existing insurance. Takes several weeks.
Worker Compensation Insurance
Business Personal Property Insurance
Business Interruption Insurance
Auto Insurance
Title to any vehicles transferred