SBA business acquisition loans

If you’re looking to purchase an existing business, you may consider a loan from the U.S. Small Business Administration (SBA).

Kat Cox

Page written by Kat Cox. Last reviewed on August 12, 2024. Next review due October 1, 2025.

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SBA business acquisition loans are available to qualified borrowers under the SBA 7(a) loan program. Read on to learn more about SBA business acquisition loans, including how to qualify and apply.

What does the SBA consider a business acquisition?

Simply put, a business acquisition is when an entity purchases an existing business and takes over business operations. The SBA also has a specific definition for their loan programs. Any change of business ownership in which a majority of the assets are sold through asset or stock purchases and where the business’s operations continue is considered to be a business acquisition by the SBA.

Using the SBA 7(a) loan for a business acquisition

As one of the most popular and common SBA loan programs, the SBA 7(a) loan is meant for small businesses who may have difficulty securing traditional funding elsewhere. The SBA 7(a) loan is meant for a number of purposes, including:

  • Working capital
  • Refinancing business debt
  • Purchasing equipment, furniture, fixtures and supplies

An SBA 7(a) loan can also be used to purchase an existing business, including expanding an existing business or even purchasing a franchise. 

Who can use the SBA 7(a) business acquisition loan?

Anyone who qualifies for an SBA 7(a) loan and wants to use it for a business acquisition loan can do so. This includes:

  • A new owner purchasing a business for 100% of the equity
  • An employee stock ownership plan (ESOP) purchasing at least 51% of the business
  • Existing owners buying out other owners in order to bring the total ownership to 100% 

You must also meet the requirements of an SBA 7(a) loan, including being a US-based, for-profit business that can prove the need for funding. This means you must have already attempted other types of financing, including your own personal funds or equity. The SBA also has guidelines on what constitutes a “small business” – usually that your revenue is between $1 million and $40 million and that you have 100 to 1,500 employees. The SBA also has requirements around which industries a business can be involved in to qualify for an SBA loan. For instance, you can’t be operating an illegal business or a business in certain industries like gambling or cannabis. 

Because SBA loans are administered by other financial institutions, other qualifications will depend on the lender you choose. It’s important to find the right lender for your needs and to make sure you meet their qualifications for creditworthiness, which can include credit score, business history and annual revenue. 

What is the required equity contribution for new owners?

If a completely new owner is acquiring a business, the SBA will ask that the buyer make a 10% equity injection. This is based on how much it costs to finance the business, including not only the loan amount but any fees. 

Is the required equity contribution for existing owners the same?

In order for an existing partner or owner to use an SBA business acquisition loan to acquire the fully business, the lender will determine how much equity the owner or owners will have to put up. However, the SBA does enforce certain minimum requirements, such as:

  • The buyer has to prove that they’ve been involved in the business operations of the purchased business and has had at ownership interest for at least two years, and 
  • The business’s financials for the most recent fiscal year plus the most recent quarter have a debt-to-worth ratio of no more than 9:1 before the ownership changes.
  • If the above two conditions aren’t met, the current owner or owners must make at least a 10% equity contribution. 

How to conduct a business valuation prior to securing finance

Before you borrow a loan to acquire a business, it’s important to determine its business value. There are two ways to do this: internally or through a third party. A business valuation will include assessing how much a business is worth based on income, assets and liabilities. 

The business valuation will help the lender determine how much of a down payment the buyer will need to secure the loan. A buyer is expected to put down at least 10% of the purchase price for an SBA business acquisition loan, but the lender will decide the downpayment based on the business valuation. 

Lenders will want to make sure that the business being purchased is profitable enough for the new owner to make loan payments going forward. The SBA also wants to know if the buyer and seller have a close relationship (e.g. family members or business partners). 

An internal valuation is one that is conducted by someone who is employed either by the buyer or seller of the business. This can include a related company manager. If your SBA loan will be $250,000 or less and the buyer and seller don’t have an existing close relationship, you can use an internal business valuation. 

If you want to finance more than $250,000 for the business acquisition loan or if the buyer and seller have a close relationship, you’ll need to find a third-party to do the valuation. A third-party valuation is conducted by an independent advisory firm, usually one that specializes in business valuation. 

Is this the same for a partner or management buyout for an existing business?

If an existing manager or partner wants to buy out the existing business, the SBA requires certification that the buyers have been involved as an owner in the business’s operation for at least two years. Also, the owners will have to submit balance sheets and financials for the most recent fiscal year plus the current quarter. The debt-to-worth ratio will have to be valued as less than 9:1, too. 

How to decide if the SBA Community Advantage loan is right for your business

The best loan for your business is the one that you qualify for. The SBA Community Advantage loan program is particularly good for new businesses and those that may have trouble securing traditional financing or loans. But there are a few other questions you may ask yourself before you apply:

  • Do I need more than $350,000? If so, the SBA CA loan program won’t work best for you.
  • Am I sure I’ll be able to pay back the loan? It’s a good idea not to take on more debt than you can repay, but the lenders will usually help you determine this, too.
  • Have I tried other options for financing my company? Again, the SBA CA program will require you to show that you’ve tried other options – like personal financing or even trying to get bank loans or grants – before they’ll approve your loan.

Get started with Swoop

Find the best SBA business acquisition loan for your needs with Swoop. Simply download our app, answer a few questions and a Swoop professional will guide you through the process, from selecting a lender to funding. 

Written by

Kat Cox

As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.

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