Buyers, Already Motivated, Fueled by SBA Incentives

SBA relief efforts are incentivizing buyers to move ahead with business acquisitions. Per the SBA website, “the SBA will pay six months of principal, interest, and any associated fees that borrowers owe for all current … as well as new 7(a), 504, and microloans disbursed prior to September 27, 2020.”

This is a massive incentive. The SBA is covering (not deferring) your loan payments for six months. What’s more, they’re taking care of the loan fees for you.

On a loan of $5 million, SBA fees could be about $$138,125 or more. That’s free money for buyers who move now and get their loan issued before the September 27 deadline.
As an added incentive, SBA lenders have the authority to defer loan payments for six months. Some buyers could acquire a new business and have a full year of payment-free operations ahead.

Buyers are motivated
But SBA incentives are just one reason buyers are still looking to acquire businesses during the COVID-19 pandemic. Here’s what’s driving three main buyer groups:

Individual buyers. As a prime utilizer of SBA loans, individual buyers will look to take advantage of these incentives. In light in recent layoffs, individuals may be particularly motivated to take control of their own destiny now.

Strategic buyers. These existing businesses are looking long-term. They know how competitive the market was a couple of months ago, and they aren’t going to let a temporary dip in operations deter their growth plans.

Private equity. These firms still have deep coffers and have a limited timeframe to act. They need to create returns for their investors, and they do that by buying businesses.
Values may not decline

In the recent Market Pulse survey from IBBA and M&A Source, we found that of the small and medium businesses currently for sale, about 35% had closed, 40% were operating at partial capacity, 4% had benefited, and 21% remained unaffected by COVID-19.

Even if sales drop, there’s value in demonstrating your business was in any way essential. Alternately, non-essential businesses that can pivot to an online or contactless business model will also be attractive.

Buyer demand is still there. As for valuations, that will depend on the nature of your business and the structure of the deal. But know this:
Most business sales are calculated as a multiple of adjusted cash flow or EBITDA. It’s typical to make adjustments for one-time expenses and unusual events. Buyers and lenders may apply the same “normalizing” adjustments to your financials, especially if you can recover quickly.

But to get full value, you may need to share the risk. Buyers may ask for more seller financing or earn out in the months ahead.

By Scott Bushkie