How Recent Changes to the SBA Lending Program Support Small Business Succession Planning

By: Dan Devlin, Regional Vice President, Senior SBA Business Development Officer, Northwest Bank

Navigating the complexities of succession planning can be overwhelming for small business owners as it tends to involve determining the right time to sell, preparing the business for the market, assessing its value, managing the sale process, and facilitating a smooth ownership transition. Seeking guidance from an experienced Small Business Administration (SBA) lender can be crucial in developing a successful exit strategy, improving access to capital, and ultimately ensuring a successful sale.

Experienced SBA lenders offer unique ways to assist small businesses in navigating ownership transfers. Collaborating with a preferred SBA lender, a federal agency providing counseling, capital and contracting expertise to small businesses, provides various advantages throughout the succession planning journey. More than half of SBA loan volume comes from changes of ownership, underscoring the SBA’s suitability for funding ownership transfers. A skilled SBA lender familiar with the program’s lending intricacies can benefit buyers, sellers and the company itself in numerous ways.

Optimize Seller Funds, Reduce Buyer Downpayment and Enhance Cash Flow

SBA financing has the potential to optimize seller cash during the sale and minimize the buyer’s down payment, preserving liquidity. This widens the buyer pool and allows small business owners to transfer operations to the most suitable buyer, rather than limiting options to those with immediate access to substantial cash reserves. Additionally, SBA solutions can ease cash flow pressures by structuring loans with maturities of up to 10 years.

Equity Injection and Buyer/Seller Flexibility

Recent updates to the SBA's Standard Operating Procedures (SOP) as of August 1, 2023, have expanded capital access, making collaboration with an experienced SBA lender even more beneficial. Changes include a simplified documentation process for the required 10% equity contribution during ownership transfers. Seller financing is now considered for up to the full equity amount, providing greater flexibility to buyers and sellers.

Partial Ownership Transfers

Another significant SOP change relates to partial ownership transfers. SBA funds can now be used to purchase a portion of a business, a single owner's interest, or multiple owners' interests. This is particularly beneficial for family-owned businesses or professional services firms with partners seeking departure and others choosing to stay. Sellers may receive loan proceeds directly and continue their association with the business, minimizing disruptions in operations.

In closing, succession planning is a crucial component for a successful exit strategy. Whether considering a sale to an external buyer, a key employee, or transitioning ownership within the family, SBA lenders can strategically guide small business owners through the exit process. SBA financing solutions not only enhance capital access for ownership transfers but also offer greater flexibility compared to traditional financing, ensuring a prosperous ownership transfer for all parties involved.

Dan Devlin serves Northwest Bank’s Indiana markets as regional vice president and senior SBA business development officer. With more than 30 years of business banking experience, Devlin previously served as vice president and SBA business development officer at PNC Bank. For more information about Northwest’s SBA lending options or to connect with an experienced SBA lender, visit www.northwest.bank/small-business/borrow/small-business-loans.