Grow Your Business

Using an SBA 7(a) Loan to Efficiently Execute a Partner Buyout

Goodwill is an intangible asset that many business owners hope they have for the future but are hesitant to treat as a true asset. Goodwill is often not recognized as collateral or a leverageable asset by traditional financing, making it hard to extract goodwill’s full value. The Small Business Administration (SBA) recognizes that for many small businesses, goodwill is not only a real asset, but also a financeable tool that can guarantee the long-term sustainability of the business. In many ways, financing goodwill is a direct reflection of the mission of the SBA.

There never seems to be enough time in the day for the business partners of a lubricant manufacturer, Josh Palmer and Larry Washington. Their spray-on lubricant offers a greener alternative to traditional products and is generating enthusiasm in the market. Domestic sales in North American have doubled in the past three years, and it has challenged their manufacturing operation to keep up. Josh and Larry try to optimize their current capacity to avoid overtime or idle machines.

Now, one of their U.S. retailers has asked them to expand distribution with them into South America. A third business partner, Leslie Ross, does not support the expansion. She has been working long hours for years and wants to see the business grow more slowly and spin off more cash and free time to the owners. Josh and Larry are aiming for growth. They knew the day when their goals would diverge from Leslie’s would come eventually, but they were expecting it a few years in the future; not now as they sit on the brink of what they believe is a lucrative opportunity. 

Josh and Larry appeal to Leslie’s desire to exit when the business is in a healthy place and approach her about a buyout. She agrees to a deal, but for tax reasons, she unexpectedly stipulates that it has to close within 90 days. Josh and Larry would prefer to finance the buyout with cash from operations, but the South American launch is requiring significant cash investments, as well as significant amounts of their time and attention.

Josh and Larry contact their banker, assuming that conventional commercial financing will be their only viable option. They are concerned about the total costs to finance and the accelerated timing that may be required, but they believe in the health and future of the business. They quickly find out that conventional financing will not cover the goodwill portion of the transaction. Upon reviewing the options, their banker points out that they can receive more attractive terms with a $1.4 million, 10 year, SBA 7(a) loan. The SBA loan offers significant advantages over a conventional loan, minimizing the amount of cash they have to put up. They feel confident with their banking team, but are nervous about the process for an SBA loan. Their team provides assurance that their experience in SBA will pay off with a seamless process.

Along the way to closing, the lack of time and spare attention to focus on the details  compromises the deadline. Josh is posted in Brazil trying to get the warehousing bugs and retailer education under control and has to prepare the application and documentation from 5,000 miles away. Their CPA is off on her honeymoon for two weeks 45 days before closing. Fortunately their inexperience with SBA loans is balanced by the deep SBA track records of their banker and their bank.  Josh and Larry learn the SBA loan process is not substantially different from a conventional loan. The loan closes in time. Josh and Larry are able to keep their attention focused on the business and its expansion. And their partner, Leslie, is now working on her plan for a new part-time career.

One of the unique benefits of the SBA 7(a) loan is the ability to use it to finance goodwill for healthy growing businesses like the manufacturer profiled in this example. While a 25% equity injection is generally required, the ability to use this loan for intangible assets makes it attractive for business opportunities like acquisitions or buyouts for which conventional financing is simply not available.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Related

Investment and Insurance Products:

Are Not FDIC or any other Government Agency Insured   Are Not Bank Guaranteed  May Lose Value 

© 2018 SunTrust Banks, Inc

equal housing logoSunTrust Bank is an Equal Housing Lender. Member FDIC

equal housing logoEqual Housing Lender. SunTrust Mortgage, Inc

SunTrust, SunTrust Mortgage, SunTrust PortfolioView, SunTrust Robinson Humphrey, SunTrust Premier Program, AMC Pinnacle, AMC Premier, Access 3, Signature Advantage Brokerage, Custom Choice Loan and SunTrust SummitView are federally registered service marks of SunTrust Banks, Inc. All other trademarks are the property of their respective owners.

Services provided by the following affiliates of SunTrust Banks, Inc.: Banking products and services are provided by SunTrust Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank, SunTrust Delaware Trust Company and SunTrust Banks Trust Company (Cayman) Limited. Securities, brokerage accounts and insurance (including annuities) are offered by SunTrust Investment Services, Inc., a SEC registered broker-dealer, member FINRA, SIPC, and a licensed insurance agency. Investment advisory services are offered by SunTrust Advisory Services, Inc., a SEC registered adviser. GFO Advisory Services, LLC is a SEC registered investment adviser that provides investment advisory services to a group of private investment funds and other non-investment advisory services to affiliates. Mortgage products and services are provided by SunTrust Mortgage, Inc.

SunTrust Mortgage, Inc. - NMLS #2915, 901 Semmes Avenue, Richmond, VA 23224, 1-800-634-7928. CA: licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, IL: Illinois Residential Mortgage Licensee #MB-989, Department of Financial and Professional Regulation, 100 W. Randolph, Suite 900, Chicago, IL 60601, 1-888-473-4858, MA: Mortgage Lender license #-ML-2915, NJ: Mortgage Banker License - New Jersey Department of Banking and Insurance, NY: Licensed Mortgage Banker—NYS Department of Financial Services, and RI: Rhode Island Licensed Lender.

"SunTrust Advisors" may be officers and/or associated persons of the following affiliates of SunTrust Banks, Inc.: SunTrust Bank, our commercial bank, which provides banking, trust and asset management services; SunTrust Investment Services, Inc., a registered broker-dealer, which is a member of FINRA and SIPC, and a licensed insurance agency, and which provides securities, annuities and life insurance products; SunTrust Advisory Services, Inc., a SEC registered investment adviser which provides Investment Advisory services.

SunTrust Private Wealth Management, International Wealth Management, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups and GenSpring are marketing names used by SunTrust Bank, SunTrust Banks Trust Company (Cayman) Limited, SunTrust Delaware Trust Company, SunTrust Investment Services, Inc., and SunTrust Advisory Services, Inc.

SunTrust Bank and its affiliates do not accept fiduciary responsibility for all banking and investment account types offered. Please consult with your SunTrust representative to determine whether SunTrust and its affiliates have agreed to accept fiduciary responsibility for your account(s) and if you have completed the documentation necessary to establish a fiduciary relationship with SunTrust Bank or an affiliate. Additional information regarding account types and important disclosures may be found at www.suntrust.com/investmentinfo.

SunTrust Robinson Humphrey is the trade name for the corporate and investment banking services of SunTrust Banks, Inc. and its subsidiaries, including SunTrust Robinson Humphrey, Inc., member FINRA and SIPC.