Succession planning can be a challenging and confusing process for small-business owners to tackle. From deciding the correct time to sell and preparing the business for market, to determining the value of the business, navigating the sale itself, and ensuring a smooth ownership transition, selling a small business is a complex venture.

Working with a lender with expertise in the financing programs of the Small Business Administration (SBA), a federal agency that provides counseling, capital, and contracting expertise to small businesses, can help owners craft a smart exit strategy and amplify capital access for ownership transfers by providing flexible and creative financing solutions—ensuring a successful sale for all parties.

The following represent some of the unique ways an SBA Preferred Lender can help small businesses navigate ownership transfers:

Maximize seller cash, minimize buyer down payment and improve cash flow

The SBA is well suited to fund ownership transfers—with more than half of SBA loan volume originating from changes of ownership. Working with an adept lender who knows the ins and outs of SBA lending throughout the succession-planning process provides myriad benefits to all parties involved, including the buyer, seller, and the company itself.

For example, SBA financing has the potential to maximize seller cash at the time of sale. In addition, SBA financing solutions can minimize the buyer’s down payment, preserving liquidity. This also broadens the buyer pool and enables small-business owners to transfer their operations to the next most suitable owner, instead of those who simply have easy access to large amounts of cash. Finally, SBA solutions can insulate businesses from cash flow pressure and improve cash flow by structuring loans to maturities of 10 years.

Recent updates  to the SBA’s Standard Operating Procedures, effective August 1, 2023, have expanded capital access and made the benefits of working with an SBA lender even more attractive. The complete loan program changes are extensive and should be reviewed with an experienced SBA loan specialist who can provide insight into how these regulations can benefit your small business.

Here’s a brief overview of key updates to the SBA lending program:

Equity injection / down payment

While the SBA still requires a 10% equity contribution during ownership transfers, the recent SOP updates have simplified the documentation requirements. This streamlines the due diligence process and enables a smoother and quicker sale. In addition, these new lending program updates also include changes regarding what type of funding can count toward equity / down payment. Seller financing may now be considered for up to the full amount of equity as long as it is on full standby for 24 months. This, once again, broadens the buyer pool and allows small-business owners to find the optimal buyer, regardless of their access to cash.

Partial ownership transfers

One of the most revolutionary revisions to the SBA’s SOP relates to partial changes of ownership. Now, for the first time, SBA funds can be used to purchase a portion of a business, a portion of a single owner’s interest in a business, or a portion of multiple owners’ interests. This update is especially beneficial to family businesses or professional service companies with certain partners looking to leave the firm and others wishing to stay. Additionally, selling owners may also remain on as owner, officer, director, or an employee indefinitely — helping prevent a disruption in business operations.

Succession planning is key to successfully exiting a business. Whether small-business owners are planning to sell their business to an outside buyer, a key employee, or simply transition ownership of operations to an heir, SBA lenders can help owners strategically navigate their exit. SBA financing solutions not only increase capital access for ownership transfers, but also provide greater flexibility than traditional financing and can help ensure a successful ownership transfer for all parties.

John Soldi joined Northwest Bank’s expanding SBA lending team, led by Lindsay Cost, as senior SBA development officer, regional vice president, in May 2023. Previously, he served as commercial lender at Canandaigua National Bank & Trust. For more information on Northwest’s SBA lending options, or to connect with an experienced SBA lender, visit www.northwest.bank/small-business/borrow/small-business-loans.

e