The baby boomer generation, which is generally defined as spanning from 1946 to 1964, could easily be called the “business owner generation,” as over half of the privately held businesses in the U.S. are owned by those 55 and older1. As more and more of these business owners reach retirement age, the topic of business succession planning becomes even more important.
Unfortunately, many businesses don’t have a documented succession plan. Estimates vary on how widespread this issue is, but according to the National Association of Corporate Directors, only about 25% of private organizations have a formal plan in place2.
For the other 75%, developing a plan is critical, particularly as owners get closer to retirement. For some, simply closing the business may be the best option, though many others will want to sell their operation to a successor. The Small Business Administration’s flagship 7(a) loan program can be a key part of the sale for anyone who is looking to purchase a business or buy-out a partner. It can also be used to assist an individual who wants to buy into a business.
Favorable terms for buyers
SBA loans often allow for lower down payments and longer repayment terms than traditional loans, which can make them appealing to someone looking to buy a business. Additionally, it can be a great tool for sellers who’d prefer to transition their business to someone just getting started as an owner, such as a long-time employee or younger family member.
A faster process for seller notes
During a business sale, sellers often finance a part of the transaction through a seller note. Under old 7(a) rules, seller notes had to be on full standby, meaning the seller was only paid back after the SBA loan was completely paid off. However, sellers can now start receiving principal and interest payments after 24 months and can receive interest-only payments during the first 24 months if the new owner can afford the payments. This makes it much easier for the outgoing owner to help finance a sale, which in turn helps make the whole transition go smoothly.
Partial sales allowed
A new 7(a) rule change in 2023 opens the program to partial changes of ownership, meaning the outgoing owner can stick around during the transition period, which allows for a more gradual changing of the guard. This is a great way for an incoming owner to learn the ropes of the business alongside the existing owner before eventually taking on full ownership or bringing in additional partners.
For business owners looking to retire and prospective new buyers eager to be entrepreneurs, contacting an SBA Preferred Lender is a great way to learn more about how these loans can help with succession.