Business acquisitions aren't just for multimillion-dollar deals involving massive corporations. Small businesses can also take part in fueling growth through strategic acquisitions. Due to paradigm shifts in the labor force causing a generational wealth transfer, the time is certainly ripe for younger business owners to expand. 

The Baby Boomer exodus

In their time leading the workforce, Baby Boomers have created incredible businesses, many of which are fixtures in their local communities. Now, more than 75 million Baby Boomers are poised to retire. The pandemic accelerated their exit from the labor force, with 3.2 million Boomers retiring between 2019 and 2020 alone, according to the Pew Research Center. Often, they are retiring from traditional employment, but statistics show that Boomers own more businesses than any other demographic. 

In fact, according to a 2019 report by Guidant Financial, well over half of businesses in the U.S. are owned by this generation. Not all these owners are going to sell, but the coming decade will likely see shifts in ownership for millions of profitable, well-established businesses.

Advantages of acquiring an existing business

There are many pros to acquiring a company versus building one from scratch, and acquisitions are a viable growth path for savvy entrepreneurs. An acquisition allows businesses to expand into new markets or create more value for existing customers. It might come with assets such as modern technologies, warehouse space, a well-trained workforce or valuable intellectual property. 

Another potential benefit of an acquisition? Attractive financing options. Small businesses often have limited working capital and find the financing for major investments in equipment, technology, real estate, and other assets necessary for expansion difficult. Rarely can ordinary banks finance business acquisitions. If they do, terms often require large down payments, short amortizations (with balloon payments), and plenty of loan covenants. By comparison, an acquisition can often be financed more easily, across a 10-year fully amortizing term with as little as 10% down and competitive rates.

Using an SBA loan to finance the acquisition 

So where should young entrepreneurs get the financing for these transactions? One appealing option is the Small Business Administration (SBA) 7(a) loan program. These loans are flexible and aren't as restrictive as other commercial lending options. Thanks to the Paycheck Protection Program, more people are familiar with SBA alternatives. Its specialized loans options are more popular than ever, shattering all-time records with over $44.8 billion in funding in the 2021 fiscal year alone. 

SBA 7(a) loans are particularly versatile and allow for the purchase of businesses, commercial real estate, machinery, materials and more, and can be used to refinance existing business debt or provide working capital. The loans typically have a 10-year term and with the lower equity requirements of 7(a) loans, buyers can finance as much as 90 percent of an acquisition. 

The present, historic low on interest rates makes it an excellent time to borrow. Loans are available for up to $5 million for SBA 7(a) loans, enabling buyers to finance significant acquisitions in pursuit of expansion. One slight drawback is that personal collateral and a personal guarantee are often required of the borrower. 

Conventional loans are another approach, though banks are reluctant to lend without significant existing assets to serve as collateral. To reduce risk, banks will look for assets, excellent credit, and a history of success in the industry. The terms on conventional loans will also be shorter, typically on a three-to-five-year term with up to 50 percent down payment, which leaves a borrower sacrificing their cash (and cashflow) to put more money down (and pay more monthly) on the transaction. 

Ways to get an SBA loan

The best way to apply for an 7(a) loan is through an SBA preferred lender (with a PLP designation). SBA PLP lenders streamline the loan process and have the authority to approve SBA loans unilaterally, cutting down the normal six-to-eight-week SBA approval process. SBA PLP lenders can guide borrowers through the approval process to provide tips for stronger loan applications.

In their decades leading the workforce, Baby Boomers have created successful businesses, many of which have become essential for local economies across the nation. While not all Boomer business owners will sell, there will still be a major generational transfer of business ownership as Boomers exit the workforce and young entrepreneurs look to take advantage. The good news is for those who need financing, choosing an SBA 7(a) loan through an SBA PLP lender is an excellent financial option.