Expanding A Small Business

Through my CPA practice, I meet a lot of business owners looking to grow their business.  Earlier this year, one of my small business clients mentioned that she spoke to another business owner in the same field that wanted to sell her business and retire.  After discussing, the potential seller told my client she would love to sell my client the business if she could come up with the purchase price.  My client asked me the best way to structure and close the deal as the seller was asking $1.2MM for the business, and my client only had about $100,000 of non-retirement savings.  My client wanted to keep all $100,000 of her current savings on hand as working capital of the business and correctly thought it was unwise to spend all of her current liquidity.  Luckily, I had a very good answer for her – the Small Business Administration (“SBA”).

The SBA allows existing small businesses to acquire another small business if the target company has the exact same NAICS code on its tax returns.  When the codes are identical, the loans is considered an expansion loan rather than an acquisition. I helped my client review the potential deal, and we found that the business expansion was not a bad one… The pros were:

• Same industry/existing management experience
• A growing business in a growing industry
• A purchase price with a reasonable multiple
• Strong debt service coverage

Because of the SBA expansion distinction, they were able to offer her almost the entire $1.2MM purchase price.  When looking at the projected revenues and the existing net worth of her existing business, we deemed this a wise option.

Moral of this quick story, if you are thinking of adding a business down the line, it helps when it has the exact same NAICS code as an existing business you own.  There are some things to consider with the loans, such as the leverage limitations of 9 to 1 for the combined entities. As always, please feel free to reach out to me if I can answer some questions or be of service.