For entities in need of financing to acquire an accounting firm and needs financing, pursuing a Small Business Administration (SBA) loan may be a good option. This is especially true if financing is unavailable through other sources. It is important to understand how SBA loans work and be aware of a few relevant considerations. The following article explains some ins and outs of SBA loans and things to consider when acquiring an accounting firm.

Benefits of Using an SBA Loan

For businesses that qualify (see further discussion below), there are a few reasons the U.S. Small Business Administration’s 7(a) Loan Program—the SBA’s most common loan program—may be a good option when acquiring an accounting firm.

First, when comparing the structure and terms of SBA loans to conventional loans, SBA loans are more flexible. Often, these loans have lower down payments, longer repayment terms, and more flexibility with respect to collateral.

Another key benefit of the SBA 7(a) Program when acquiring a business is the ability to wrap multiple uses of proceeds into one loan. For example, the 7(a) Loan Program can be used for short-term and long-term working capital. This is especially important to consider when purchasing an accounting firm, given the traditionally seasonal nature of the business. Including working capital in the loan can help cover any delays in cash flow after acquisition, especially if the firm is purchased several months before the start of the higher-revenue tax season.

The SBA 7(a) Loan can also be a good option when real estate is part of a business purchase, which is often the case in the acquisition of an accounting firm. When real estate is included in a business acquisition, the buyer can extend the term of the 7(a) loan for anywhere between 10 to 25 years.

In addition, as opposed to traditional equipment financing loans, financing equipment with a long-term SBA 7(a) loan can spread the payments over a longer period of time and free up cash flow for other business expenses, such as furniture, computer equipment, fixtures, and office supplies.

Qualifying for an SBA Loan

SBA loan requirements can vary according to the lender and the particular loan program; however, the U.S. Small Business Administration does outline basic criteria to qualify for an SBA loan.

First, the applicant must demonstrate a need for loan funds and show that they are unable to obtain financing on reasonable terms through other sources—such as a conventional loan—before pursuing an SBA loan.

The business must also meet all of the SBA’s eligibility requirements related to size standards and industry-specific regulations based on the North American Industry Classification System (NAICS) Code.

In addition, the target business must be an officially registered for-profit business operating in an eligible industry—which includes accounting. In addition, the accounting firm acquisition target must be physically located in the United States or its territories.

SBA Loan Nuances

In order to secure an SBA loan, applicants must provide an unlimited personal guarantee. This means the accounting firm owner—or any and all owners with at least 20% ownership in the business—must agree to use their personal assets as collateral in case of a default on the SBA loan.

The borrower must provide a personal financial statement highlighting assets and liabilities for the lender to do a personal cash flow analysis. Lenders will also do a credit and background check on all guarantors. Potential borrowers should have a conversation with their lender early on if there are credit issues or criminal charges, bankruptcies/foreclosures, or judgment liens. It is better to be fully transparent upfront to determine eligibility and whether the lender can move forward.

It is also important to understand that, similar to a conventional loan, the SBA loan application process can take an average of 45 to 60 days—and sometimes longer—from start to finish. This is largely because many stakeholders are involved in the SBA loan application process, including the firm owners, personal and business bankers, the SBA, attorneys, insurance professionals, business brokers, and others.

Similar to a conventional loan, the SBA loan application’s tedious and complex process impacts this timeline. Applicants must submit extensive paperwork, including personal financial information, credit reports, and business plans. SBA loan applicants can potentially speed the process by having their financial ducks—and all their paperwork—in a row.

Make sure to clearly set expectations early on with all parties involved to ensure they know the timeline from start to finish when utilizing SBA 7(a) for financing an acquisition.

Accounting firms that are unable to wait for the SBA loan application process to play out may consider working with a private investor, private equity, or an alternative financing option to acquire another firm.

Insider Tips

Having worked with many businesses to acquire accounting firms using an SBA loan, the author has picked up a few insights that can be helpful to both buyers and sellers:

Seller Note. Consider whether it makes sense to include a seller’s note in the business purchase agreement. This could be 5% to 10% of the total business sale price, which would be due to the seller over a period of time, with flexible rate and terms contingent upon the business’s ability to cash flow.

When a seller provides a seller note, it shows they have confidence in the business post-acquisition under new ownership, which can also provide comfort to the buyer. Also, this can increase the lender’s confidence in the borrower’s ability to repay the loan, making it more likely for the loan to be approved.

Industry experience. The borrower’s ability to demonstrate experience and success in the accounting field will go a long way when pursuing financing and position them for long-term success.

Consulting firms, law firms, tech companies, private equity firms, and other accounting businesses are all examples of entities that might be interested in acquiring an accounting firm. SBA lenders are interested in knowing whether the borrower has a solid understanding of the industry, the market, and the competition, as well as whether they have the skills and experience needed to make the acquisition successful.

Staffing. The quality of an accounting firm’s staff is critical to its success after acquisition. Buyers should look for a firm with experienced and talented staff, particularly in key positions such as partners and managers. Lenders will want to know how many employees will be staying on board post-acquisition. Consider the staff’s qualifications, experience, and education.

Also, note that for an individual buyer, it is important to find out early on in the due diligence process whether it is necessary for that individual to be a CPA. If the owner of the accounting firm you’re acquiring is a CPA, the buyer must also hold that designation to perform the duties, tasks, and responsibilities of the previous owner—unless there’s another employee at the firm who is a CPA and who will remain with the firm after the acquisition.

Timeline. SBA loans have historically had a reputation for requiring a slow and cumbersome application process. However, banks with the SBA’s “preferred lender” status can shorten the timeline because they have the authority to make decisions independently of the SBA.

For businesses that qualify, an SBA loan can be a good option for acquiring an accounting firm because of the generally favorable terms offered by the SBA, as well as the benefits of having one loan cover a variety of uses. Finding the right loan and implementing smart business practices can help a newly acquired accounting firm succeed.

Mihir J. Patel is an SBA business development officer at American Momentum Bank.