The First Time Business Buyer Guide

What Lenders Expect From A First-Time Owner

You do not need to have owned a business to get an SBA acquisition loan. SBA has no such rule. What the lender does have to do is write down, in its credit memo, who will run the business day to day and why they can. As a first-time buyer, that is the question you need to answer well.

In our experience, the strongest answers come from one of these:

• Industry experience. You have worked in the same industry, ideally as a manager.
• Management experience. You have run teams, budgets or a P&L in a related field, and the business does not need a licensed specialist to operate.
• A team that stays. A general manager or key employees who run operations today are staying on.
• A real transition. The seller agrees to consult for several months to help you take over. SBA allows this for up to 24 months, though the seller cannot stay on as an owner or employee.

Most lenders also look for personal credit scores around 680 or higher and some cash left after closing. Those are lender preferences, not SBA rules, and they vary. Read what SBA lenders look for in a buyer for more.

The Path From Idea To Closing

Step 1: Know Your Numbers

Before you look at a single listing, work out three things: the cash you can put in after keeping a personal reserve, the salary you need to live on, and your credit. Those three numbers decide how big a business you can buy. Our guide to how much business you can afford shows the math.

Step 2: Get Pre-Qualified

A pre-qualification letter tells sellers and brokers that a lender's eyes have been on your finances. First-time buyers benefit the most, because brokers tend to give their time to buyers who can close. Request a pre-qualification letter once you know your budget.

Step 3: Find And Screen Businesses

Brokers, online marketplaces and direct outreach to owners are the main channels. Screen hard. An SBA-friendly business is profitable on its tax returns, has three years of history, is not overly dependent on the owner or one customer, and is in an eligible industry. See how to find a business to buy and how to evaluate a business listing.

Step 4: Make An Offer

Your letter of intent sets the price, the structure and the timeline. Put the SBA financing contingency and any standby seller note in it from the start, so nothing surprises the seller later. See the letter of intent guide.

Step 5: Diligence And Underwriting

Once the LOI is signed, two things happen at once. You and your advisors check the business: financials, customers, contracts, employees and the lease. The lender underwrites the deal: it orders an independent business valuation, verifies the seller's numbers against IRS transcripts, and orders a Quality of Earnings report if the price is $3 million or more. The lender also visits the business.

Step 6: Close And Take Over

Attorneys draft the purchase agreement and loan documents, the lender issues its commitment, and funds move on closing day. Most deals close 60 to 90 days after the LOI. The work then shifts to your first 100 days as owner.

What It Costs To Get In

First-time buyers often underestimate the cash needed. Here is a typical budget for a small business purchase financed with an SBA loan and a standby seller note.

Two things help here. Money you spend on the reports SBA requires, such as the business valuation, counts toward your Down Payment. And your cash can come from savings, a gift from family or retirement funds, among other sources. See the SBA Down Payment guide and buying a business with 5% down.

The loan is made to the business, or to the business and you as co-borrowers, and you personally guarantee it if you will own 20% or more. That guaranty is the real commitment, so go in with your eyes open.

Mistakes First-Time Buyers Make

Picking The Right Kind Of Business

For a first purchase, the best businesses are boring in a good way: steady customers, repeat revenue, documented processes and a few employees who know the work. Many first-time buyers do well with home services, distribution, light manufacturing, B2B services and franchise resales, where a brand's systems shorten the learning curve.

Avoid starting with a business that relies on the seller's personal relationships for most of its sales, one that is shrinking, or one in an industry SBA does not finance, such as passive real estate or lending. Our list of what businesses qualify for SBA loans covers the exclusions.

How To Use The Rest Of This Guide

This guide is laid out in the order you will need it:

1. Learn the basics. Start with how SBA acquisition loans work and SBA loan requirements.
2. Plan your Down Payment. Every source and its rules.
3. Get pre-qualified and find the business. Brokers, listings and off-market deals.
4. Value it and make an offer. SDE, valuation, cash flow coverage and the LOI.
5. Structure the deal. Seller notes, real estate, working capital and partners.
6. Diligence, underwriting and closing. What the lender orders and what you sign.
7. After closing. The transition, your first months and your next acquisition.

When you are ready to talk about a specific business, the SBA business acquisition loan page is the place to start.