SBA Loans Over $5 Million: Buying A Larger Business With Pari Passu

The $5 Million Limit

SBA caps any one Standard 7(a) loan at $5,000,000. If the business has affiliates, the limits apply to all of them together as if they were one business.

There is a second limit behind the first. SBA's guaranty to any one business and its affiliates cannot exceed $3,750,000, and on loans over $150,000 the guaranty is at most 75%. A full $5,000,000 loan at 75% uses all $3,750,000 of it. That includes any SBA Express line or other SBA loans the business has, so there is no room for a second SBA-guaranteed loan next to a full-size one.

So for a purchase where the debt needs to go past $5,000,000, the extra has to come from somewhere other than SBA.

What Pari Passu Means

Pari passu is Latin for "on equal footing." In lending, it means two loans share the same lien position on the same collateral. If the business fails and the assets are sold, the SBA lender and the conventional lender share the proceeds in proportion to what each is owed.

In a typical large acquisition, one lender makes both loans: a $5,000,000 SBA 7(a) loan and a conventional loan for the rest, closed at the same time and secured by the same assets. Sometimes the conventional loan comes from a second bank. Read more on our SBA pari passu page.

Pari Passu Versus Piggyback

SBA does not allow its loan to sit behind another loan made for the same purpose at about the same time. That structure is called piggyback financing: one or more lenders make more than one loan to a borrower, approved within 90 days of each other, for the same or a similar purpose, where the SBA loan has a junior lien or no lien on the collateral securing the other loan.

Pari passu is different, and SBA says so directly. A shared lien position is not piggyback as long as the conventional loan's maturity is not shorter than the SBA loan's. On an acquisition, where the SBA loan runs up to 10 years, that means the conventional loan has to run at least as long.

That one rule is why fewer lenders do these deals. Many banks are not comfortable making a 10-year conventional loan against goodwill. The ones that are tend to be active acquisition lenders who already know the SBA side well.

Worked Example: A $6,500,000 Industrial Distributor

You are buying an industrial supply distributor for $6,500,000. The lender's valuation supports the price, and the seller agrees to a note on full standby for half of your Down Payment.

A few things to notice:

• The 10% is on the whole project. SBA bases the Down Payment on total project cost, regardless of the source of the funds, so the conventional loan does not escape it. Lines of credit and 504 loans are the only exclusions.
• The valuation caps all the debt. The SBA loan, the conventional loan and any seller note that is not on full standby together cannot exceed the business valuation. Here that is $6,120,000 against a $6,500,000 valuation.
• The cash flow has to cover both loans. The lender tests coverage on the combined annual payments of every loan in the deal, at a minimum of 1.25 for an Initial Acquisition. If the combined payments were $900,000 a year (an illustrative figure), the business would need at least $1,125,000 of adjusted cash flow.
• A Quality of Earnings report is required. At a Business Purchase Price of $3,000,000 or more, the lender must get a QoE on an Initial Acquisition and use its earnings for the cash flow test. See the Quality of Earnings report guide.

Deals At The Top Of The SBA Range

Here are three closed deals at the top of the SBA range. One used a conventional loan alongside the SBA loan, one used a companion term loan and one paired a $5,000,000 deal with a 10% seller note on full standby:

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

Other Ways To Finance A Bigger Deal

Pari passu is not the only path. Depending on the deal, you can also:

1. Bring more equity. More cash, or money from investors, shrinks the debt. Minority investors with less than 20% and no control count as limited sources, and anyone owning 20% or more must personally guarantee. See investors for the Down Payment and search fund and investor-backed acquisitions.
2. Use more seller financing. A seller note on full standby can cover up to half of the 10%. If the price is above the valuation, SBA allows extra limited sources on full standby to cover the gap. A note repaid alongside the loans has to fit the cash flow and stays inside the valuation cap. See seller notes on full standby.
3. Split out the real estate. If the business owns its building, the real estate can be financed with a separate loan, including an SBA 504 loan, rather than on the same 7(a) loan. Your lender will work through how the SBA limits apply. See buying a business with real estate.
4. Use a conventional line of credit for working capital instead of putting it in the term loans. Lines of credit are also excluded from the Down Payment base. See working capital and lines of credit at closing.

What Lenders Look For On Larger Deals

The SBA rules are the same as on a $2,000,000 deal, but larger deals get more scrutiny. In our experience, lenders on deals above $5,000,000 tend to look for:

• A management team, not just an owner. Who runs operations, sales and finance after the seller leaves. SBA requires the credit memo to describe your industry experience and who handles daily operations.
• Strong, clean financials. Reviewed or audited statements carry more weight than tax returns alone. SBA has the lender use the highest level of reporting available.
• Real liquidity after closing. Cash in the business and in your personal accounts.
• A clear plan for the seller's exit. The seller can consult for up to 24 months, but cannot stay as an owner or employee.

Lenders differ more at this size than anywhere else. Some will hold the full amount. Some will only do the SBA piece. Some do not do pari passu at all. That is where a broker helps: we know which lenders in our network of 50+ do these structures, and we put the deal in front of the ones that fit.

Is A $5 Million Plus Deal Right For You

These are real businesses with real teams, and they are among the most rewarding deals to buy. They also leave less room for error. Before you make an offer, test the price against the valuation, the combined cash flow and your Down Payment. Our guide to SBA acquisition loan terms covers the rest of the structure.

When you have a target, request a pre-qualification letter that shows the SBA and conventional pieces, and see the full overview of SBA business acquisition loans.