Probably shoulda come to this brain-trust sooner, but a co-worker and I are going to be buying our office (10 employees) from our parent company.

The company is a Utah based company with 3 offices, one in UT (home office), one in central TX, and ours in Houston.

In any case, we've been looking at SBA 7a loans and that is looking like the most likely scenario for us to be able to purchase outright. We've also thrown the idea to the current owner group that we'll pay them more, directly over a protracted period of time - not necessarily a financing situation per say, but we'd be paying them upfront for all hard assets and equipment.

What do y'all think that fed rate is going to do, seeing lots of different speculations - so just trying to wrap my head around it and moving forward the best way (hard push for variable rate only from the banker...)

Where are you located?

West of Houston, sugar land/Richmond/Rosenberg.

Couple of things regarding SBA 7(a) loans ...

First, these can be fantastic vehicles for acquisitions in this type of scenario - your lender should be considering this a management buyout. Management buyouts are these lenders' second-favorite thing to do, behind only a partnership buyout. The main benefit here is the extremely low equity injection most lenders require on these types of deals. You didn't mention it, but if you happen to have any sort of shareholder position in the company, that would make for an even better arrangement with your lender.

As for the interest rate concern right now ... I only know of one SBA lender offering a fixed rate 7(a) at this time. An adjustable rate is scary today because we are facing some very unpredictable rate changes both in the short and long term. But on the other hand, fixed rates are worrying folks because they think they may be locking in a high rate for 10 years that will only come down over time to where we have been recently.

While there's no right or wrong answer here - both options have potential pros and cons - I'm advising most of my clients to take advantage of the fixed rate. All things being equal, the main reason being the likelihood they are going to refinance their SBA debt in 2-3 years to begin with. While SBA 7(a) loans are tremendous acquisition vehicles, they come with a relatively high debt service load from an operations standpoint. Because of that, a large percentage of SBA borrowers will refinance that SBA debt into a conventional loan once they have established a strong cash flow, putting themselves in a better operational position going forward.

If rates drop over the next few years, then refinance that SBA debt. If rates climb over the next few years, then you're locked into a better rate.

This is essentially what you said, a management buyout.

We pushed and pushed because we're senior managers and run our own office, while being governed from afar.

This is the end result.

If you'd be so kind… when you said this, The main benefit here is the extremely low equity injection most lenders require on these types of deals.

What should I be envisioning…?

Every bank will be different when it comes to equity injection requirements, but the one thing they all are governed by is the SBA SOP, which requires a minimum 10% equity injection by the borrower.

However, some lenders will operate in a gray area in this regard, especially on a management buyout. You could likely get a deal like this done with 5% cash down and a 5% seller note on full standby - the bank will treat that as 10% total equity injection. There are some other requirements, such as post-closing liquidity, but those are hard to estimate not knowing the deal.

Hope that helps ...

It does. Thank you very much.