After a thirty seven year career building his agency, Travis Kent was ready for retirement. With a solid book of business, seasoned agents and account managers, and a thriving economy, all of his hard work and commitment was about to pay off. And it did. With a nice multiple and a younger buyer, a sale was completed; the next generation was in place and his remaining employees were happy. Travis could not have had a better exit… Or could he?
What Travis didn’t realize is that his perpetuation plan was missing a key ingredient for success: He didn’t own his office real estate!
If he’d purchased a building in his early years, he would have owned it outright by the time he sold his business. He would have enjoyed the stability of ownership, the tax and financial benefits of real estate, and he would have paid himself rent instead of his landlord. He would have built up a retirement asset, and now, he could have rented the building to the new owner for an additional stream of retirement income.
Small Business Administration Loans
If Travis had known about the Small Business Administration (SBA) Loan Program, he could have purchased the building with as little as $10,000 in cash, and secured a twenty five year fully amortizing loan, much like a residential real estate loan. His monthly mortgage payments would have been very similar to what he paid in rent, maybe a little more, and as he built up equity in the real estate, and as the real estate appreciated in value, his early investment in himself would have paid him back many times over.
Too late for Travis, but what about the new buyer? We’ll call him Bradford. Bradford wants to take advantage of real estate ownership as he grows the agency. After a few years settling into the business, our new owner identifies a building just three miles away that will provide space to grow and more parking. Seems a perfect fit. But cash is very tight after buying the agency. With a cost of $900,000 to purchase and renovate the building, Bradford was way short of the typical $200,000 to $250,000 required for a conventional real estate loan. Like many successful small businesses, he could manage the loan payment, but he didn’t have the cash to get the loan! Local banks were not encouraging. It was a lucky conversation with a fellow insurance professional that introduced him to a bank making SBA Loans.
Using SBA 7(a) Program
By utilizing the SBA 7(a) program, which is intended to support small businesses just like his, Bradford was able to purchase the building, make substantial renovations, and acquire furniture and fixtures, with very little out of pocket cash contribution. As the below chart of sources and uses of funds illustrates, the business borrowed $890,000 with a contribution from Bradford of $10,000, or 1.1% of the loan amount!
25 Year Term SBA 7(a) Real Estate Acquisition Loan
And the loan, with a long term of twenty five years, spread the agency’s payments out in a manageable way. The tax benefits of ownership over renting only added to the long term value of buying the building.
In order to qualify for the loan Bradford needed to demonstrate that his business could afford the payments, and that his plan for growth was reasonable and prudent. He had to convince the bank he was a good credit risk. Because his financial books were up to date and accurate, and his personal credit score was high, Bradford met the test, and became his own landlord, paying rent to himself and building up a retirement nest egg in the process.
This story is fictional, but the loan example is real, and so is the opportunity available through an SBA loan. Pacific Western Bank is an SBA Preferred Lender with over $5 billion of originated loans. We understand the independent insurance business and can help you secure the stability and opportunity of owning your own real estate. If you would like our overview guides,” Ten Tips to Prepare Your Business for a Loan”, and “Building a Successful Business”, just reach out to Karen Johnson at 402-246-2070 or KJohnson@PacWest.com. Pacific Western Bank, Member FDIC www.pacwest.com
This article was published in the July 2019 edition of Colorado Insurance News (COIN). To view more articles and read the whole COIN, click here.