Buying vs. Building Wealth: What Buying a Business in New Orleans Looks Like
Eight days from now, on October 1, the SBA changes the rules on financing a business acquisition. If you have been circling the idea of buying a business in New Orleans, that date matters more to you than almost anything else on your calendar this fall.
I want to lay out what actually changes. First, though, the bigger question underneath it, because the two are connected.
There are two ways to own a business. You build one, or you buy one that already works. Building is the version everyone romanticizes. Buying is the version that comes with customers, a payroll that already clears, and a track record a lender will actually look at. The buyer of an existing business is not starting at zero. They are starting at the seller's last twelve months. That is the whole case for acquisition, and it is why an entire category of professional buyer has organized itself around it.
That category has grown up considerably. Nearly half of business brokers now report rising activity from search funds and MBA-trained acquisition entrepreneurs. Wharton, Stanford, and a dozen other business schools fund and teach this path directly. Penn established its entrepreneurship-through-acquisition program with a ten million dollar commitment and funds graduating students to go buy and run small companies. I did my MBA at Wharton, so I will say it plainly: the people coming out of those programs are disciplined, they screen against a published list, and they are looking at the same businesses you are.
Here is where it turns in favor of a local buyer. That professional pool has a floor. Stanford's published search fund criteria call for ten to thirty million in revenue and more than one and a half million in EBITDA, and most lenders and investors backing those buyers favor companies at or above that line. Below it, the funds mostly are not looking. Meanwhile the median business sold through the largest small-business marketplace this year traded at a sale price of $349,250, on median revenue of $692,087. Between those two numbers sits a large, real, under-shopped middle. That is where a prepared individual buyer can still win a good business without bidding against a fund.
What changes on October 1
SOP 50 10 8.1 takes effect October 1 and applies to any application issued an SBA loan number on or after that date. The four changes that will affect you most:
The ten percent equity injection cannot be reduced or eliminated on an initial acquisition. Lenders keep some flexibility on expansions and owner buyouts. On a first acquisition they do not.
A seller note can only carry you halfway. Non-cash sources, including a seller note on full standby, cannot exceed half of the required injection. There is already a wide gap in expectations here: ninety percent of buyers expect seller financing to be part of the deal, and only twenty-nine percent of owners plan to offer it. If your plan assumed the seller would paper most of your down payment, rebuild the plan.
Debt service coverage rises to 1.25 from 1.15, and it has to be supported by historical earnings. Projections can be considered, but they cannot carry the ratio on their own. The business has to have already done it.
An independent business valuation is required on a change of ownership, and on purchases of three million or more, a Quality of Earnings report as well, prepared by someone independent of both you and the seller. Every acquisition now gets full standard 7(a) underwriting regardless of loan size. The streamlined small-loan track is gone.
Read together, those changes say one thing: the SBA wants buyers financing businesses that have already proven they can service the debt. That is harder on an unprepared buyer and better for a prepared one. The competition thins, and the businesses that clear are the ones actually worth owning.
The part buyers find out too late
You are usually not buying one asset. You are buying a business, and you are taking a position on the building it operates from, whether you buy it, lease it back from the seller, or inherit a lease from a third party. Each of those is a different deal.
A seller who has been leasing the building to himself at below-market rent has been overstating the earnings you are about to pay a multiple on, and any competent valuation will normalize that rent back to market and lower the number. If you are inheriting a third-party lease, your lender will generally require an assignment of lease or a landlord waiver, and the lease term including renewal options has to equal or exceed the loan term. A short, unassignable lease can end a financed deal after you have spent months and real money on it. That question belongs at the front of your diligence, not at closing.
Two weeks ago I wrote the seller's side of this same table. If you are buying, it is worth reading what prepared sellers are being told to fix, because those are the businesses you want to be looking at.
Buying a business in New Orleans, and the building under it
That coordination is the part I handle differently. I am a licensed real estate broker and a business advisor in one seat, with a Wharton MBA and more than twenty years in real estate and finance, including work that financed over five billion dollars in assets. I value and coordinate the operating business and the real property as one transaction, rather than handing you two advisors who each own half of the outcome and neither of whom owns the closing.
I am licensed in Louisiana and Mississippi. If the business sits on one side of that line and the building sits on the other, that is one conversation rather than two.
If you are thinking about buying rather than building, the work starts well before you look at a listing. What you can actually finance under the new rules. What the real estate does to your number. What a defensible valuation looks like now that a lender is required to order one.
Book a short, confidential call and we will map it against your situation. No pressure, and nothing leaves the room.
Lydia Cutrer, Broker/CEO, The O.W.N. Life
Call or text 504-517-0008 | Office 504-517-6696 | lydia@theownlife.com
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