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Viso Insights

How are Acquisition Entrepreneurs Doing Now?

We reported on the acquisition loan default stats from Lumos Data back in 2023. The results then were fairly reassuring for acquisition entrepreneurs with overall default rates well under 2% depending on how we sliced the data. You can find that report here. In this report, we are updating the data through 9/30/23, SBA’s fiscal year-end, and including some new stats on the growth trends for SBA acquisition lending as well as some more positive stats around acquisition borrowers that have done well enough to pay off their loans early. Incidentally, for those of you who want to take a deeper dive, Lumos Data has a number of interactive dashboards available for free on their website so you can view the data from the angles that are most relevant to your situation.

Although defaults trended upward in 2023, the good news is that the probability of default for SBA business acquisition loans is still relatively low, at a 2.25% probability of default.

Growth of larger Acquisition loans flattened significantly in 2023

The data represented below excludes any SBA loans that were not used for business acquisition, and also excludes acquisition loans under $1 million. We think this larger loan data set may be more representative of what we have come to know as “Search Fund” buying community.

As we can see in the chart below, for 3 years in a row, the number of these larger acquisition loans grew by 1,500 to over 2,000 loans per year at YOY growth rates of 19-33% until we reached a total of over 8,300 of these loans per year. But last year, in 2023, while the number of these loans still grew, it was only a 2% growth rate, so almost flat with 2022. We can only speculate as to whether this could be caused by reaching the crest of the so-called “Silver Tsunami” of retiring business owners, tighter lending standards, or whether it was buyer enthusiasm beginning to cool off.

Probability of Default Trending Up in 2023, smaller loans slightly worse performance

For acquisition loans of all sizes, the likelihood of defaulting has increased by 1.04% from 2022 to 2023, which is nearly double. While the overall rate remains low, this increase is certainly concerning. The data for acquisition loans greater than $500k continues to show slightly stronger performance than the all loan size data set, but we still see an increase of 0.78% in the probability of default from 2022 to 2023, which is a 57% increase YOY.

Some thoughts on what may be behind the higher default rates:

• Rapidly rising interest rates (most of these loans are variable rate);

• Inflation and labor shortages impacted many small companies over the past 2 years;

• Companies acquired in 2020 and 2021 (the 2 highest growth years for acquisition loans over $1 million) may have realized post-pandemic “normalized” cash flow that was less than the EBITDA the businesses traded for;

• High loan growth years led to more lender competition, and potentially less lender credit discipline.

Early Pay-Offs also rising sharply

So as not to only focus on the negative (defaults), we’ve pulled some positive news from the Lumos Data as well. At the other end of the spectrum are borrowers that are doing well enough to pay their loans off entirely and ahead of schedule. The rate of early pay-offs more than doubled in almost every category in 2021. Perhaps this is where some of the excessive stimulus funds were put to use? These early pay-off rates soared in 2022, with some moderate flattening in 2023. Somewhere between 7-8% of SBA borrowers are able to pay their loans off early each year, which is great to see.

Between the Defaults and the Early Pay-Offs

Small business acquisition and ownership is a journey and the reasons people choose to pursue it are as varied as the businesses themselves. There are tens of thousands of SBA acquisition loans outstanding today that have neither defaulted nor paid-off early. These are acquisition entrepreneurs who are undoubtedly having successes, failures, triumphs and struggles – and often all of these in the same year! That is the nature of small business ownership, and what drives people to this space to test their mettle. We’ll continue to watch the stats and report on them, but we’ll remain far more interested in the stories and experiences that come from participating in the acquisition entrepreneurship journey. The ability to start up a business or even acquire one from someone who wants to retire or do other things after building one, is made possible in many cases by the SBA loan program. It’s a remarkably successful public-private partnership that benefits our economy tremendously and allows acquisition entrepreneurs to live their dreams.