I'm seeing a lot of questionable businesses for sale, I think there will be many defaults in the next 2-3 years. What happens to the assets that are tied to that loan? Does the SBA take ownership? Where do they ultimately go?
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1) They owner may work to sell the business to another operator. Depending on how the business is operating it might still have value. The owner might get enough money by selling the business to fully repay the loan. If they do not, then they will need the Bank to approve a discounted sale of the business. The remaining balance might remain the responsibility of the owner and be termed out over time, or there might be a settlement made for any remaining balance on the loan.
2) If the business does not have much value, the owner can work with the lender to liquidate assets. This might include selling off the inventory, collecting outstanding A/R and selling any equipment or other fixed assets to pay down or payoff the lender. If there is a shortfall it would likely be handled similar to a shortfall in option 1 above.
3) If the owner walks away or does not cooperate with the Bank, the Bank will file legal action and liquidate any remaining assets of the company. Depending on the type of business the lender may have some options to sell the business. If it is a franchise as an example, the lender may be able to work with the franchisor and they might be able to find another operator to step in and take over. But more than likely when an owner does not cooperate with the Bank or walks away, the Bank ends up liquidating the collateral for pennies on the dollar and then recovers capital from the SBA guarantee or from pursuing any personal guarantees from the owners.
If you are attempting to find businesses that have SBA loans that might fail in the future that you would like to purchase the business at a discount, it is not always easy to do find those businesses. First, due to privacy laws Banks cannot discuss past due loans with just anyone, so Banks themselves cannot market businesses unless the owner gives them permission to try and help find a buyer. Many lenders might not know a business is struggling until it is too late. Often the Bank does not know until a business owner defaults on the loan, at which point usually the problem is pretty severe. Business owners tend to stick their heads in the sand a bit when they have an issue and just try to fight through it. They are often embarrassed and do not ask for outside assistance. They also often assume they cannot get enough for the business to repay the loan so they do not even think of selling the business. But from time to time you might find a struggling business listed for sale. I think watching the listings is going to be the best way to find struggling businesses. They might be struggling to support their debt level, but that does not mean they would not support a lower debt level if purchased by another operator at a lower price.
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