There are approximately 300 SBIC-licensed private equity firms in the U.S. These firms operate under the Small Business Investment Company (SBIC) program, which is overseen by the U.S. Small Business Administration (SBA). These SBIC-backed firms provide funding and support to small and growing businesses across a wide range of industries. The number can vary slightly year-to-year, depending on new SBIC licenses issued or firms exiting the program. The total capital under management by SBICs exceeds $30 billion, making it a significant source of private capital for small businesses in the U.S.
North Carolina and South Carolina each host a number of Small Business Investment Companies (SBICs). In North Carolina, SBICs have been active, investing nearly $1.2 billion in small businesses over the past five years, with over 200 companies receiving funding. These investments have had a substantial economic impact, supporting thousands of employees. However, specific numbers of SBIC-licensed private equity firms in both states are dynamic and change as new firms receive licenses or as existing firms close. The M&A advisor or business broker should know the current landscape and always include SBIC-backed private equity firms in the target list of potential acquirers.
About the SBIC Program
Since 1958, the mission of the Small Business Investment Company (SBIC) program has been to stimulate and supplement the flow of private equity capital and long-term debt financing that American small businesses need to operate, expand and modernize their businesses.
SBA does this by licensing and providing capital to professionally managed equity and debt investment funds as Small Business Investment Companies. SBA capital comes in the form of a government-guaranteed loan to the fund to match privately raised capital. The SBA-guaranteed loan, paired with private capital, increases access to financing for qualifying U.S. small businesses and startups while potentially improving risk-adjusted returns for private investors. (Source: https://www.sba.gov/partners/sbics/apply-be-sbic)
If managed properly, the federal government provided capital, can increase returns for private equity investors and the business owners that roll a portion of their equity into their acquired company. While this seems great in theory, proving actual tangible dollar results is more difficult with little hard data existing. Business owners should view this more of an intangible factor, unless the SBIC-backed private equity fund can actually provide them a better economic deal in a competitive M&A sale process.
Small Business Investment Company (SBIC) program
The Small Business Investment Company (SBIC) program is not a government grant, but rather a private investment program regulated and partially financed by the U.S. Small Business Administration (SBA). It provides small businesses with access to capital through investments from private equity firms and venture capital funds that are licensed by the SBA. Here’s a breakdown of how the SBIC program works:
1. SBICs Are Privately Owned and Managed
SBICs are private investment funds that are licensed and regulated by the SBA. They are typically private equity firms, venture capital funds, or other financial institutions that raise money from private investors, including individuals, pension funds, and corporations. The key difference between an SBIC and a regular private investment firm is that the SBIC can access additional funds through the SBA, which helps increase their investment power and firm returns by lowering their cost of capital.
2. Leveraging SBA Funding
The SBA provides SBICs with leverage, which is essentially government-backed debt. For every dollar that an SBIC raises from private investors, it can borrow up to $2 from the SBA through SBA-guaranteed debentures. This leverage gives SBICs more capital to invest in small businesses. For example, if an SBIC raises $50 million from private investors, it can access up to $100 million in leverage from the SBA, resulting in $150 million available for investments in small businesses.
3. How SBICs Invest in Small Businesses
SBICs provide two main types of financing to small businesses:
Debt Financing: SBICs may offer loans, typically with longer repayment terms and more flexible conditions than traditional bank loans.
Equity Financing: SBICs may also provide equity capital by purchasing a share of ownership in a small business, which allows the business to raise funds without increasing its debt load.
The financing is used to support business growth, expansion, product development, or even mergers and acquisitions.
4. Eligibility and Target Businesses
SBICs primarily target small businesses that meet the SBA’s size standards, which vary by industry but typically include businesses with fewer than 500 employees or those with revenues below a certain threshold (e.g., under $100 million in annual revenue). They also target businesses with strong growth potential or those in need of capital for expansion. SBICs often invest in sectors like manufacturing, business services, technology, healthcare, and other industries where there is high growth potential but where companies might have difficulty raising capital from traditional banks.
5. The SBA’s Role
The SBA does not make direct investments in small businesses through the SBIC program. Instead, it licenses and provides oversight of SBICs, ensures that they comply with SBA regulations, and guarantees the debentures used to leverage private capital.
Key roles of the SBA in the SBIC program include:
Licensing SBICs: Private investment firms must go through a rigorous application process to become licensed as an SBIC.
Providing Leverage: The SBA provides up to 3x leverage (though most SBICs typically receive 2x leverage) based on the private capital the SBIC raises.
Monitoring: The SBA monitors the financial health and compliance of SBICs to ensure they operate in line with regulations and use the leverage responsibly.
6. Profit and Loss Sharing
The SBIC, not the government, bears the risk of the investment. SBICs aim to generate profits by successfully investing in small businesses and helping them grow. The SBA benefits when these businesses succeed because it collects fees and interest on the debentures it provides to SBICs. However, if an investment fails, the SBA shares in the loss because of its loan guarantee.
7. Returns for Investors
Private investors in SBICs typically receive returns from the profits generated by the SBIC's investments in small businesses, just like they would from any other private equity or venture capital fund. However, the SBA does not provide grants or direct funding to these businesses — it merely provides debt leverage to the SBIC, which increases the pool of capital available for investment.
Key Takeaways:
Not a Grant: The SBIC program is not a government grant; small businesses receive investments (loans or equity) from SBICs, not free money.
Private Funds + SBA Leverage: SBICs are private firms that use private investor capital and government leverage to invest in small businesses.
Increased Access to Capital: SBICs allow small businesses to access more flexible and patient capital, which may be harder to obtain through traditional lenders.
In summary, the SBIC program is a public-private partnership where private investors raise capital, the SBA provides leverage, and SBICs invest in small businesses, creating a valuable source of growth funding for small and medium-sized enterprises (SMEs).
Whether an SBIC-backed private equity group will pay more for your small business depends on several factors, but they may have some advantages compared to other buyers. Here’s how SBIC-backed private equity groups could impact the price:
1. Long-Term Growth Focus
SBIC-backed private equity (PE) firms often focus on long-term growth rather than short-term profits. They are generally more patient with their capital, meaning they might be willing to pay a higher price if they see significant potential for growth in your business. Unlike some traditional private equity firms that prioritize quick returns, SBICs may value your business more based on its future potential rather than just current profitability.
2. Flexible Deal Structures
SBIC PE firms typically offer more flexible deal structures, including a mix of debt and equity. This flexibility may allow them to offer a more competitive price, as they have access to SBA leverage and lower-cost financing compared to traditional private equity. For example, they might be able to structure a deal that includes earn-outs, seller financing, or partial equity retention, which can increase the overall deal value.
3. Specialized Industry or Niche Focus
If your small business operates in a niche or underserved market that SBIC firms target, they might be more willing to pay a premium. SBICs often focus on businesses that are too small or too risky for traditional investors, so they could see unique value in your business that others may overlook.
4. Strategic vs. Financial Buyers
While SBIC-backed firms are typically financial buyers (focused on generating a return on investment), they sometimes act more strategically in their acquisitions by aligning with businesses that have long-term potential. If they believe your business aligns with their broader portfolio or strategic goals, they may be willing to pay more to acquire and develop your company over time.
5. Competitive Bidding
If you receive interest from both SBIC and non-SBIC private equity firms, it could create a competitive bidding situation, which could drive up the price. SBIC firms may compete aggressively to acquire businesses that align with their investment strategy, especially in growth sectors.
6. Financials and Growth Potential
Ultimately, the price an SBIC PE firm is willing to pay will depend on the same core factors as any buyer, such as:
Revenue and profitability: Higher margins and consistent cash flow increase your business's value.
Growth potential: If your business has strong growth potential or operates in a growing industry, an SBIC-backed firm may value it more highly.
Management team: A strong and experienced management team can drive up the price, as it suggests the business can continue thriving post-acquisition.
7. Lower Debt Burden for the Buyer
Since SBIC-backed firms have access to cheaper SBA financing, they often carry less expensive debt. This can make them more comfortable offering a higher purchase price than firms relying on more expensive sources of capital, as their cost of financing is lower.
8. Focus on Smaller Deals
SBICs typically target smaller businesses than traditional private equity firms, so they may have fewer large-scale deals to choose from. This focus could drive up the valuation for a small business, as they see it as a prime investment target within their typical deal size range.
Conclusion
SBIC-backed private equity firms may pay more for your small business if it fits their long-term investment strategy, industry focus, or growth goals. They often offer competitive and flexible deal structures due to their lower cost of capital. However, the final price will ultimately depend on your company’s financial health, growth prospects, and how much competition there is for your business.
Charlotte Capital | M&A Advisory | Debt Financing | Restructuring | Strategy | Interim Management
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