SBA loan defaults have exploded over the last few years. In 2021, total defaults were around $570 million. In 2024, they topped $1.6 billion. Early defaults – within the first 18 months after acquisition – have nearly tripled.

So, what’s going on here? And what does that mean for the rest of us?

Well, on the surface, yeah – rising defaults sound like a warning sign. But for acquisition entrepreneurs who know what to look for, it’s actually an indicator of something else: opportunity.

Let me explain.

 

What’s Driving the Spike?

After COVID hit, the Fed dropped interest rates, handed out stimulus checks, and essentially created an environment where capital was cheap. A lot of people bought businesses – or propped up existing ones – with more leverage than they should’ve.

 

Source: brrr.money

 

Once rates went up and cash got tighter, it started to crack. Same thing that’s happening in commercial real estate. If you over-leveraged during the boom, you’re likely struggling now.

And the SBA 7(a) loan program – something I’ve personally used going back to 2006 – is now at the center of that pressure. So yeah, defaults are climbing. But again, that’s just one side of the story.

 

Why Some Businesses Collapse and Others Thrive

When a business falls apart under pressure, it’s usually not just because of the macro environment. There’s almost always something weak underneath. And there are a few things I always look for that can help you avoid being the next default story:

First, margins. If you’re looking at a business with bottom-line margins of 2% after debt service… just don’t. I remember someone in the Lab wanted to buy a small sandwich shop. It wasn’t a chain, just a standalone place with razor-thin margins. I advised him not to buy it. He did anyway. It didn’t end well. There just wasn’t enough room to absorb any volatility.

Second, fixed costs. I try to avoid businesses that are too capital- or labor-intensive. Whenever I can, I hire freelancers. Not just because of the cost savings, but because you get flexibility. And in a downturn, you need that. That said, you can’t just swap employees for contractors without considering how it affects delivery. So don’t overdo it.

Third, cash conversion cycle. I almost bought a business once where every time they got an order, they had to raise capital just to fulfill it. They were essentially going backwards on every sale. It looked great from a top-line perspective, but the business was dying underneath.

 

Source: Analyst Prep

 

Fourth, supply chain vulnerability. If you can’t deliver a product, you can’t make money. It’s that simple.

All of these factors matter way more than most buyers realize. These are the things that break when the tide goes out.

 

So What Does a Resilient Business Look Like?

Let’s flip it.

When you look at the businesses that not only survive but thrive in a volatile market, they usually have a few things in common.

Essential services. I was talking with my friend Tom Strive the other night – he owns Strive Electric here in St. Louis. He started the business in his early 20s after his uncle (a roofer) told him, “If you’re going into the trades, don’t be a roofer. Be an electrician. That’s where the money is.”

He listened – and he’s built a killer business. High margins. Consistent demand. And he can’t go a week without getting unsolicited offers to buy him out.

Recurring revenue. Think about Hoffman Brothers, another company in St. Louis. They’re an HVAC business, but they turned their customers into monthly members. I pay them every month, they come change the filters, tell me what’s broken. At first, I hated the idea. Now? I get it. It’s predictable, scalable, and sticky.

Businesses that straddle the old and new economy. Apple isn’t just a hardware company – it’s software and services. Tesla isn’t just a car company – it’s data, software, and energy. The best businesses have one foot in the physical world and one foot in the digital.

 

Source: WallStreetMojo

 

Businesses that evolve with consumer behavior. Amazon is a great example. They’re not just an ecommerce site. They’re a logistics and fulfillment machine, anticipating exactly how people want to buy – and meeting them there.

 

How to Buy Smart in a Market Like This

If you’re buying in a market with rising defaults, you need to be sharp. Here are three rules I follow:

 

1. Get the trends right.

You want to buy something on trend, not trendy.

After COVID, a wave of private equity flooded the Amazon FBA space. They were acquiring brands left and right. At the same time, ecommerce growth spiked and valuations soared. But most of these aggregators were overpaying for small businesses with no real moat. A lot of them are gone now.

The lesson? Hype fades. Fundamentals stay.

 

2. Focus on intrinsic value.

When I bought my ecommerce business in 2016, I didn’t have the brand. I was just a reseller.

But what I saw was: no one in the space had done SEO. No one owned the digital real estate.

So I built the most-trafficked site in the category, captured the leads, and dominated the long tail of search. That’s intrinsic value.

You’ve got to look past what’s obvious and figure out what actually drives value in the deal.

 

3. Look for what others miss.

That might be motivated sellers. A Lab member just met with a 95-year-old owner doing $7–10M in revenue. The seller didn’t care about maximizing the price. He cared about his people, and his legacy. That’s the kind of deal you want to find.

 

Source: ERE | Preparing for the Silver Tsunami

 

It might be distressed but fixable businesses. I’ve seen great companies that buyers won’t touch just because revenue is down a little. But the bones are solid.

Or it might be a hidden asset. I bought a business once that had this old DOS-based ordering system. Every customer needed a binder just to place an order. I took that process and turned it into a WooCommerce frontend. We rolled it out to one of the largest privately held companies in the country and brought on new customers from there. It wasn’t expensive. It was just recognizing an asset no one else saw.

SBA defaults are rising, yeah. But that doesn’t mean “don’t buy.” It means “buy better.” Look at fundamentals. Look for real value. Get the trends right.

Because when things get messy – that’s when the smart buyers move.

Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.