Is "ZERO money down" the new way forward for Searchers?? (example below)
May 12, 2023
by a lender from Baylor University - Hankamer School of Business in Houston, TX, USA
Did you miss THIS???
The recent changes to the SBA may be the greatest single BOOST to the Searcher/ETA community!!!
But instead of "telling you" what's up....let me just show you what I mean.
From now on, here's what a typical deal structure might look like.
Example:
- 81% Buyout (Searcher buy's majority stake in the business)
- 19% Seller Equity Rollover (the Seller does not have to PG the SBA loan)
- *ZERO money down!* (buying less than 100% helps resolve the LTV problem for some banks)
- Buyer has the option to call (or buy out) the Seller's remaining equity after 12 months at the original valuation multiple
{cue 'Happy Dance'}
Here's why this changes EVERYTHING...
(1) The Buyer (Searcher) gets to take out a smaller loan, put ZERO money down, and STILL gets a majority (controlling) stake in the business. Booyah!
(2) The Seller gets 81% upfront and STILL gets to stick around the business for a while longer....without having to PG the SBA loan.
(3) If the Buyer manages to successfully supercharge the business, he/she can STILL buy out the Seller's remaining 19% equity stake at the exact same valuation multiple from before.
Bob Dylan said it best: "times, they are a changin."
I am thrilled to see what happens NEXT!
- Grant
from United States Naval Academy in Colleyville, TX 76034, USA
Valuations go up because you have more money chasing deals, we saw that with near-zero interest rates and it still hasn't fully corrected.
So, here's a different scenario...
You own###-###-#### % of that, but a savvy seller is going to want her share of the cash flow calculated before debt service - that's your debt, not hers. So you're paying an inflated multiple to get a capital stack that is effectively 100% debt (80% debt for 80% of the business and 80% of the cash flow). Your actual DSCR is 20% lower than your calculated DSCR so your margin for error is very low and normal day to day business fluctuations may leave you (individually) strapped for cash.
When things go REALLY sideways (say...supply chain disruption) you need to put money into the business, not take it out. You don't have the money to save the business, Savvy Seller says "not my problem" because she's not on the hook for the debt. The debt service is crushing, business goes under. If you don't think that happens, see Grumpy Old Man #1.
Savvy Seller negotiates a side deal and buys the assets back from the bank for way less than you paid her in the first place. She can live off the money you paid her the first time while she gets the business back up and running to sell it again.
In the meantime, you're waiting tables while you're trying to sell your house and find a "real" job to pay off that PG.
TANSTAAFL
from Baylor University in Houston, TX, USA