Am I wasting my time searching for tech services?
March 08, 2024
by a searcher from Northwestern University - Kellogg School of Management in Newtown, PA 18940, USA
I am searching for tech services firms. Software dev, consulting (technical in nature), smaller managed services mixed with project work etc. I'm not talking about software product companies, or extremely high recurring revenue firms.
I have been informed by 2 separate brokers that SBA will not work with a deal like I've inquired about so they will not send me the CIM after the NDA. My background is in tech services ~25 years, and I would be structuring deals with 10%-12% of my equity. (The two brokers didn't even get that far to find out.) Once they found out SBA was involved the conversation was over. In my conversations with (1 bank, 1 loan broker) I've disclosed the type of firm I'm searching for and haven't heard specific concerns raised other than the typical vendor / customer concentration, DSR, my financial status, etc.
Questions:
#1 What is the SBA's view on tech services, consulting, non-product software development?
#2 I'm about to launch an outbound campaign to find off-market tech services firms so if I need to change strategies because SBA really will not work these deals I'd rather find out before I spend the money and time to find off market deals. Are there certain types of tech services firms that SBA does avoid?
#3 Does this merely sound like a couple of brokers playing defense on bad deals, knowing SBA does review things closely?
from Northwestern University in Southborough, MA, USA
1 - Be operating (Fine.)
2 - Operate for profit (Fine.)
3 - Be located in the US (Uh oh, we used 30 offshore resources last year.... will we get to the end and inside of an LOI only for due diligence to knock us out and say they won't fund it since a substantial amount of the work happened in india?)
4 - Be small under SBA (Fine.)
5 - Be an ineligible business (This is hairy, like if DraftKings is a customer, and a big one, maybe more than 1/3 of revenue is from legal gambling activities? Is one of the owners incarcerated or is under indictment of a felony? Is it Lender owned in any way? Has someone defaulted on a federal loan or anything? Is there any lobbying activities or speculative activitives?) All of those could kick the company out of the lending process.
6 - Be creditworthy (This could be problematic..... did they make $1mm one year and lose $2mm another? Subjective and banks can reject loans because of it)
Having come from this industry, as you know, I feel it's a good business too, but it's my experience that bankers don't always understand consulting as well as inventory based businesses. I don't think you're wasting your time, but I might be a bit silent on using SBA until you're in the process and see a business you really like.
Sean
from Rutgers in Cherry Hill, NJ, USA
#1. I work with many banks so it is important to understand what their appetite is for tech and what their underwriting is comfortable with. Screen your lenders to make sure it is the best match for your search. Ask specific questions about their underwriting, the portfolio they carry, and even the LO experience. How many tech deals do they close a year and such. Get this resolved before moving onto your question #2.
#3. As for the broker, I think they should have been more transparent about the type of buyer they are looking for upfront. It is a hard balance to strike in marketing a listing (restrictive vs open to anyone). I don't know what you mean when you asked if they are playing defense on a bad deal. It is more likely about the seller's demand to get more which means they buyer needs to be cash heavy to do the deal. They screened you out.
Finally, I think you are also asking how do you get a shot at the deal although they are not accepting offers from anyone with SBA financing. Looks like you felt disappointed by that. I wouldn't be. Either find a way to remain persistent with the broker. Build a relationship to find other deals they have that are a fit. Or just move on. By no means am I saying this is easy but there are plenty of deals out there.