Bad NAICS codes for Self-Funded Search
June 30, 2021
by a searcher from University of Pennsylvania - The Wharton School in San Mateo, CA, USA
Does anyone have a list of NAICS codes which are highly unlikely to be suited for a self-funded search? I've run into a number of edge cases that I've been going back and forth on such as...
236210 Industrial Building Construction
236220 Commercial and Institutional Building Construction
My natural inclination is that they're not a fit but I know there are a few searchers who have bought businesses that might fit into these categories (such as roofing).
I figured I'd ask if anyone's already thought through this/if there's a list out there
from The University of Texas at Austin in Dallas, TX, USA
31-33 Manufacturing
42 Wholesale Trade
48-49 Transportation and Warehousing
55 Management of Companies and Enterprises
56 Administrative and Support and Waste Management and Remediation Services
62 Health Care
I'd suggest it is more of finding a SBA bankable deal than the the industry. Company needs to have 3-5 years of stable cash flow, some real estate(only to push the term to 20 years vs 10 years) and has assets that will cover 15%+ of the loan amount. If you can then amortize the airball "uncollateralize portion of loan" less than a 1-3 years, you should get the loan. SBA loans are 85% guaranteed, from the government, that is why banks require usually 15% equity. So it is less about the industry but more about finding a bankable deal that you can cover DSCR of 1.25x and you are less than 2-2.5x total debt/ebitda. Wholesaler and distribution companies fit this profit very well, as they have long term contracts, and assets. If you add services to the offering it is low capex way to fuel growth. An example of this is a fruit and vegetable distribution company that was selling to restaurants, which then began adding food prep to their services (sold chopped fruit and veg to restaurants) Sold same fruit/veg just eliminated an expense for the restaurants (prep cook chopping veg), sold more at a higher margin, and increased the switching cost and locked in customers with contracts.
My group bought a roofing company and it was a great deal, returned investors capital less than 1 year, this was due to a large project we won early on, and a great structure with seller and bank. We own three other commercial contractors which we have had success with, due to lack of other buyers, finding bonding that did not require guarantees and getting favorable terms from sellers and lenders. Best of luck in your search.
from Marquette University in Seattle, WA, USA