Bank Financing

June 22, 2020

by an investor from Babson College in Boston, MA, USA

The most substantial source of financing for an EtA (Entrepreneurship through Acquisition) business will be bank financing. A quick survey of two dozen searchers finds they have raised between 35% to 75% of their transaction price through bank debt with the average being 51%, with an additional 10-40% coming from the seller. Traditional banks have become more willing to lend against historical earnings even for businesses with few assets for collateral. In the USA, the SBA (Small Business Administration) loan guarantee program has made it much easier to raise debt, and to be competitive banks have become more flexible. There is a wide variety of searcher experiences internationally that should be understood and vary widely country to country – Brazil, almost non-existent to UK which is very similar to the USA.

You can read more in the blog post. Please let the community know your thoughts and comments below! https://jimsteinsharpe.com/searching/bank-financing-2/

Search On!!!

Jim Sharpe

Reply by a searcher
from California State University, Los Angeles in Beverly Hills, CA, USA

Coming from the banking industry, I will say that not all SBA loans are equal. The individual bank must underwrite to their specifications and ensure that it meets their requirements. That said, as Jim mentioned, these regulations are easing up a bit, but banks are more timid than ever on extending new loans - especially for acquisitions. A sound business plan must be in play, amazing numbers of both past and future pro forma, and the covenants could be extremely tight. Couple this with at least a 3% - 5% fee from the all in financed amount, SBA tends to give very expensive and restrictive lending. Leverage will surely be less than 3x, restrictive covnenants may include no additional debt to be encumbered (meaning no sub debt or seller finance), and you could trip a covenant with one bad quarter where you are not profitable on a TTM. So, be prepared to negotiate with several banks on the same kind of loan - SBA merely gives a bank comfort in knowing they won't take a 100% loss if it defaults.... All that said, this is pre-covid knowledge. Today, I have no idea other than what I'm being told from friends in the industry.

Reply by a searcher
from Harvard University in Fort Wayne, IN, USA

One quick comment that should be obvious... Shop around. As mentioned above, some banks that cater to Searchers (including on this platform) are taking advantage of novice negotiators/acquirers. I was quoted a rate a full 2% higher than what I eventually received from a bank in my region (and no, the fees weren't significantly different to make up the difference). Especially these days, w/ a lot of volatility, some are hungry, some are scared, and some are happy to screw you over.

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