Conventional Lender for ~$1M EBITDA business acquisition in CA

December 19, 2023
by a searcher from The University of Chicago - Booth School of Business in Newport Beach, CA, USA
I am negotiating an LOI with a seller for a restoration business in California doing ~$1M in EBDITA. The seller plans to roll equity into the new entity and we are looking for a conventional lender who would be willing to underwrite the loan against cash flow rather than collateral. We are prepared to inject 30% to 40% equity with a sizeable seller note to de-risk the deal for the lender. SBA is not a good fit given it requires a stock sale for the seller to roll equity.
from The University of Chicago in Chicago, IL, USA
My comments on rollover equity:
Ownership of a business is % of equity owned. Reducing x% of Enterprise Value (EV is unlevered) does not mean seller is retaining x% of post-acquisition equity (E is levered). Example: $5,000 EV. Buyer puts up 10% i.e. $500 in equity and owns 100% of the business. Now assume seller rolls over 15%. i.e. Seller is rolling over $750 k. Buyer gives $4,###-###-#### % of $5,000) to seller and gives 15% equity in NewCo in an Asset purchase, or lets the seller keep 15% of OldCo in a Stock deal, Such 15% equity owned by the Seller is worth $75 (15% of $500) to seller; it is not $750 that the seller left on the table. I have had many buyers call after spending $$$ and time to find the deal fell apart the day before the closing. This has nothing do with DD. It is not the domain of CPAs. And frankly, most attorneys do not understand or advise this early in the game. It becomes an issue when paperwork has to be prepared/filed for post-transaction seller's ownership.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA