Creative financing for first acquisition

searcher profile

February 24, 2022

by a searcher in Dallas, TX, USA

As the title says I am searching for my first acquisition. I am curious what types of creative financing you have seen for $1M-$5M purchase price? I hear a lot about a buyer cash/seller note/SBA combo but wondering if there are other things out there to look into.


Another question: what is the least amount of cash you have seen a first time acquirer put in for $1M+ deal and how did they get it done?

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commentor profile
Reply by a lender
from McGill University in Greenwich, CT, USA
Hi - my firm is a best-in-class revenue/cashflow based lender that funds acquisition deals. We underwrite a target company's financials and typically fund 10-20% of the target's annualized revenue, up to $5M. We can come in as a gap piece, or as the buyer's cash consideration to help you close the deal. I'd be happy to jump on a call to discuss. Please email me at redacted if you want to set up a time to discuss. Thanks!
commentor profile
Reply by a searcher
in New York, NY, USA
The first question you need to ask yourself is whether you're going to use SBA financing, as the rules for those deals are well-defined, strict, and fairly consistent across lenders. If you will be using SBA loans, you will not be able to use many of the more flexible tools (such as earn-outs, seller-retained equity, etc) that commercial financing may allow. For SBA deals, generally a seller note is used to satisfy some of the SOP requirements. Thus, for an SBA loan you will generally be required by many lenders to use a combination of cash equity, seller note, and SBA-guaranteed financing. But some banks will also provide a commercial loan in addition to the $5mm SBA loan for larger transactions. The variation in ratios of each leg of the structure to the others is high, but the variation in terms of the types of legs in the structure in the first place is low.

If you aren't using the SBA, your options are much more flexible and at that point the structure is probably best determined based on the unique circumstances of the seller and the details of the target itself. There's no one-size fits all and the variation in terms of the assets and capital structures available to a potential acquisition means broad-brush statements aren't always helpful. The ideal for most searchers probably would be zero cash down; 100% seller financing at favourable terms from a valuable, drama-free, and trustworthy seller; and no banks involved at all. But even that isn't universally the best option. What about deals with existing high-rate debt that can't be refinanced since that structure doesn't involve new cash?

The best advice I have is to talk to a few lenders once you have a deal in hand. They generally will be able to give you an idea of what structures works if you're not pursuing SBA guarantees.
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