Deal Structure to mitigate risk

April 03, 2023

by a searcher from University of Arkansas (System) in Fayetteville, AR, USA

I'm considering a business that is directly tied to construction of Multi-family and Hotels. The region I’m in has seen significant growth in multi-family construction in recent years. While demand is still strong, Interest rates have changed the economics for development. The seller of course believes that the business will continue to see significant demand increases.

What are some SBA compliant ways to structure a deal to mitigate risk of demand declines in coming years?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Overall there is a lack of quality construction firms out there, so demand has remained strong for quality firms. However, I agree with the above posts that there are some serious headwinds in construction, especially due to the increases in interest rates. Most lenders are underwriting the end loans at much higher interest rates, which means many investors / developers need to bring substantially more equity into transactions to get the numbers to work, and this is leading to many projects stalling. Often times the capital stacks do not make sense for developers with too much equity.

With that said, there are always ways to structure deals if they make sense. Likely the biggest issue you will face today buying such a company from SBA lenders is experience. If you do not have direct industry experience, that will make it challenging to buy a construction company in any market but even more so today when the construction industry is expecting to face some headwinds. However, I would be more than happy to jump on a call and discuss this request or options with you in more detail if you would like. We are a Commercial Loan Brokerage shop with over 500 funding partners. You can reach me here or directly at redacted Good luck.

Reply by an investor
from University of Missouri in Austin, TX, USA

I would be very careful about businesses with this kind of exposure for a variety of reasons. Many areas, specifically in the south and southeast have boomed over the last 3 years in this regard, elevating all related businesses. The most simple SBA compliant manner would be to tie some of the purchase price to a forgivable seller note (if performance metric is not met, you do do not have to pay the note). Key thing here is that the metrics have to be tied to historical performance levels - not future. So if biz did $5m of revenue last year (assuming highest level of revenue), you could not tie a note to a target of $10m of revenue.

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