Deals Above SBA Limits

February 27, 2024

by a searcher from New York University in Cranford, NJ, USA

In order for me to commit and quit my current job, the size deals I am looking at are above SBA limits (probably more in the 10M purchase price range). As a funding strategy, I would be looking to inject about 500K and would need a seller to do the same as part of the 10% injection and then would need to finance the rest between SBA/conventional lenders. Wondering how frequent this pari passu lending gets approved and if what I am seeking is actually a viable option. Would love anyones thoughts/experiences/feedback here, etc. Have to stay anon for now, as I need to keep my current position until ready to close on something. Thanks in advance.

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Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

Thanks for the tag Luke. My honest answer is that I think it will be difficult to close on a transaction structured how you envision. I was in a similar boat where I was looking at leaving a comfortable salary and needed a certain deal size to make it pencil out. Some things working against you: 1.) The bigger the deal, the more professional the competition. When I was pushing north of $5m the competition was almost entirely financial groups rather than individuals. 2.) Multiples tend to increase with size and 5X was the minimum multiple I saw in this range. 3.) Non-SBA lending or mezz debt on top of SBA tends to be more restrictive, which requires more equity. This is all to say 500k in equity likely isn't going to be enough to close on a $10m company - not saying it hasn't been done, just tough to do in practice.

I think you need to look at your situation and ask if you need salary or equity upside to make this worth your while. In my situation, I have kept my personal overhead low and while I need a salary, I expect to make my return on equity. Below is the how I thought about deals as I was looking at a wide range during my search.

Sum $5m: vanilla SBA, can close with $500k equity. Own 100%, minimal salary, full upside exposure.
$5m-8m: SBA loan, 10-20% seller note, $1m total equity w/ friends/family raise to close any gaps. Own 70%, minimal salary, high upside
$8-12m: Much larger equity check, partner with family office/HNWI, market salary, lower equity/upside

The first two options weren't vastly different in most models I ran and generally the larger deals were more complex but had higher expected return in positive cases. The third option was vastly different and would have a higher low case due to higher salary, no PG, and less equity so reduced upside.

If you want to discuss, feel free to reach out directly.

Reply by an intermediary
from Clemson University in Raleigh, NC, USA

The comments thus far touch on many of the challenges of $5MM-$10MM enterprise value transactions.

Until 10 days ago.

SBA has released an SOP that allows a single borrower to have multiple $5MM cap loans for businesses whose first 3 NAICS codes are different - yes DIFFERENT. In other words, the SBA is incentivizing buyers to purchase businesses that may be outside of their area of expertise.

I found this foolish and am petitioning the SBA to revise the SOP to increase the SBA guarantee cap to $10MM with NO restriction on NAICS (still excluding the current NAICS codes on the 'black list'). The last time the loan amount cap was raised was in 2010 when it was increased from $2MM to $5MM. That means, assuming a 3% cost of living increase business buyers today have 42% less buying power than they did in 2010.

You may be interested in this 16 minute podcast I did with Diamond Financial founder Steve Mariani where we touch on the new SOP, it's intended impact, it's likely impact and a better solution - raising the cap to $10MM.

https://enlign.com/blogs/sba-sop-change-to-5-million-guarantee-cap-to-allow-individuals-to-receive-multiple-guarantees

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