Make your offer stand out with this unique structuring hack!
October 22, 2023
by an intermediary from Clemson University in Raleigh, NC, USA
I've been an M&A Advisor for 20 years and never have we seen SBA rates at 11%. Over the past ~2 years I've lost deals as a result and seen offers declined because buyers were "pricing out" the incremental cost of interest.
First, successful buyers realize that the cost of capital (interest rate) is a cost of doing business. It is no different than rent and wages. Every year (in most agreements) there is about a 3% bump in rent. Every year employees expect a raise or a bonus for good performance (and if gen z apparently for any performance!). You don't decide not to buy a business for those costs, so why would you in a rising interest rate environment? Ultimately, these costs of business are passed to customers in the form of higher prices - it's called inflation and interest rates are just another component.
Second, there is a very low probability that interest rates will remain at or above 11% for the typical 10-year term of your note. I've seen many buyers "do the math" and calculate the incremental cost of interest between prior ~7% and current ~11% and price it out - or reduce it from their offers. This is a non-starter for many reasons, the biggest being it's not the seller's fault that rates went up.
So, how do you make an offer shine in an adverse lending environment without over-paying that makes YOU stand out as a serious buyer with a viable structure?
Here's the hack: Go ahead and "do the math" but only calculate the incremental cost of interest for 24 months. Reduce the offer by only by that amount. Effectively this provides you two years at only 7% and two years for interest rates to ease (that with the coming election I feel is almost certain. Note (no pun intended) that SBA loans are almost always adjustable and will float down when rates drop.
It's your choice whether to disclose your methodology to sellers or not.
Check back in 2025 to see if I'm a hero or a zero...
from University of Pennsylvania in Charlotte, NC, USA
Subtracting supposedly "incremental" interest from a valuation based on an interest rate that's no longer applicable but supposedly more "normal"? This is novel, but it ignores how assets are actually valued, I won't dispute it if you say many buyers are doing this, but it seems unwise to try to compete against an approach that makes no sense to begin with. Especially by adopting a slightly less nonsensical variation of the nonsense.
As pointed out, this approach amounts to a bet on unknown future interest rates which most market participants, including bankers, aren't comfortable with for good reason.
Can anyone help out with thoughts and observations?
from Clemson University in Raleigh, NC, USA