Capital Stack ideas

July 26, 2024

by a searcher from University of North Texas in Dallas, TX, USA

I'm writing this after speaking to many people with conflicting beliefs, and would love to hear the communities wisdom on this topic.

I'm not sure how many of you heard of someone named Dan Pena, or Pace Morby but they both also talk about this, and I am going to leave reference of these at the bottom.

From what I have seen across searchfunder, many people align their capital stack by getting an equity partner for x %, Seller Finance x%, and Commercial lending as x%, example:

4,000,000 business (4x multiple)
10% 400,000 equity from partner
20% 800,000 Seller Finance (venter finance) or whatever term you use
70% 2,800,000 commercial loan

444,###-###-#### annual payment - 2,800,###-###-#### % interest, 10 year amortization

126,###-###-#### annual payment - 800,###-###-#### % interest 10 year amortization

= 570,###-###-#### total annual payment

570,891.19 / 1,000,000 = 175.16% DSCR

Now this is what it looks like before any equity partner splits which is a pretty good deal I think most would go for these kind of numbers.

This is just an example!

my question is:

Is it possible to complete the capital stack without an equity partner meaning, can you just ask for more seller finance from the business owner to make him carry 30% instead of the 20%, and have the lenders consider the seller finance portion as the equity in the deal and not need any of your cash into it? I have heard multiple sources say that this is possible but its not something you get unless you ask for it and go for it specifically. Dan Pena teaches this method and calls it QLA.

New capital stack:

4,000,000 business (4x multiple) 30% 1,200,000 Seller Finance (venter finance) or whatever term you use 70% 2,800,000 commercial loan

444,###-###-#### annual payment - 2,800,###-###-#### % interest, 10 year amortization

190,###-###-#### annual payment - 1,200,###-###-#### % interest 10 year amortization

= 634,###-###-#### total annual payment

634,323.54 / 1,000,000 = 157.65% DSCR

I've also heard and seen people push out the payment of the seller finance 5-7 years out so the deal could even be more of a slam dunk. You can refinance the sellers out at that point or just take the###-###-#### % DSCR which is still not a bad deal considering you have full equity and didn't put any of your cash into it.

Has anyone here ever successfully done a deal without an equity partner? QLA style? This would create much faster growth and much more opportunity. I heard that Andrew Carnegie did this (2nd richest American to exist) to grow his massive steel empire and he did this because he hated having equity partners. What are your thoughts on this? Even if you don't think this is possible imagine if it was? What would your thoughts be on it if it was possible.

here is a video of Dan Pena with his Mentee Andres Mildner who built a company from scratch to 30 million in revenue and 6 million in EBITDA in just a couple of years through Dan Penas teachings. watch 6:15 where he talks about how the banks reacted to QLA
https://www.youtube.com/watch?v=kQPofj7Cu1Q&list=PLR1fEJ0wRh7TR8uBFd2GDJ0NKOOzbzCrR&index=24

This is a video of Pace Morby, He's a real estate investor who has 1500 units and using creative finance to build his portfolio. He does the same thing as QLA but does it on real estate, and calls it the "Morby method" he even mentions which bank he uses to do this kind of transaction.
https://www.youtube.com/watch?v=ldtFPDURmeI

I would love to hear some bankers thoughts on this.

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

^redacted‌ thank you for the tag. This is a great question. Although it is possible to use seller financing for the equity, typically this only works in SBA transactions. We typically do not see it get done with conventional or non-bank financing. On the SBA side, technically if you have 10% of the purchase price on standby for a minimum of 2 years, you can finance the remaining 90% of the transaction. However, very few lenders are doing this. Most lenders are still requiring a minimum of 5% equity. We have done a few deals at 2.5% equity as well for experienced borrowers. The only time we have been able to finance the rest is when we have had an employee buying out a company they work for or someone buying another company in an industry they are already in.

Now, if you get the seller to finance a larger percentage of the deal than 10% on standby for two years, then you might find a lender more willing to do a deal with less money or no money down from the buyer. However, there is no magic number and it is deal specific.

Please keep in mind most lenders want to see buyers have experience or relatable experience for a deal they are acquiring, they want them to have a personal net worth that helps to support the deal, and that they have post closing liquidity and support for the deal. If you have a minimal net worth and little liquidity, it does not matter if you have a 30% seller note if you want $5 million in financing. It is likely not going to happen. Also, the cash flow has to work to support the seller note and the Bank debt at the level you are financing.

Please let. me know if you have any questions. You can reach me at any time at redacted

Reply by a professional
from University of New Brunswick in Saint John, New Brunswick, Canada

I am able to get 100% bank financing offered on many deals, but it requires a few things 1) that you have enough PNW to back the loan 2) that they believe in you and your vision for the business 3) that the target business' financials make sense (the normalized historicals, projections post close, and your major assumptions 4) that you have key risks mapped out and ways to mitigate them. Aside from that there are many other ways to buy a business with no investor or equity of your own. Seller financing, earn-outs, profit share. Like others have said, anything is possible, especially if you can convince the value you bring to the business will make it worth much more, then convincing them to participate in the future value becomes quite easy. If a seller tells you how much "potential" the business has, which most do, then that's a door to open to talk about shared risk/shared return structures.

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