Raising Capital on Small(er) Deals

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June 18, 2024

by a searcher in Meridian, ID, USA

My partner and I have a signed LOI on a business in the financial services sector and are looking to raise capital (which I'm new to). It's a steal of a deal, but incidentally, the deal size seems like it's too small for many sophisticated investors (purchase price $2.5M; EBITDA of $650k).

In an ideal world, we'd close with 5 (or fewer) investors, but most investors interested in a deal our size are looking to contribute $100k or less. Looking to this community to understand how to position our deal to be more palatable to sources of capital further up stream and welcome the collective wisdom of this group.

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commentor profile
Reply by a searcher
from State University of New York (SUNY) in Buffalo, NY, USA
If SBA eligible, the math on this one is fairly simple. $2.5mm purchase price and assume $150k of deal costs with the SBA guaranty fee, legal, DD and any other costs. Hopefully you can get seller’s note for 10% of purchase price, 80% of project cost as an SBA loan, and the balance via equity. In total that would be $2.12m of SBA loan, $250k of seller note, and $280k of equity. Divided by 5 that’s a manageable $56k per investor. It should pencil at ~1.5 DSCR given the multiple, but you’ll have to do the math.

If it isn’t SBA eligible, this is a tough one to get done unless you have a credible path to doubling / tripling the size of the business, which is easier said than done. The returns on equity just won’t be attractive enough without massive growth because you don’t have the benefit of leverage. Think 35%+ IRR in the base case.
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Reply by a searcher
from Texas A&M University in Surprise, AZ, USA
I love this community, sounds like you've already received some great information and leads in the event that you didn't want to use an SBA.

Out of curiosity, since your post gives off a savvy vibe, have you already explored SBA as an option? Did you write this post because you ran into issues finding the down payment or because you are trying to minimize players involved and paperwork? I would think this would be a straightforward presentation to an SBA loan provider assuming you have the $$$ and that there are no other red flags.
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