Resources for "zero $ down" acquisition methodology?
October 24, 2022
by a searcher from Harvard University - Harvard Business School in Boston, MA, USA
Hi all!
I've been researching the costs associated with the "self-funded" acquisition method. From what I gather so far, the costs are:
- $XXX search costs (varies person to person)
- $5,000 fund setup fees
- $35,000-$60,000 legal fees
- At least 1% down payment. Typically, 10% is expected, but, per my research, it is not unusual to find funding for 9% of this.
If above assumptions are missing something, or need correction, please correct me!
My main question, however, is on how to fund as many of the above costs as possible? From what I've gather so far:
- it helps if the business is so attractively priced that the bank is willing to use it as collateral
- utilize SBA loans
- utilize seller financing
- seek investors to cover the gap
While I have the bullet points down, I am having trouble understanding cohesively how this is supposed to work? For example, assuming I find a business for an attractive price, SBA loans 90%, do I then reach out to the banks to get a loan to cover as much of the down-payment as possible? Do the banks will always ask that a piece be covered via seller financing, with banks getting priority of repayment? Or are banks not involved at all if the SBA is involved? Also, what types of "investors" to look for, I assume traditional search investors wouldn't be interested?
If you could point me to any resources on this topic, I would really appreciate it!
Thanks in advance!
from California State Polytechnic University in Pomona, CA, USA
Senior Debt (up to 90%) is an SBA lender/bank. The SBA guarantees a percentage of the loan the bank is making, it does not loan the money. Debt Service Coverage Ratio (DSCR) will be determining factor on if you can get to the 90% mark or need more equity on the deal.
Junior Debt, typically a Seller Note, which most banks will require be equal to 5% of the remaining 10% and be on full standby (not being paid down until the SBA loan is paid off). There possible can be a larger portion of seller note and the banks each have their own requirements on how they are structured.
Equity could be from the self-funded searcher, investors, or combination. I was not able to find a bank that would allow for $0 out of pocket on a self-funded search because you are not truly creating a search fund. So, the banks I have spoken with all required some participation from the Searcher.
Equity, outside of the full-standby seller note, cannot come from a debt source. This is often referred to an Equity Gap, and must be filled via investment of some sort in terms of institutional investors, mezzanine, angels, family, etc. and some will most likely have to come from the searcher. As a self funded searcher, there was not a single bank I spoke with that did not require I come to the table with some sort of personal cash outlay on the deal.
Repayment and disbursements are paid in order of Senior Debt, Junior Debt, then Equity holders/investors with the exception of the delayed repayment of the Full Standby Seller Note.
I am going through the process of finding investors right now, so that is a good questions. There are many avenues for this and there is a great presentation by redacted on the topic and how to structure. https://www.searchfunder.com/event/view/280
from University of Illinois at Urbana in Rockford, IL, USA