SBA valuations vs owner valuations
May 20, 2024
by a searcher from University of North Dakota in Loveland, CO, USA
We are looking at a deal with a gap between the owners valuation and how the bank values the deal.
A 4X multiple is putting the offer at a value of $6,000,000 but the owner wants $8,000,000.
The reason he feels it's now worth $8m is because 2 new large (brand name) clients have started using them to manufacture their goods. The production just started so they are expecting to do much more in revenue.
I was able to walk through the production facility and confirm these customers are now using them and I'm familiar with these brand names.
My question is, a bank is going to put a value on this company based on historical figures, not what it is expected to do. Since there are no contracts, I understand their position.
What are some creative ways to close the gap between what the seller wants and what the bank values the business? Especially since an SBA note won't allow for earn outs.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
The second issue is the business valuation. The Bank cannot lend you more than how the business is valued combined with how the equipment or real estate is valued if there are those assets. If the business value comes in lower, then the maximum senior debt you could get would be that amount plus the value of the equipment and real estate. The companies doing business valuations for SBA loans typically put the most weight on the last fiscal year and then some weight on the previous fiscal year and the TTM. If those values are much lower than what the company is doing now, then it is going to be a challenge to get a higher value for the business.
Although I understand the seller wanting to get a higher price based on the new business, you also need to be cautious with this. You do not know how sticky that business will be. You also do not know if it will impact existing business the company has. You do not know if they will perform and retain that business. Lastly, you will not know if that business is very profitable. Did the seller just add a bunch of revenue prior to sale to get a higher price but he bid low to get the revenue and then you are stuck paying for a business that does not have the same margins you thought it would have? These are all things you need to consider.
If you are interested in moving forward I think there are two options you would have. Option 1: You could offer a large seller note with forgiveness to it. That forgiveness would be tied to performance on those new contracts and margins those contracts generate. If the business does not maintain a higher level of revenues or adjusted EBITDA going forward, then certain portions of the seller note up to the full seller note become forgivable in the future. If you put the seller note on standby for several years, then it likely would not get factored into the debt service by most lenders up front. If it is in repayment right away, then it would get factored into the debt service and would not count. This would allow the seller to earn something on that business but also provide you some protections if the business does not materialize or is not profitable.
Option 2: You do a partial business acquisition all allow the seller to stay in the business for an ownership interest under 20% (that way the seller does not need to guarantee the SBA loan). By doing this you can give the seller another bite of the apple in the future based on higher future anticipated EBTIDA. You can have an advanced agreement of what you would buy him out at, but you could not have a guaranteed execution date on that until after the SBA loan is paid off. Although you can always go back to the lender sooner to execute that buy-out if the cash flow is there to support it.
I would be more than happy to talk through these items in more detail. You can reach me here or directly at redacted Good luck!
from Creighton University in Los Angeles, CA, USA
- Seller Financing: Ask the seller to finance part of the purchase price. This can help you meet in the middle by spreading out the payment.
- Equity Rollovers: Offer the seller a small equity stake in the company, keeping it under 20% so they don’t have to guarantee the SBA loan. This way, their interests are tied to the company’s future success.
- Mezzanine/Bridge Financing: Consider mezzanine financing or a bridge loan. This mix of debt and equity can help cover the difference. Also, it's worth shopping around. Different banks value the company differently, and you could find one that agrees with your $8M valuation.
I’ve actually built a free tool that automates this process, making it easier and faster for you to find the best deal. Check it out here: [https://godealwise.com/beacon]. I’d be happy to chat if you have any questions!