Seeking Input on Deal Structure for Asset-backed LBO

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March 25, 2020

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Florida, USA

Greetings SF Community!

I am an independent sponsor who is working on sourcing my first deal. I am leaning towards acquiring an asset-heavy manufacturing business with relatively high FCF, and using high leverage backed by the assets to obtain financing.

I've never done this before and am really curious to know what some other searchers who have done LBOs would recommend. I see the basics are that the SBA loan could provide up to 75% of the total EV not to exceed $5M, so I'm using the example of a target generating $1M EBITDA and 4x ETBIDA multiple, so $4M total EV. $3M is covered by SBA (75% noted above). If I did not want to put in any equity, can I get a deal done with 100% debt, which would require me to find the other 25% somewhere? I've heard of a seller note but haven't had time to look that up yet.

Thoughts?

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Reply by a searcher
from Stanford University in Houston, TX, USA
There's a couple items here.
1) An SBA 7(a) loan is approved based on expected cash flow, not assets.
2) SBA's allowed maximum financing is not 75%, but rather 90% (or 95%, in the scenario Madan stipulates). However, a given deal might be approved by the bank for less than 90%, depending on their DSCR requirements (among other things).

Separately: if the business has heavy fixed infrastructure, than you can get a separate SBA 504 loan just for that.

In short: I don't believe SBA 7(A) allows 100% debt acquisitions; but that's a question for an actual bank.

Otherwise, to get to a 100% debt acquisition, it's probably requires a mix of conventional, mezzanine, seller, and/or asset-based loans.
commentor profile
Reply by a searcher
from University of Kentucky in Houston, TX, USA
With the right lending partner, you might be able to get to 10% down (min. SBA requirement). 50% of the 10% (i.e., 5% of the purchase price) could come from seller note. However, the seller has to agree to be on standby for the entire term of the SBA loan###-###-#### years). If you personally don't have liquidity to the tune of 10% of EV, most lenders are going to turn you down, unless you find a guarantor (with a solid asset/liquidity base). More than happy to discuss other possible structures as an intellectual exercise. Please let me know how you end up structuring this deal -- I am always interested to see how creative people get with their deal structures. All the best!
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