Self Funding acquisition

August 25, 2020

by a searcher from Williams College in Chicago, IL, USA

Does anyone have any experience or knowledge of searchers who have self funded the equity for their deal. For example, would it be possible to find a company for $1 mm, fund the deal with 90% SBA Loan / 10% Equity with the 100k in equity coming out of savings? I can see a couple of potential issues:

Getting SBA approval, would this be difficult without deep pockets / or deep industry experience?
Business lack the size / scope to have a management team in place. I assume that would make things more challenging in the beginning. It seems like you could offset that by getting the seller to stay on and provide training after the sale. I assume there would be additional upside / the business would be more attractive in a future sale if you were able to grow it to the size where you could bring in some type of management team?
I assume there would also be some issues where you're basically buying a job for yourself.

The obvious upside here is that you would be able to retain control and after paying down the debt would have a significant equity position.

Am I missing something here? Why isn't this talked about more as potential path?

Reply by a searcher
from Tufts University in Los Angeles, CA, USA

In my experience pursuing SBA financing, some lenders are shockingly flexible regarding the experience requirement. It seems like if there is no special licensing required and the searcher has at least 5 years of general management/finance/consulting experience they will be able to find a lender.

There are a lot of drawbacks to this route, which is perhaps why it is not more popular:
- Must be a self-funded search.
- Acquirer must attached a personal guarantee to the loan. This may scare off some searchers who have already accumulated some personal wealth.
- There are limits on how much outside equity you can raise without those sponsors having a personal guarantee as well.
- Maximum loan amount of $5MM.
- Typically you still need 15% "equity" in the deal, either through the form of a cash injection from the buyer or fully subordinated nonamortizing sellers note (counts as equity).
- Various lenders may have different debt to EBITDA or debt to tangible book value hurdles, which can make it a bit tough to close marginal deals.
- Loan structure is fairly inflexible - 10 year fully amortizing is the best you will find.

All that said, I think it is an extremely viable path that should be more popular.

Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

This size of deal purchased with SBA financing is a typical "main street size" business sale transaction. As long as the buyer has good credit, relevant management experience, be willing to personally guarantee the loan, and willing to pledge additional personal collateral (think 2nd or 3rd on a home or other real estate) as needed, and the business shows historical cash flow to service the acquisition debt, its generally doable. I've done lots of these. The new caveat is that the business has to have survived/or thrived through COVID. Otherwise, there will be lots of underwriting questions and the banks may not be willing to fund. You'll need a business plan with financial projections. Don't overthink this - it's a simple plan describing what you'll do better/different than the past (or perhaps do more of the same) with Excel spreadsheet showing 2 years cash flow and 2 years p & L. .

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