Viable Purchase Structure?
April 19, 2024
by a searcher from University of Virginia in Chattanooga, TN, USA
Hello, I'm looking at buying a business / RE combination where the RE value would be 50%+ of the deal, so the 7a amortization would be 25 years. I am considering the following structure:
-10% down
-20% SF (over 5-7 years, with performance restrictions)
-70% SBA
Business Valuations is ~3.25 SDE and RE is at a 9% cap roughly.
Does this seem reasonable?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) The real estate must be over 50% of the total cost, including any funding you are getting for working capital that goes to the business portion in the loan. It will also need to appraise to support this. If the appraisal comes in less and you still move forward and more goes to the business purchase, then you could have a blended amortization instead of the 25-years. So you will want to be sure there is some room in value so it works.
2) You can definitely build forgiveness into the seller note so long as that note is not being used as any portion of your required equity. If you plan to use that note as any portion of your required 10% equity, then it cannot have forgiveness in it and it also cannot have any sort of balloon in it. You could always look to do two sellers notes, one with forgiveness and one with no forgiveness if you are trying to get away with less money down.
3) Someone suggested USDA funding, but that likely will not work. The USDA requires the loan to be fully collateralized with hard assets. You cannot do goodwill value of the business with an USDA loan. You would need to have fixed assets to back up that portion of the loan to meet the USDA collateral requirements.
4) You can definitely do seller financing so long as you have 10% minimum down or possibly even less down if the seller is holding back 10% or more of the transaction in a note on full standby for two years. I think the confusion that ^redacted many have is that the SBA guarantee rules for sellers only apply if they hold 20% or more equity on the transaction. They do not apply if the seller takes a note back for 20% or more of the deal. The seller is only required to guarantee the loan if they hold 20% or more equity on a partial business acquisition. On a full sale the seller can finance as much of the deal as they want without any requirements to guarantee the loan.
5) Overall the summary structure you have here appears to make sense.
Happy to have a discussion and review the deal in more detail and provide you with more specific feedback. It definitely sounds like something that is financeable. You can reach me here or directly at redacted if you need any assistance with the financing. Good luck.
from Biola University in North Tustin, CA, USA