Wishful thinking about SBA guaranteed business acquisition loans?
May 10, 2019
by a professional from University of Southern California in North Palm Beach, FL, USA
What do you think or know is the proportion of SBA guaranteed loans where buyers make the lowest (10%) permissible down payment / equity investment for their acquisition?
I’ve been trying to pry this insight out of lenders but they are not cooperating with facts.
From my perspective of SMB done deals, few acquired businesses post-closing can adequately service acquisition (and other) debt unless buyers upfront make a larger than 10% down payment from un-borrowed funds.
from Babson College in Boston, MA, USA
90% LTV works best when you have proprietary deal flow, AND when trailing EBITDA is flat, and usually these two factors go hand in hand since it is often the presence of a good broker which causes the sellers to improve the pre-sale performance of the company (and thus EBITDA grows instead of remaining flat) and who also generates an auction, making cash at closing a greater factor.
So What? You may have more luck CLOSING a proprietary deal with >85% LTV than an brokered deal. You may need to look at smaller EV's for brokered deals where you can have a lower SR DEBT/EQUITY ratio.
You can eat turkey by firing your rifle from your back porch, but you'll need to venture deeper into the woods to eat deer meat.
from University of Southern California in North Palm Beach, FL, USA
Technically you can go as low as 5% down with 5% of seller financing that is on Standby (no payments but interest accruing) for the life of the loan. Banks will do this especially for employee purchases.
I always get some additional financing from the seller (as there are tax breaks in place now that after 5 years the seller can have 40% more after tax cash in pocket than taking cash at closing), And if the seller doesn’t believe that his business is not a safe investment and that the buyer is the right buyer, then it is a good indication to walk.
Many if not most SBA deals (especially high goodwill and under $5mm) are 10% down. Some banks are more aggressive than others. Some interpret the Liquidity Rule, which is not fully in place, a little more liberal than others. This is the amount of liquidity the buyer has available after the injection for the down payment.
As one of the other responses stated, the best way to do this is by being a sole sourced deal, not broker- listed and not in an auction.
In 95% of my client’s deals, we are the only buyer in the discussion.
Cash flow is still king, and the maximum that I value a business is the amount the banks will loan, plus some cushion. Typically a debt coverage ratio greater than 1.5, whereas the legal limit is 1.2.
It has to be a win-win deal for motivated parties.
Many sellers are afraid of listing with brokers because of the high sales commission (8%+) and especially afraid of confidentiality issues and thus over 80% of the done deals are not listed when there is an “A” level buyer.