08/09/2024
M&A Funding Tip:
Analyze ALL potential acquisition deals as if they need to be SBA financeable even if you don't plan on using an SBA loan.
Why? Well, if a professional lender/bank won't fund the deal, with a 75% guaranty by the federal government, why should you?
They have more data on success and failure rates of business acquisitions than almost any one individual acquirer (unless you are a fairly large private equity firm).
The main challenge is, from my personal firsthand perspective, that the vast majority of business brokers/sellers don't offer prospective buyers the numbers/docs that actually matter to an SBA loan underwriter. E.g. These bankers don't even consider "SDE." And, most acquirers don't really know what to ask for to vet a deal properly and swiftly.
What they care about most is the net income reported on the last filed business tax return, and use that to calculate the Debt Service Coverage Ratio (DSCR). Any other numbers like T12, interim P&L, etc. are simply supplemental. In other words, a T12 or P&L can only hurt a deal (if lower than the net/ordinary income on tax return), and never enhance it.
And then there is the subject of add-backs. Oy vey. 99% of proposed add-backs are not viable at all, and that's why SDE isn't even considered by banks, and most businesses for sale never get sold. Unrealistic expectations and claims.
Most deals, once add-backs are properly factored, fail because the true net income number isn't nearly enough to support a loan to buy the business (i.e. the business is over-priced).
In the sub-$5,000,000 business sale realm, 50-80% of all business acquisitions are financed with an SBA loan. The only other methods of finance in this range are seller financing and cash.
Sure, there are a small number of deals that get financed by local community banks with non-SBA portfolio loans, but these deals must fit into a pretty narrow box and by located in that community bank's limited geographic footprint.
To clarify, the cash portion I mentioned above may be the buyer's cash or that of an equity partner they bring in to fund some or all of the transaction.
And, most business owners willing to seller finance more than 10-20% are highly motivated to sell for reasons that should be considered a red flag. It's one thing if the seller is distressed, but often times it just means the business is a lemon, and not worth the value-add opportunity it's being pitched as.
So... if you ever want help with "fundability" due diligence on deals, including but not limited to effectively vetting proposed add-backs, overall financials, post-acquisition fundability and profit optimization, feel free to reach out!
P.S. If you are apprehensive about using an SBA loan to finance an acquisition because of the timeframe (~60 days), just know that you should probably be taking that much time, yourself, to properly conduct DD, even if you're using cash and seller financing. Plus, most of the reason for that time frame has to do with delays by the seller and/or broker, so you'll encounter them regardless of how you finance the deal. It's just that a good bank isn't going to relent and overlook those red flags, so why should you??
