Deal structure advice

July 08, 2022

by a searcher from Purdue University in Prosper, TX, USA

Hey, all.

I came across an interesting deal that I'd love some advice on when it comes to the structure. Below are the key points...let me know if you need any additional info. I'm going to keep industry and type of business out of it for confidentiality. The SDE here is lower than I was looking for, but the asking price and real estate involve has peaked my interest. It is in an industry that I could plug myself into and scale. I believe CRE is worth more than 50% total purchase price, so know I could do 25yr note with SBA...however, I'm wondering if there's a better way to structure this given the heavy CRE and asset value.

Any ideas how to structure deal outside of SBA? Please keep comments and advice focused on deal structure. Thanks in advance!

-Current asking price of $600k
-SDE previous 3yr avg = $200k
-Industrial warehouse real estate included in asking price; 4k sq ft, on 0.5 acre, built 1979, in fair condition
-Machines and other assets included worth at least $100k FMV
-I have $100-125k cash I'm willing to put towards this as needed
-I currently have no additional income since I decided to pursue self-funded search full-time (just a side note if relevant for alternative lending options)
-Need the owner to stay involved for ~3-6mo to assist with transition, so want some ideas on financial incentives to keep him engaged...earnout maybe if I can do this outside SBA?

Reply by a lender
from University of Massachusetts at Amherst in Washington, DC, USA

Good perspectives in this comment thread. I don't think you'd have too much of a challenge going the SBA route, assuming the financials are solid and the DSC is healthy. The average loan amount for the top 50 SBA lenders so far in FY22 (data here: https://data.sba.gov/dataset/lender-activity-reports) ranges from 105K to 2.7MM, so I think the primary drivers of whether an SBA lender goes for the deal will come down to industry, location, market, and the overall fit (can you run this business; do you have the qualifications, etc.). In other words - I don't think this deal is too small based off the asking price alone. The other thing I'd mention regarding incentives...since you can't have an earnout with an SBA loan, one thing I have seen is essentially a reverse earnout. Basically, it's a clawback of funds if certain milestones are not met or attained. For example, you might be able to negotiate that if the margins don't remain above a certain percentage, or if sales do not exceed a certain level, then 10% of the purchase price is surrendered (or if it's a seller note, some portion of the note is forgiven). There are a multitude of approaches on how to structure something like that, but it's obviously not ideal since you're essentially starting from the seller's max benefit and then working backwards if things don't pan out (you also would need to navigate concerns the seller would have about control and you potentially steering the business towards one of the thresholds in order to reduce his/her ROI).

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Hello Colton. I agree with some of the sentiments already made. You are going to see the best terms from the SBA option because they will only require 10% down and are going to give you a 25-year term. The only disadvantage is you really cannot offer the seller any incentives outside of a salary going forward.

There are conventional options available as well. However, I think those options are really going to depend on the value of the assets and likely are going to require more cash down. You would be looking at likely 80% financing on the real estate, and up to 80% of the liquidation value of the equipment. From there you might get a lender to provide some goodwill exposure, but it will not be a ton. The real estate is likely going to be a 20 to 25 year amortization (depending on age and condition of the property) and the business loan is likely going to be a maximum of five years. The business will have to provide enough cash flow to support not only debt service at these levels but also a reasonable salary for you to cover your personal expenses. If you can achieve this, then there is potentially a conventional lender that could assist you. You would likely be looking at a local community bank as your best bet.

I would be more than happy to discuss in more detail and go through all options and concerns at any time. We have over 350 funding partners we work with, including local community banks and credit unions scattered across the U.S., and we do quite a bit of SBA financing as well. You can reach me directly at redacted

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