Deal Structuring Assistance
July 14, 2024
by a searcher from University of California, Berkeley - Haas School of Business in Oakland, CA, USA
Hello, I'm in discussions with a business in Nor Cal and working on different deal structure options with the seller. Hoping to use SBA loan and minimize the amount of equity I need to raise as the seller is interested in seller financing. I'm also hoping to incorporate the building into the sale. Would greatly appreciate any lenders who would be willing to talk through scenarios with me as I am less familiar on best way to incorporate real estate into a transaction like this and want to be able to propose 3 solid options for the seller to strike a deal that can work for both sides.
from University of Wisconsin in Madison, WI, USA
1. You could look to use an SBA 7(a) loan to acquire both the business and building together. The term and amortization would be blended based on the weighted average formula: [[(Lesser of Purchase Price or Appraised Value of Building) / Total Uses of Funds] x 25 years] + [(Non-Real Estate Uses of Funds / Total Uses of Funds) x 10 years]. The advantage of combining the building and business onto one SBA 7(a) loan would just be simplicity
2. You could acquire the business and building with 2 separate SBA 7(a) loans - one used to buy the business and the other used to buy the building. The loan for the business acquisition would have a 10-year term (fully amortizing with no balloon payment or pre-payment penalty). The loan for the building purchase would have a 25-year term, fully amortizing, no balloon payment, with a 3-year pre-payment penalty schedule. The benefit of buying the building and business separately with 2 different SBA 7(a) loans would be to avoid cross-collateralization. It would make it easier if you wanted to sell the building and not the business, or vice versa,
3. You buy the business with an SBA 7(A) loan and the building with an SBA 504 loan. More on the 504 loan program here -- https://www.sba.gov/funding-programs/loans/504-loans. The benefit of including a 504 loan in the deal structure is that ~ 40% of the total project costs for the building purchase (purchase price of the building + associated transaction costs) would be fixed for 25 years at the current SBA 504 rate at the time of closing. The rates on 504 loans are very attractive relative to 7(a) loans -- I believe currently in the high 6's.
On your question about minimizing the equity raise, you have a few different options at your disposal. The SBA 7(a) loan program allows you to use cash, a full standby seller's note, or a partial standby seller's note to come up with the 10% required equity injection (down payment). You mention in the post that the seller is open to seller financing part of the transaction. If the seller is willing to hold a note with no payments for the first 2 years after closing, followed by payments in year 3 through year 10, that can count towards the down payment. Most banks will allow this to count towards up to half of the 10% down payment.
Without knowing more about the transaction, I would contemplate something like the following if it worked for you and your seller:
SBA 7(a) loan of X% of the funding stack
Seller Note (with payments) of X% of the funding stack - I would aim for a 10 year amortization, and if the seller wants a balloon payment, have the balloon somewhere around the end of year 4 or year 5
Cash in from you and/or investors - I would aim to have this comprise half of the 10% down payment
Seller's note on 2 year standby - I would aim to have this comprise half of the 10% down payment. This would be structured as follows: No payments in year 1 and year 2, then full principal and interest payments in year 3 through year 10
If you're interested in brainstorming further, glad to connect. Feel free to reach out with an email to redacted . I'm not a direct SBA lender, but I run a commercial loan brokerage firm that helps buyers, specifically ones using SBA 7(a) financing, with identifying the right SBA lender for their deal, based on how the deal is structured, and then being involved from start to finish to ensure that things go well
More on Pioneer Capital Advisory here ( https://www.pioneercapitaladvisory.com/ ) and former client reviews here (. https://endorsal.io/reviews/pioneer-capital-advisory-llc )
Best,
Matthias Smith
President / Owner
Pioneer Capital Advisory redacted
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA