Economics for non-SBA self-funded search deal

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by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management
in Miami, FL, USA

1yr ago

Economics for non-SBA self-funded search deal

I've currently got a deal under LOI that's probably a bit too big for an SBA loan ($10.5mm EV with ~20% seller financing).

I know some lenders will do a Pari Passu loan on top of the SBA, but for various reasons I don't think that is in the cards.

I know typical economics are ~25% equity for a solo-searcher under the traditional model and ~60-90% on an SBA deal.

Where do the economics typically fall for self-funded deals without an SBA? Are there typical percentages or is it solely based on where the returns model out?

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reply by a professional 1yr ago
from University of Notre Dame in New York, NY, USA

Let me preface by saying nothing in that space is “baked” and economics do really vary deal by deal depending on a multitude of factors. Non-SBA deals approaching $15+M in EV are independent sponsor territory (albeit on the low end). Independent sponsor economics are more akin to a traditional PE economics than searcher economics.

You’ll hear people sometimes use the term “independent sponsor” to describe a self funded searcher using an SBA loan plus junior debt (with investors helping write the equity check) to do a 10-12M deal, but those economics are way different and I wouldn’t call those folks independent sponsors. The capital stack is much different on true independent sponsor deals vs large self funded search deals (way more leverage in the latter).

I have clients that deploy both strategies so happy to chat about what I’ve seen in both spaces. Feel free to DM me or email me redacted

reply by a professional 1yr ago
from United States Air Force Academy in Chattanooga, TN, USA

Jeff:

I'll round your deal size down to $10mm for the sake of argument. Realistic to believe you could get 20% seller financing since it isn't an SBA 7(A) (could not get 20% seller financing under an SBA loan because the seller would then have to PG the loan). Let's assume you can do 5% down. That leaves you with $7.5 left to fund the deal.

You could structure 50% as senior conventional debt. Higher interest rates than SBA deals and shorter terms, so you'll have a higher debt service coverage for that type of financing. Alternatively, you could structure that 50% in a maxed-out SBA 7(a) with more favorable terms. Either way, you'll have $2.5mm left to close out.

Best option: earn-out. You'll have to plan for this to be paid, but creating financial incentives that put the onus on the seller and on the business to perform highly aligns their selling incentive with yours, and it also ensures that you only have to pay if the business actually performs.

Next-best option: give the seller rollover equity at a 1:1 turnover rate (essentially meaning the seller is selling less of the business). If you're doing an SBA loan, the seller could not carry more than 19% of rollover equity.

Finally: pull in outside investors. Again, no single investor can eclipse the 20% threshold without having to PG your loan, and at that size you'll probably need multiple investors, but they will probably ask for at least a 1.5x step up on their equity (i.e. they are funding 25% of the deal but get 37.5% of the equity in the purchased entity). This option leaves you with 62.5% of the business equity, a PG on a $5mm loan, and a few more people to call mommy and daddy, but at least it gets you to close.