Establishing Deal Budget - Self Funded

August 28, 2024

by a searcher from Harvard University - Harvard Business School in Washington, DC, USA

As a self-funded searcher planning to use personal funds + SBA + seller financing; how do you determine your deal budget? In other words, how do you calculate how much you can afford?

Will an SBA loan officer talk to you to help you with this if you have no deal in hand? If yes, what would they use to qualify you for a certain amount? I ask because - presumably - the financials and health of the business itself is a significant factor in this determination?

Given that seller financing is a variable, and that personal funds are finite, how would I calculate budget without pricing myself out of deals? i.e. for simplicity, lets say I have $10 personal funds. Assuming that the SBA loan requires 10% down, would my budget be restricted to $100? Would I be able to look at $200 deals if the seller puts loans me $10? Or more?

How much would you typically expect in seller financing?

Also, is there something I am missing?

Apologies if this is a bit "all over the place". I am just trying to educate myself.

Any help would be appreciated!

Reply by a searcher
from Harvard University in Fairfax, VA, USA

I think the word "deal size" might be a better description of what you are looking for since budget, in my mind, includes things like your day to day expenses as a searcher plus diligence/operational costs leading up to the deal close.

Generally speaking, self-funded searchers stick to an EBITDA range of $250k to $1M although I am sure there are exceptions. At a 4-6x multiple, that would put a purchase price of $1M to $6M. Assuming the financials support a loan size of up to 90% (the SBA limit is still $5M I believe), you could think of your own equity as the limiting factor.

Thus, without knowing too many details, if you had $10, the largest deal you could reasonably do would be $100. That isn't considering the costs of your day to day life, and the due diligence costs which might be ~10% of the deal size. Seller notes are a whole other can of worms and I believe there are a good amount of resources to discuss that (including some that I have commented on)

Hope that helps - good luck!

Reply by a searcher
from Shippensburg University in York, PA, USA

I wouldn't get too hung up on how much deal you can afford. Get your reps in looking at and reviewing deals first. You're not going to accidentally buy a business. If you find the right deal, getting the money won't be a problem. There's plenty of money out there chasing good deals. But yes, most SBA lenders will pre-qualify you without a deal. You're pre-qualification and the deal prequalification are two separate items that get married together when you find the right deal into a global "are you qualified for the deal?" That SBA personal prequalification will at least give you a range of price ranges of business you should be looking at. But, keep in mind that the prices that are listed for most businesses isn't usually where they end up trading at, so go bigger than you think you can! Also, the standard expectation for seller financing is usually 10% at minimum if the seller is willing to do owner financing. Hope that helps

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