Financing a business valued based on future earnings (SBA or alternative)

October 04, 2023

by an investor from Columbia University - Columbia Business School in Seattle, WA, USA

Currently looking at a business with two successful retail locations and a third location just opened about two months ago. The two locations have grown nicely and have great reputation in the community (reviews, awards, etc) and the third location seems promising.

However, the sellers are pricing this based on projected earnings for 2024, meaning it's valued at almost 5X of 2022 SDE when most businesses in this size are valued at 3X, 3.5X SDE tops.

Has anyone tried to finance a business like this? With such high valuation, assuming I put down 15%, their DSCR based on historical cash flow is barely 1.2, which I know would turn away many SBA lenders. I do feel comfortable however that their third location can bring the ratio to 1.5+ fairly soon. Obviously that's future earnings and not guaranteed, so I'm wondering how SBA lenders will react to this.

Seller is willing to carry a note but no more than 10% as he's trying to build up cash reserves to deal with the said health issue.

Reply by a searcher
in Cleveland, OH, USA

The deal sounds too tight. Here’s what you could do: approach an SBA lender(s) and pitch the deal for financing.

Most likely, they will tell you the deal is too tight, and there’s no way they can value the business based on the uncertain future performance of the third location. (If I’m wrong and they give you a term sheet, that’s fantastic!)

Approach the seller with the lender’s concerns, and let them know that you (and your board/team) have taken a decision to reevaluate the deal based on the concerns the lender provided. Remind the seller of the value you add, and then seller know they would either have to compromise on price or terms (more SF). Otherwise, you will have to respectfully walk away.

Hope this works out! Always keep your pipeline full and never fall in love with one deal.

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

I agree it feels tight. However, if there is a third location not fully up and running, it might be possible to have a portion of the acquisition done on a projection basis. The other thing to consider is a larger seller note that has some clawback features and delayed payment terms that allow the cash flow to work on the senior debt and so long as the cash flow for that store gets where it is supposed to be, the seller can earn the money later. But this is definitely going to be more challenging if looking at SBA financing without finding some sort of creative solution the seller will agree to. I would be more than happy to discuss in more detail at any time. You can reach me here or directly at redacted Good luck.

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