Funding acquisition of family business

August 09, 2021

by a searcher from University of California, Berkeley in Los Angeles, CA, USA

My uncle owns a land-use/development consulting business and is looking to retire. I work for him currently (along with 3 other employees). The business is fairly small ($1M revenue), but he wants to include approx. $6M worth of land (with various entitlements) in the sale. He'd carry a note for some of the cost and stay on for 2-3 years on a part-time basis (to finish out projects with larger clients). I don't have the personal balance sheet to buy the company (and/or PG any debt). Any tips on where I might start looking to fund an acquisition? The business throws off healthy cash flow and the basis for the development properties is fairly attractive.

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Reply by a searcher
from Calvin College in Grand Rapids, MI, USA

I wouldn't assume that you aren't able to finance the transaction on your own. SBA terms are more favorable for existing employees of the company. So there may be an opportunity to effectuate a complete buyout with some leverage. I've also heard that existing investors for 2 years in a company do not need to come up with any additional equity financing for an SBA loan. So you could invest a modest amount now, and work on that transition with your uncle now. Two years from now you could finance the remaining balance with some seller financing and the SBA.

Regarding the RE, given that it sounds like its vacant, you may want to explore a land contract. You could also look to do a ground lease to a developer and use that cash generated to meet your land contract obligations or equity requirements for financing.

Reply by a lender
from University of Missouri in St. Louis, MO, USA

Hi Sean, is the land for business use or is it just held for development? The use of the land might be a determining factor for financing options. if the land appraises out and he is taking on a seller note the lack of equity shouldn't be an issue provided the business can support that level of debt. Back of the napkin math on a $4M loan (assume he is subordinate with no payments for a bit) you would need about $350-$400k in positive cash flow after you pay yourself. feel free to DM me if you want some other specifics

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