Funding SBA Deals When Real Estate is Worth More Than the Business
February 19, 2025
by a searcher from University of California, Santa Cruz in Austin, TX, USA
Hi Search Funder Community,
Question for y'all about raising equity when real estate is in the transaction.
I'm in discussions on multiple deals where RE is worth ~60% of the total transaction value. Ive sorted out the bank financing for this situation (SBA extended amortization, 504, pari passu if needed). However, for the purpose of raising equity to fund the deal, it is not clear to me the optimal playbook & capitalization structure when using investor equity.
In other words, have y'all had success in raising that (ideally~10%) equity with the same investors under a valuation of EBITA multiple + Real Estate or do I need to plan to treat this as 2 fundraising activities with different investor bases ie Business Equity (EBITA multiple) & Commercial Real estate (cap rate, etc)?
I do have experience with real estate transactions and know investors specializing in both these categories. That said it feels like a lot of complexity to introduce the need to close 2 funding rounds simultaneously. Same goes for sale-leaseback as a 3rd option (which from my understanding only works well with large deals or very undervalued real estate).
TLDR i'd love to hear from folks whom have successfully gotten these deals done and how they made it happen.
Thank you!
from University of Missouri in St. Louis, MO, USA
1. is the real estate important to the business? Would it be better to move down the road to a different space or is the location/infrastructure/zoning relevant to the success of the business?
2. Do you want to own the real estate? Some business owners always want to own and others have no interest. If you have to buy the building but you don't want to keep it, you could do a sale leaseback and lessen your need for down payment.
3. Do you want to maximize the amortization, or decrease the capital injection? You could buy just the business and have a lease to own opportunity on the CRE. If you are an existing business buying the building, you don't have to put any money down, 100% financing on the building. Buying the building 6-12 months after acquisition would mean you don't have to raise any capital
4. Would you be able to buy the business without needing funds from investors? if so then lease to own makes even more sense since you would keep 100% ownership?
My opinion is that you should only buy real estate in an acquisition if you feel like it is vital to the business, have a desire to own real estate, and overall feel like it is a net benefit. A lot of people buy buildings b/c the financing is easier. That can be dangerous, especially if you end up buying the business and finding out the building isn't optimal for your vision of the company's future.
in Ponte Vedra Beach, FL 32082, USA