Likelihood of a combination of seller's financing and SBA 7a lending

April 10, 2020

by a searcher from University of Arkansas at Fayetteville in Memphis, TN, USA

I have negotiated a seller to 20% seller financing. I intend to get the other 80% from SBA 7a financing, but it is a requirement of an LBO that the bank get paid first. My SBA lender is telling me that very few sellers will do that. In your experience, is this a sticking point? Is there a way around this or a way I could sweeten the pot?

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Reply by a searcher
from Northwestern University in Los Gatos, CA, USA

I believe 5% Cash from borrower is the lower limit of what's possible in an SBA deal, but that can include everything rolled into the deal (acquisition price + transaction costs + working capital requirements + initial cash reserves). I've also heard that 5% would be very unlikely... maybe only if the deal is super cheap (e.g. a deal at <2x SDE might get you there). SBA bank gets first lien on everything in the transaction (plus PG and whatever other personal collateral they require), but does not have to be repaid in full for other debt (including seller note) to be in the transaction and to be in active repayment.

Reply by a searcher
from Pepperdine University in Boise, ID, USA

I am fairly certain that as a buyer, you need to have at least 10% equity contribution, regardless of the deal you have struck with the seller. Also, you might want to get more details on the restrictions on the seller carry. I believe SBA requires the seller note to be subordinate and cannot be serviced until the SBA note has been fully paid off. In other words, the seller could be looking at a long payoff (10 years), unless your plan is to scale the business and sell in a few years -whereby your current seller would be able to cash out on the note.

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