Operating Capital
May 15, 2024
by a searcher from University of California, Los Angeles in Orange County, CA, USA
I'd like to maximize the size of my business acquisition, but need to ensure I'll have enough operating capital after making the 10% SBA equity injection.
For self-funded searchers, what are your reliable sources of operating income post-acquisition? Personal funds that were left over after the 10% equity injection? Credit lines? Let me know your thoughts/strategy around this. Thank you!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) It is important to have an adequate working capital peg built into your deal with the seller. You should have some working capital left in the company post acquisition.
2) If you are worried about having cash post closing, you could look to limit your cash down payment below 10% by having the seller carry back a note for 10% of the purchase price on full standby for 2 years. This would allow you to potentially get away with 5% or even possibly less cash down. Of course the cash flow needs to work to support this additional financing.
3) You can build working capital into the SBA 7A loan. Please keep in mind if you do that your equity requirement with most lenders will be based off the purchase price plus working capital. So if you are buying the business for $1 million and getting $100,000 of working capital, they would likely need $110,000 down instead of $100,000 down.
4) You can get a separate line of credit for the business. It is relatively easy to get an SBA Express line of credit from most lenders at time of closing so long as we can justify the cash flow need. Typically we can get that done up to $500,000 depending on the size of the deal. These lines are typically interest only from 2 to 5 years and then automatically amortize out over the remainder of a 10 year term.
5) You can do a combination of working capital in the SBA 7A loan and an SBA Express line of credit. The only word of caution here is that the SBA has been on lenders not to overfund working capital, so we typically need to be able to justify to the Bank why both are needed.
6) You can always raise some outside equity to provide additional working capital.
These are the main options I think you have available. If you would like to discuss in more detail, you can reach me here or directly at redacted Good luck with your search.
from Creighton University in Los Angeles, CA, USA