Hi all,
I’m an ex-MBB consultant launching a search fund with my wife who works in financial services, Searchfunder member
washingtoncapitalassociates.com
We have a few questions for the community as we wrap set up before launching the search:
- What are market rates for acquisition loans right now? 10%? E.g., SBA
- What are market rates for seller financing and what are the typical terms and duration?
- When we contact a seller, how does the process work in terms of financing? How do you engage in a serious conversation with a seller if you don’t have the full financing on hand? E.g., an SBA loan
- Does anyone have any financial model templates that includes a calculation on a return/salary for us and all the other inputs? E.g., price, ebitda, revenue, financing, etc. We have one, but curious what else is out there.
- To raise capital to close our financing gap, we are considering offering non-equity loans in $100k units at 10% over 5 years, a 27.5% effective rate of return, which is competitive. How should we think about sourcing investors for this vehicle? We understand it isn’t traditional to source debt vs. equity investment but there is demand bc we’ve gotten a few investors and this is the only way a search will be worthwhile for us in terms of economics and control. Else, we would stay at MBB and Finance. We have 5 units left if anyone is interested.
- What tasks do you have interns work on? We’ve hired 2.
Thanks all,
David
I greatly appreciate the responses. Thank you for the benchmarks and your perspectives. Being new to the community, I'm surprised and impressed with the support searchers give to each other.
I've gotten some good feedback from the search community on my proposed debt offering. I tend to agree with folks that preferred equity is a somewhat similar and better option for both myself and investors. The debt option would seem to be attractive to a market of unsophisticated investors, for lack of a better term, that can be found by contacting wealth management offices. Given this, I will likely move forward with a preferred equity offering given the greater appeal and demand.
Also, there was some confusion on how does a 5-year, 10% loan equate to a 27.5% effective return. The reason is because interest accrues monthly. Here's my math, please let me know if I'm off base with my calculation:
Monthly payment breakdown for a $100,###-###-#### loan: • Loan amount (P): $100,000.00 • Interest rate (r): 10% per annum • Loan term (n): 5 years (60 months) • Monthly payment (M): $2,###-###-#### o P = 100,000 o r = (10/100) / 12 = .00833 o n = 60 M = ((P*r)*(1+r)^n)/(((1+r)^n)-1) M = ((100,000*###-###-#### )*(1###-###-#### )^60)/(((1###-###-#### )^60)-1) M = $2,124.70
60 payments of###-###-#### = $127,482.00, an effective rate of return of 27.5% (27,482/100,000 = ~27.5%)