Greetings SF Community!
I am an independent sponsor who is working on sourcing my first deal. I am leaning towards acquiring an asset-heavy manufacturing business with relatively high FCF, and using high leverage backed by the assets to obtain financing.
I've never done this before and am really curious to know what some other searchers who have done LBOs would recommend. I see the basics are that the SBA loan could provide up to 75% of the total EV not to exceed $5M, so I'm using the example of a target generating $1M EBITDA and 4x ETBIDA multiple, so $4M total EV. $3M is covered by SBA (75% noted above). If I did not want to put in any equity, can I get a deal done with 100% debt, which would require me to find the other 25% somewhere? I've heard of a seller note but haven't had time to look that up yet.
Thoughts?
Seeking Input on Deal Structure for Asset-backed LBO
by a searcher
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1. subordinated note, skew the principal toward the end of the amort period with interest only first year
2. assign a value to a covenant not to compete paid overtime (ordinary income to the seller, probably),
3. consulting contract to the seller (again, ordinary income to them).
1) An SBA 7(a) loan is approved based on expected cash flow, not assets.
2) SBA's allowed maximum financing is not 75%, but rather 90% (or 95%, in the scenario Madan stipulates). However, a given deal might be approved by the bank for less than 90%, depending on their DSCR requirements (among other things).
Separately: if the business has heavy fixed infrastructure, than you can get a separate SBA 504 loan just for that.
In short: I don't believe SBA 7(A) allows 100% debt acquisitions; but that's a question for an actual bank.
Otherwise, to get to a 100% debt acquisition, it's probably requires a mix of conventional, mezzanine, seller, and/or asset-based loans.