Thread by @SBA_Matthias

A seller note on full standby "incentivizes the owner to help you for the life of the loan and helps create a higher cash on cash return for you as an entrepreneur" - Fady Ebeid, a searcher that worked with Pioneer Capital Advisory LLC

#sba #smb #acquisitions #entrepreneurs

1/x: Why is a full standby seller note, and why do I need one for my SMB acquisition? In this 🧵 I will cover the answers to both of these questions.

#sba #smb #acquisitions #entrepreneurs

2/x: Definition & Explanation:

➡️ A seller's note on full standby is defined as a note on which no payments of principal or interest are made for the term of the SBA loan

#sba #smb #acquisitions #entrepreneurs

3/x: The Construct of Using One in an Acquisition:

➡️ SBA requires an equity injection (down payment) of at least 10% of the total uses of funds.
➡️ Up to 1/2 of this down payment can come from a full standby seller note.

#sba #smb #acquisitions #entrepreneurs

4/x: Meet Erin - A Self-Funded Searcher with $200,000 to put towards a down payment on a business acquisition

If Erin has a seller that is open to the full standby note, she has 2 options

Option 1:

➡️ Put $200,000 of cash into the acquisition for 10% of a use of funds chart

5/x: Erin's second option is to pursue a larger deal

➡️ $200,000 is 5% of $4 million. This means that if Erin's seller is willing to finance $200,000 on full standby, rather than being limited to $2 million as the total uses of funds, Erin can now search for a larger business.

6/x: Debt Service Coverage

➡️ One thing that I want to point out is that the full standby seller note in the above example makes no impact on the debt service coverage

7/x: Debt Service Coverage (continued)

➡️ There is zero impact to cash flow if Erin puts down $400K or if she puts down $200K and the seller provides a full standby note for $200K

8/x: Investor Perspective on Full Standby

➡️ As an investor, obtaining a good return on equity (MOIC or multiple on invested capital) and a solid IRR can be important considerations when determining which deal to invest in

9/x: Investor Perspective (Cont.)

➡️ The existence of the full standby seller note enhances the returns of the SMB acquisition.

10/x: Investor Perspective (Cont)

➡️ A searcher that @PIONEERCAPADV recently gave guidance to increases the IRR and MOIC of his deal from 43.2% IRR pre-standby to 57.9% post-standby & MOIC of 3.52% pre-standby to 4.72% post-standby note

*Details omitted as deal is in closing

11/x: Preservation of capital & cost of debt vs. return on equity

➡️ Lets say that you are in a position to make the 10% down payment in cash rather than using the 5% seller full standby note for part of the down payment
➡️ There is no reason for you to do so

12/x: Preservation of capital & cost of debt vs. return on equity

➡️ The dollars that you could use towards the down payment are better deployed as cash to the balance sheet to your SMB, where you will obtain a higher return on equity (hopefully in the double digits)

13/x: Preservation of capital & cost of debt vs. return on equity

➡️ Or, if you are a searcher that wants to start chipping away at the balance of your SBA loan, you could use those dollars that you would have put towards the down payment to accelerate payment on the SBA loan.

14/x: Seller Helpfulness & Current SBA Limitations

➡️ SBA currently limits sellers from being involved as a consultant for more than 12 months following the closing of a business acquisition.

15/x: Seller Helpfulness & Current SBA Limitations

➡️ Back to Erin: Her seller will likely be more helpful (as needed) following the 12 month consultation if there is a note on full standby on which no payments will be received until the SBA loan is paid off

16/x: The Current Bank Appetite Towards Full Standby Notes

➡️ Some banks will accept seller notes on full standby for part of the equity injection (down payment). Others won't.
➡️ Most of the lenders that @PIONEERCAPADV works with accept these.

17/x: Parting Thoughts

➡️ If you have a strong deal where you want to use a full standby note for part of your down payment & you are getting push back from your lender, send me a DM or an email ([e-mail])

18/x: Parting Thoughts (continued)

➡️ If you found this thread useful, please feel welcome to RT and also give me a follow at @PIONEERCAPADV
➡️ Please also feel welcome to comment with any specific questions that I can answer or shoot me a DM if preferred.

Correction to above thread: the MOIC figures are multiples, not percentages