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
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.
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 (matthias.smith@pioneercapitaladvisory.com)
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
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➡️ In May, the SBA dropped a document called a Procedural Notice that has fundamentally changed the landscape in SBA lending
➡️ Partial changes of ownership are now the rage as they should be. If your seller is going to help you grow the business, why not have them be your… twitter.com/i/web/status/1…
➡️ But there is one thing that few are talking about — unless you’re closely following my posts
➡️ Enter the 24 month seller note
➡️ Last year I started tweeting about the @FullStandbyHat and it got some attention on SMB Twitter
➡️ While the Full Standby Seller note is still a dynamic tool and one that I’m a big proponent of, the 24 month seller note is even more explosive 🧨
➡️ In this thread, I’m going to break down the details of what the 24 month seller note is, how it works, and why you would be… twitter.com/i/web/status/1…
I’m planning to help sponsors from across SMB Twitter close at least $50 million in SBA 7(a) loan facilities this year
I will do this by working 60 to 80 hours a week including some weekends, and being available on weekends to take calls on deals going under LOI
While I totally understand that this isn’t a lifestyle that folks across the space endorse, it’s how I will help the clients or @PIONEERCAPADV achieve the American Dream of business ownership
If you have a deal going under LOI and there is a mutual fit to work together, please feel welcome to reach out via DM, email to matthias.smith@pioneercapitalarvisory.com or via text to my cell - 608.421.2750
One thing that people don’t necessarily understand about working with an SBA loan broker is that in effectively free to work with
I’m honestly an open book
On Zoom calls with prospective clients, I have screen shared sections from referral agreements before
Lots of the time when I’m speaking with someone they think there is a catch — there isn’t
I have several deals on underwriting now where the sponsor is getting Prime + 1% fixed for 5 years with more conservative debt and equity structures
I have other deals where the sponsor is utilizing the Full Standby seller note structure and/or the 24 month seller holdback note structure for part or all of their down payment, and the interest rate is Prime + 2.75% or Prime + 3%
I had a consulting call today with someone we will call Bob.
Bob is on the sell-side of an SBA financed acquisition.
ABC bank is lending to Bob's buyer.
ABC bank is a preferred SBA lender but is choosing to put the loan through the SBA's general processing channel. 1/x
Banks like bank ABC should be sticking to conventional lending instead of doing SBA.
There is risk involved in any SBA financing transaction, including acquisitions. 2/x
If you are stuck with a bank like Bank ABC and want to connect to discuss alternative options, please feel welcome to DM me or email me at matthias.smith@pioneercapitaladvisory.com if you want to connect. 3/3
This is a real story and unfortunately is not atypical.
I spoke with a searcher today that has spoken with multiple local banks that "did SBA lending."
The bank insisted on the searcher's spouse providing a personal guarantee on the deal. 1/x
Refresher:
SBA requires a personal guarantee from someone when they:
1. Own 20% or more of the applicant business 2. Own equity in a property being pledged as collateral (typically here a limited personal guarantee is sought- not unlimited). 2/x
It was the bank's position that if the buyer's spouse was not "on board" with doing a deal, the bank shouldn't lend on the deal.
This is when @PIONEERCAPADV throws in the B.S. towel and helps you find a new lender.