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Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
@SBA_Matthias
Dec 10, 2022 • 20 tweets • 8 min read • Read on X
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 Image
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. Image
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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More from @SBA_Matthias

Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
Mar 12
Fundamentals of SBA Debt Financing for Business Acquisitions

In this thread, I will cover some of the fundamental requirements and SBA guidelines for business acquisitions

Please feel welcome to read on if you are a searcher or business buyer that anticipates using SBA financing for a business purchase

Note: For the purpose of this post and brevity, it is going to be focused on requirements for SBA 7(a) loans over $500K since that is the threshold at which requirements change and all days that @PIONEERCAPADV helps clients with fall above this size range
The SBA 7(a) loan program through the United States Small Business Administration provides business buyers with a loan program to obtain access to capital that they wouldn't have otherwise been able to obtain through traditional (non-SBA banks) for a variety of reasons ranging from:

➡️ Lack of collateral: Substantial difference between the loan amount & the value of the assets backing the loan

➡️ Lower down payment %: SBA 7(a) loans for business acquisitions typically only require a 10% down payment (also called an equity injection) which is proportional to the total uses of funds. Non-SBA (traditional lenders) typically require higher than this

➡️ Lack of Experience: Non-SBA (traditional lenders) are very fickle typically about a buyer's experience in the industry that they're acquiring in due to the fact that the government is not backstopping the loan. SBA lenders allow first time buyers without industry experience to acquire businesses in industries that they otherwise wouldn't have the ability to

While there are other reasons that business buyers who obtain SBA financing don't qualify for obtaining non-SBA financing, the above 3 factors are ones that I see routinely
Collateral & SBA 7(a) loans:

The SBA has some very specific requirements when it comes to the collateral required for a business purchase. Below are some specific requirements to be cognizant of as a business buyer:

➡️ Personal Guarantees: Anyone in the business buyer group that on a beneficial ownership level owns 20% or more of the applicant business is required to provide a personal guarantee. This same requirement applies if there is an entity buyer at that ownership threshold -- in which case a corporate guaranty would be required. I often get asked the question is there a workaround for this -- if every person owns less than 20%, goes no one have to personally guarantee the SBA loan. The answer is "No."

➡️ Business Collateral: The SBA requires a 1st GBSA / UCC-1 state filing on the borrower's business entity securing everything ranging from accounts receivable to inventory. All of the business assets of the applicant entity are collateralized with the SBA loan. This also applies if you are acquiring business vehicles or similar. The SBA lender is required to perfect liens on any vehicles or acquired equipment that is financed with SBA loan funds

➡️ Life Insurance Collateral: While SBA does not impose a specific requirement for life insurance policies for SBA 7(a) loans, @PIONEERCAPADV has generally observed that most SBA lenders require term life insurance policies in the amount of the SBA 7(a) loan

➡️ Liens on properties: The SBA requires banks to take liens on properties when the equity in them is 25% or more and when the assets that are collateralizing (backing) the SBA loan do not match the loan amount after applying the discount rate (liquidation rate) to the specific assets. The vast majority of SBA 7(a) loans are not fully collateralized, so this calculation typically comes into consideration by the SBA 7(a) lender. The calculation is done by taking the fair market value of the property or properties owned by those in the buyer group that will be guaranteeing the loan and subtracting the outstanding mortgage amount and also subtracting the maximum amount that could be drawn on any lines of credit that are in place on the properties

Example: Jane owns a $1 million house

She has a $600K mortgage

She also has a HELOC with a maximum amount of $120K

Jane's equity in the property would be calculated as follows:

FMV: $1 million

(-) $600,000 (mortgage)
(-) $120,000 (HELOC)

= $280,000 of equity

$280K of equity / $1 million = 0.28 x 100 = 28% equity

If the assets of the business that Jane is buying are less than the SBA 7(a) loan amount, under the above described situation, she would have to personally guaranty the SBA loan
Read 6 tweets
Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
Jun 20, 2023
➡️ 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

➡️ Hats were made and handed out at ETA… twitter.com/i/web/status/1…
➡️ 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…
Read 16 tweets
Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
Jun 18, 2023
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
Read 8 tweets
Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
Jun 18, 2023
It’s Father’s Day today

People are spending time with their families and I respect that

I will be spending the day working and going through emails to catch up on sponsors that are about to go under LOI
The message to you as a searcher if you’re reading this is that @PIONEERCAPADV is ready to help on your deal when you’re under LOI

While your banker takes a week off to head to the cabin this summer, we will be slugging it out in the trenches on deals
With the exception of weekends and 4th of July — no days off

We will be here for you and your deal to provide the level of dedication and service that it deserves

When you’re building and scaling a business, you have to put the time and effort in to make it happen
Read 5 tweets
Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
Jun 18, 2023
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%
Read 9 tweets
Matthias Smith, CEO - Pioneer Capital Advisory LLC Profile picture
Feb 23, 2023
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
Read 4 tweets

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