Thread by @sbabmarks

WSS: Bruce, I am looking to acquire this business for $3,700,000

I heard I might be able to do so without putting any money into the deal

Is that true?

YES !

Really:

So this Buyer sets up a call with me to discuss a target acquisition.

He explains that he has an existing small business and would like to expand through an acquisition

He and the seller have agreed on a purchase price of $3,700,000.

In addition, the Seller has agreed to hold a note for 15% of the purchase price.

He then inquired about what his equity injection would then to be.

However he also mentioned that he has heard that the SBA does allow a business to be acquired with no equity.

In fact this is the case! The SBA does allow for an existing small business to acquire another small business if the target company has the exact same NAICS Code on it’s existing filed tax returns.

The SBA considers this an “expansion” loan rather than an acquisition.

So given we were on a zoom call, the Buyer shared his screen. I asked him to pull up his 2021 filed tax return for his existing entity. After doing so, we noted the NAICS Code (North American Industry Classification System)

I then requested he show me the targets tax return

Lo and Behold, they were an exact match. Given this was the case, I confirmed for him that he in fact could acquire the business without injecting any equity!

The multiple he offered was just over 3.5X.

Given the fact that the Seller was holding a 15% note on favorable terms, the deal economics worked extremely well.

As a result, there is strong debt service coverage to boot

So I informed the Buyer that this looked like a very solid structure.

So based on:
1. A purchase price with a reasonable multiple
2. A 15% Seller Note
3. Strong Debt Service Coverage
4. Same industry
5. Existing management experience
6. A growing business in a growing industry

That this was a very strong transaction

The Buyer said he would now continue with his financial due diligence and get back with me.

So, if you’re a Searcher and you are thinking of making a bolt on acquisition down the road, look for a business with the same exact NAICS Code. What a useful strategy this could be

From a leverage standpoint, the debt can not however exceed 9 to 1 for the combined entities.

This means that if your existing business has a Net Worth of $500,000 that with the the additional debt, it can not exceed 9 times that or $4,500,000.

As always, If you found value in this thread, please like, share and retweet so others might see this as well @sbabmarks

#Buisness #Search #ETA #Acquisitions

https://twitter.com/1519438732767764480/status/1624372582190284801

3.5X EBITDA