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

➡️ 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…

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

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

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 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

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

Starting a new business is hard especially trying to break into an established market with strong existing players.

Here are some challenges that go into the first year of business:

➡️ securing your first customer

➡️ cementing a firm marketing and strategy plan. 1/x ➡️ fending off haters especially from established firms (sometimes the hounds chase after you!)

➡️ re-evaluating or evaluating professionals that you trust to be part of your team and board of advisors

➡️ Differntiating yourself from existing competition. 2/x

One question that I frequently receive from searchers is what industries to pursue deals in.

Here is the same advice that I share on searcher calls:

➡️ Find an industry that you envision your skills being transferable to

➡️ Stay away from retail 1/x ➡️ Stay away from hotels (flagged or not flagged) unless you know this industry very well

➡️ Stay away from restaurants and anything adjacent. Banks have been leery to lend to these post-pandemic 2/x

@TwitterSupport - My DM capabilities to all followers have not been working for the last 3 days unless I have an open conversation or unless they DM me first. Please help me with resolving. Example below. Thanks! I am also having this issue with both the @PIONEERCAPADV account and @FullStandbyHat both of which I own and manage. Screen shots in below Tweets

One of the most meaningful things about helping aspiring entrepreneurs buy businesses is seeing the meaningful impact it can make for their families financially.

I am going to give an example. I am currently working with a client that grew up in a single parent household. 1/x Client paid his/her way through college by working multiple jobs and had to fight and scrape for everything they've accomplished.

Client is currently under contract to buy a $1 million + EBITDA business company.

Approval should hopefully come today. 2/x

➡️ W2 employees are continuing to realize that they have alternative options to working in corporate America

➡️ Many are tired of working at companies that have minimal upside for them where they don't reap the financial rewards of the value they create. 1/x ➡️ Entrepreneurship Through Acquisition offers a viable alternative for those with the propensity to take on risk that want to be rewarded for the value they create. 2/x

The ETA space has never had this much action.

I will give a few anecdotal examples from the last several weeks:

➡️ 2 friends contemplating an acquisition in 2023 fly out from California to Dallas for the SMB Dallas event hosted by @SMB_Attorney & others. 1/x ➡️ On a weekly basis, I am receiving DMs on Twitter from undergraduates at major U.S. universities asking me what they can do to present well to lenders for being qualified to buy a business

➡️ DMs coming in from Bankers & PE professionals looking to leave finance. 2/x

Common misconceptions about SBA loans:

📌 Misconception: You always have to pledge a lien on your house

➡️ Reality: The lien is only required if you have 25% or more equity in your house. 1/x

#sba #smb #acquisitions #entrepreneurs #independentsponsors *Continued*

📌Misconception: When you're buying a business, your 10% down payment needs to be all cash

➡️ Reality: You have the ability to do 5% cash (based on the total uses of funds) if the seller holds 5% on Full Standby as a seller note. 2/x

Some benefits of SBA loans for business acquisitions that shouldn't go overlooked:

➡️ No balloon payment- fully amortizing loans

➡️ No post closing financial covenants. Make your payments on time and you're good. 1/x ➡️ Flexibility with prepayment: No prepayment penalties on loans that don't involve commercial real estate in the purchase

➡️ Minimal post closing financial reporting: For the most part - annual tax returns, annual personal financial statement. 2/x

I post a lot jokingly taking pot shots at corporate America and promoting entrepreneurship, but the truth is, it's not for everyone.

Here are some facts about being an entrepreneur for those considering taking the leap. 1/x ➡️ Everything ultimately falls on your shoulders as the business owner. If you fail, it's your fault. If you succeed, same.

➡️ Taking vacations is difficult. As a W-2 employee, oftentimes you can have someone back you up. Not so as a business owner. 2/x

So what's the point of all these posts with @FullStandbyHat?

➡️ Has @PIONEERCAPADV become a fashion designer or have I lost my marbles?

➡️ To answer the first question: Maybe

➡️ To answer the second question: No 1/x ➡️ At the end of the day when it comes to securing financing for a business acquisition, as a prospective buyer you have options

➡️ This is what I educate searchers on: This is what's SBA eligible and what you can do when it makes sense for your deal. 2/X

One of the most fulfilling things about being an entrepreneur is having direct control over your own destiny.

Your successes are yours & your failures are yours.

Put simply - the buck stops with you.

There isn't a maze of politics or artificial ceilings to navigate through 1/x There are lots of layoffs that are taking place at companies across America.

Even if layoffs aren't taking place at your firm, one thing to think carefully on is what opportunities you have to grow and develop if you stay at your business. 2/x

➡️ One casual observation from my trip in Costa Rica: there are entrepreneurs everywhere

➡️ At restaurants, waiters have side hustles doing sales to sign people up for local excursions

➡️ At the beach, it's an entrepreneur trying to sell you juice or a beer. 1/x ➡️ This is not a political post but is simply my own opinion: America should take note of the hustle in countries like Costa Rica

➡️ If you lose your job, instead of seeking unemployment or sitting and playing Xbox, start shoveling snow or mowing lawns. 2/x

➡️ I post a lot jokingly poking fun at the W2 world, but seeing all of these recent layoffs especially at big name companies makes me thing it's somewhat justified

➡️ The business owners that I know that own small to medium sized businesses are all hiring. 1/x ➡️ @Google @Meta @GoldmanSachs ➡️ layoffs happening

➡️ Today your job is safe, but who knows about tomorrow?

➡️ Are you a solid producer that happens to be expensive but isn't politically tied in? Maybe it's the 🪓 for you. 2/x

One of the most popular phrases that you will see on SMB Twitter is the "Silver Tsunami," alluding to the massive wave of retiring baby boomers selling their businesses over the coming years. In this thread, I am going to cover how to capitalize on the Silver Tsunami 🌊 as a prospective entrepreneur or searcher that is looking to buy a business within the coming years.