Many people think that when a company is looking to make an acquisition, they need to have the cash up front to give the seller or maybe give stock or some combination of stock and equity in their own company. And while some transactions do take place like this, most that I’ve seen at Website Closers require some amount of financing to get over the finish line.
Today we chat with Stephen Speer, whose company EcommerceLending.com has funded over a billion dollars in online acquisition loans. And he’s here to tell us about how the financing works when you’re looking to buy a business – particularly for larger deals that are over the SBA lending threshold ($5 million loan).
So let’s figure out how this all works!
This episode of Deal Closers is hosted by Izach Porter, brought to you by WebsiteClosers.com, and is produced by Earfluence.
Transcript
Stephen – 00:00:05:
Well, we pushed them all up market. We’re like, well, John, why are you trying to buy a $3 million business when you could, you can buy a $10 million business. And it’s really been cool because. It’s like, they’re like, well, you never thought of that, but I know SBE financing is only up to $5 million. It’s like, well, we have our Capital Access Program. You have the liquidity. You’ve done this before, you’ve exited, businesses before have the skill set. Let’s go.
Izach – 00:00:42:
You’re listening to The Deal Closers Podcast brought to you by websiteclosers.com. A show about how to build your e-commerce business to be profitable, scalable, and one day even sellable. I’m Izach Porter and on the show today, we’re bringing in someone whose company has funded over a billion dollars in online acquisition loans. And he’s here to tell us about how the financing works when you’re looking to buy a business. You know, a lot of people think that when a company is looking to make an acquisition, they need to have the cash up front to give the seller or maybe give stock or some combination of stock and equity in their own company. And while some transactions do take place like this, most that I’ve seen at Website Closers require some amount of financing to get over the finish line. In particular, I’m really interested to talk with Stephen today about a new option that e-commerce lending has for larger deals that are over the SBA lending threshold, which is $5 million in loan size. So let’s figure out how this all works and bring in Stephen. Hey, Stephen, how are you doing today, man?
Stephen – 00:01:49:
Doing all right. Thank you for having me.
Izach – 00:01:52:
Oh, yeah, man. Good to have you back on the show. I know you’re a seasoned guest here on The Deal Closers Podcast. We’ve had you on over the years talking about SBA lending and all the facets there. And I know we’ve got some new changes in the SBA guidelines that are coming out, so that might be interesting. But the thing that really piqued my interest recently as you and I have been working together on some deals is your new Capital Access Program for more middle market transactions that are over maybe $2 million in EBITDA and $8M in loan exposure and up. Can you just give us a little bit of an explanation on what you’ve done with that program and what you’re targeting and what kind of deals might be a good fit for that new option you’ve got.
Stephen – 00:02:42:
Certainly. Over the years, online business acquisitions have really evolved where… Acquisition prices have been… drastically increased at least. The last 10 years I’ve been in this space. And so SBA financing, you know, 10 years ago was fine. I mean, it was adequate, you know, loan amounts up to $5 million, pretty much covered all, acquisition transactions. The industry’s really evolved. We started facing a few years ago where know, acquisitions were in the, you know, $7, $8, $10M range, $12M range, and really SBA financing, wasn’t, it was kind of square peg round hole. It really didn’t suit those types or those size of transactions. So, um. During the last several years, I’ve been on kind of the hunt to find financing to kind of fill that void of… going from a low market to a lower middle market type of situation where you’re having acquisitions, $10, $20, $30 million. You know, businesses generally with an EBITDA or SDE of about $2 million or more. And finally, we’re able to put together a program which is called our Capital Access Program, to really serve that market, and really help, you know, acquisition entrepreneurs, independent sponsors, and management teams, that are targeting larger transactions to be able to provide financing, sometimes not only debt but equity as well. I think we rolled this program out about a year ago and it’s been doing really well, and really evolving at a very nice pace.
Izach – 00:04:24:
Cool. So you know first time we talked about this I got kinda geeked out because of my background. I was a commercial lender for a couple decades doing middle market lower-middle market deals. And at that time, we were doing what we called EV Reliant, Enterprise Value Reliant deals, those are cash flow deals. The banks I was with had, in order to really base those valuations just on the cash flow and not rely on tangible collateral, they needed to be substantial enough for the bank to feel comfortable with that risk profile. I think you mentioned $2 million and up, and so I just wanted to dig into that. Is that still, that’s kind of the line where you’re seeing banks come into this cash flow lending space and be interested in lending in these middle market transactions?
Stephen – 00:05:18:
Yeah, I mean, most of our capital providers look for a minimum EBITDA of $2 million. You know, as you know, they have a lot of cash to deploy, and they can’t be deploying it on smaller transactions. So that’s why they put that limit in, some of our capital providers, that require at least a $3 million EBITDA or SDE. But we’ve been able to, pretty much there, kind of again, fill that void, between kind of the. Enterprise value transactions roughly $7 million and up. So there’s really, you know, in, in Pretty much SBA handles everything, below seven million. So it’s been, again, a tremendous success, several years ago as we started seeing this, huge gap between these types of transactions. We knew we had to fill the void and there’d be a great opportunity at least for e-commerce lending, to really capitalize on that, and we have.
Izach – 00:06:10:
Yeah, and I’ve seen in my own book, my average deal size over the last couple of years went from $2 million to $5 million to $10 million. And this year, we’ve had some… really monster transactions that we lost to the average is way up. But I think that trend of increasing valuations in the space will continue to grow because these online businesses that we’re focused on, we’re focused on e-commerce and technology businesses where they’re monetizing some type of digital channel. They’re growing. They’re growing, they’re consolidating, and the sector is growing. I’ve definitely felt a gap in the financing, so I was excited that you kind of figured out a way to bridge that. How many lenders are you working with or capital providers are you working with right now as part of this program?
Stephen – 00:07:07:
Probably two dozen.
Izach – 00:07:09:
Awesome.
Stephen – 00:07:10:
Doesn’t, yeah, right now.
Izach – 00:07:12:
So you guys, you know kind of what all of the… what the underwriting matrix looks like for these various lenders. And then when you’re working with a client… What are you looking at to kind of determine which capital providers are gonna approach for a particular transaction?
Stephen – 00:07:32:
Well, we know we have a very good understanding of what each capital provider, the types of businesses are looking, the type of opportunities are looking to finance. So we very much take a rifle approach, not a shotgun approach. So generally when we go to, we have an opportunity, we’ll bet the business, we’ll bet the buyer or buyers, buyer group, and now have a really good keen sense on which capital providers we’re going to go to. We generally go to them in tranches of five, and then start having those conversations with the capital providers and being able to, to really kind of. Um, eliminate some and really get down to a short list of, of um loan facilities for our clients and really discuss it with our clients which loan facility best meets the need of the short term and long term, goals of our client.
Izach – 00:08:27:
So let’s talk about an actual example. We’re working on, you and I are working on a transaction together right now. You’re working with a buyer for a company that I’m representing on the sell side, is a digital marketing agency. It’s just under $3 million in EBITDA, and you’re working with the buyer. Can you just describe a little bit of what that process looks like for the buyer? What does the buyer have to do in terms of approaching these capital providers? What role does e-commerce lending play in that process? What does that typical transaction process look like from the… As the LOI is signed and we have an initial deal structure worked out between buyer and seller… What’s next?
Stephen – 00:09:16:
Well, first and foremost, in that case, in that specific example. Our buyers came to us saying, we’re looking at this opportunity, and I happen to be listed by you, which was awesome, because we get a chance to work together again, and and we vetted the business. What we did was we, kind of put together a little, I guess we’ll call it a teaser for some of our capital providers, to make sure there was interest there in financing that type of business. And you know as well as I do in the lower middle market transactions, capital providers not only bet on the horse, but they also strongly that on the jockey and in this case we have very strong buyers, with that background. So that’s the other piece. So we look at the business, is this an opportunity? that we feel absolutely confident we could get financed. And then we look at is this a type of buyer or buyers that build that skill set and that liquidity requirement. And in this case, obviously they do.
Izach – 00:10:16:
Okay. So what’s the timeline for the process going to look like in general, right? So the buyer approaches you, you put out that teaser, bank, you know, some lenders say, yeah, we have an interest. What happens next? And how does that timeline and process compare to a SBA 7A loan process? What’s different? What’s kind of the same?
Stephen – 00:10:37:
Yeah, the time when shorter generally around eight weeks let’s say six to eight weeks. You know, once our clients go under LOI, We give them homework. We have them put together, pitch deck, including a little one-page teaser. And then so, we’re able to approach our capital providers and get feedback on that. And once we get positive feedback, we start arranging, conference calls with our capital providers, and our clients, and we get on those calls and discuss the deal and pretty much it’s almost like going for a job interview, really, for them. We coach them tremendously before any of the calls and then… after the initial call will critique their call, constructive criticism, and then go on to the next call and start getting interest in, the financing of the of the business. And we’ll be actually doing that with that client next week. For example, we’re getting a lot of interest on that specific deal. That’s kind of how we roll with it. Meantime, our clients are, you know, they order their quality of earnings report, which is required, and they’re going down that due diligence path concurrently with the financing piece.
Izach – 00:11:52:
Okay. And so in my experience when, you know, back in my banking days, when I was looking at a transaction like this, we use kind of what we call the green light process, which was essentially the client would pitch the deal to us. You know, when I was in my lender shoes and we would have, you know, a combination of maybe a loan officer and some underwriters. Initially review the transaction, look at the financials, make sure the structure and the cash flow lined up with, let’s say, the credit policy of the bank, and then say, you know, you’ve got a green light to proceed with this transaction. And what that meant typically is that… barring something unforeseen coming up in the due diligence and quality of earnings that we were going to finance that deal and felt good about, telling the borrower to continue to invest money in going through the due diligence process. Is that still kind of the process you’re seeing? And if so, what’s the next step after they say, we have like an initial thumbs up from this.
Stephen – 00:12:55:
Yeah, so we first get a thumbs up prior to the introduction to our capital provider.
Izach – 00:13:01:
Gotcha.
Stephen – 00:13:03:
And once we get that, then we arrange the conference call. And usually. After the conference call, there’s a series of questions. Sometimes there’s a subsequent call like we have one this afternoon with another opportunity where we’re having the second call with our capital providers in our, and our buyer, and our client. And then ultimately we start talking about financing terms, et cetera, and then, you know, with the intent of eventually, receiving a formal loan proposal from our capital, years, and then discussing that with our client. Okay. So it’s a process. Yeah. One thing I will say with the lower middle market type of financing instruments, there’s far less paperwork from the buyer standpoint than Maybe an SBA loan. It’s really quality of earnings report. Obviously, they do a background check on, our clients, et cetera, making sure there’s nothing there. But it’s not a situation where it’s very paperwork intensive like an SBA loan. From that standpoint, it’s. It’s easier for the client, and vastly easier for the client and in some cases easier for us because we’re not It’s not all about paperwork. It’s about really… structuring the deal accordingly. And also, I don’t think I mentioned this, but with our Capital Access Program. There are no personal guarantees. And generally the cash you know, the deal structures are vastly different than an SBA loan, because you’re allowed to have own outs, you’re allowed to have, you know, the cash it closes typically far less than the actual. Purchase price, as you know. And and you can get really creative on the structure, which I love because. SBA is pretty rigid on the structure. So I’ve been, as we continue to evolve with this program, It’s been really fun, instruction deals in very creative, flexible ways.
Izach – 00:14:59:
Yeah. Yeah, so let’s talk a little bit about structure and maybe just kind of some examples because I think. I had a senior loan underwriter when I was in my early banking days tell me, once you’ve seen one deal, you’ve seen one deal. What he meant is that every deal was a little bit different in the middle market. They were all kind of uniquely structured based on the specific nuances of that business, because the deals are larger, you can afford to kind of have this, more bespoke credit structure and a bespoke credit agreement as compared to an SBA loan where they’re really trying very much to fit every deal into standard terms, because of the size of those deals. So, you know, what kind of leverage ratios are you seeing? What are maybe some typical structures that you’ve seen recently or have discussed with some of the capital partners?
Stephen – 00:15:53:
You know, generally the structure is kind of what I call 3-1-1, which means, you know, Generally, it’s the in terms of. The cash at close it’s it’s three times And then, and then, one turn of, typically a cellar note and then, earn out on top of that. So generally they’re structured that way. Earnouts aren’t always involved, but generally the deal structure is that way.
Izach – 00:16:19:
Okay. And are you seeing mezzanine debt on those? I think one of the things I think about is what are the potential… levers to pull when we’re talking about capital structure. You’ve got senior debt, you could have seller subordinated debt, you could have retained equity, you can have earnouts, you could have Mez financing. Are there all those options on the table for these deals in some combination to get to a total valuation of four or five times EBITDA?
Stephen – 00:16:48:
Absolutely. Absolutely. Yes. Yeah. And you know, one thing that’s you know, prevalent are. I wouldn’t say prevalent, but. It’s not uncommon to have a seller equity role. We have one deal in particular right now where there’s seller equity role, which really mitigates risk, not only for our buyers, but also for them.
Izach – 00:17:12:
Yeah, yeah, absolutely. Yeah, and so talk about a seller equity role just in case somebody listening doesn’t understand what the term means. How does that work in terms of a deal structure?
Stephen – 00:17:24:
Well, you know, so essentially what’s happening is the buyer of the business is only acquiring, let’s say, 90% of the business. So post acquisition, the seller is going to retain, equity in the business. Generally, and you can help me out with this, generally it’s 10, maybe 20%, but generally around 10% is kind of the sweet spot. Yeah. So they’ll retain that, that interest. So that’s and though generally will, you know, keep their maybe they continue to be this. CFO of the business. They’re generally involved with the day to day post acquisition. Not always, but generally involved with the day to day.
Izach – 00:18:02:
So to put some numbers to that, and I’m just thinking out loud here, but if we’re talking about a $10 million valuation, let’s say it’s a $2.5 million EBITDA business and we come to terms at a four times value. That’s $10 million total valuation and the seller is going to keep 10%. That means the seller keeps a million dollars of that $10 million value. And then the buyer has only got to cover the remaining $9 million from financing. And if we’re-
Stephen – 00:18:33:
Maybe there’s a seller note bringing that down to maybe 8 million.
Izach – 00:18:36:
Yeah, seller note for 8 million. Just trying to work backwards through a potential capital structure. And then if we’ve got three times leverage on the two and a half, then we’re at seven and a half million and you’d have a $500,000 earn out. So you’d have a seven and a half million dollar cash at closing, which would be a combination of the senior debt and the buyer’s equity. Earn out a seller note and retained equity and that’s your 10 million bucks.
Stephen – 00:19:04:
That’s yes.
Izach – 00:19:05:
That would be kind of a down the middle transaction, right?
Stephen – 00:19:09:
That is, I would say at the $10 million mark, it’s probably not that, that complex. I would say that’s more in line with maybe a $20 million transaction.
Izach – 00:19:19:
Ah, man, I love the complexity, Stephen. I want to get interested here.
Stephen – 00:19:24:
Yeah. But generally, $10 million transaction doesn’t have all those levers. Generally, it’s a lot simpler in terms of deal structure, whereas you get… kind of the $20 million range are gonna have all those variables. But you backed in that number very well. I commend you.
Izach – 00:19:43:
Just making it up as we go, you know. So, okay, so here’s some other questions. A lot of lenders won’t touch online businesses. Even at two and a half or three and a half million dollars, bigger commercial banks aren’t going to get interested in these business models until you get to eight or $10 million of EBITDA. And then everybody plays in that space. But in my mind, there’s been this gap at kind of $2.5 million of EBITDA to $10 million of EBITDA where there just hasn’t been availability financing. How did you find these capital partners to put this program together? And how did you kind of vet them out? And there’s thousands and thousands of lenders out there. As a broker, I’ve been looking for this solution for years, and I’m so happy that you brought it to market. I guess there was an obvious need. That was the genesis of the idea. But then how did you actually put the program together and identify these lenders that are willing to do the same thing? EV Reliant Collateral Light Transactions for online businesses.
Stephen – 00:20:51:
Yeah, I mean, we so you know, I brought on Brian Dovis, our managing director of capital markets. He is an advisor of e-commerce lending. He’s more of an advisory position, but You know, with his 20 plus years of lending experience, he was able to allow us to make several introductions and meet these capital providers. And then it was my pitch to them saying, listen, I know that, you know, online businesses are still, a little bit of the Wild West, you know. But we’ve been in the space a very long time. They’re very stable businesses, et cetera. And then. And then it did, there was a kind of evolution of Go, our capital providers learning more about online, businesses. You know, initially it was like, okay, so tell me what they do. They sell business. It was kind of a learning process, and now they’re very comfortable. And, you know, I mean, we’re doing, you know. You know, we’re doing SaaS businesses, we’re doing e-commerce businesses. You know a lot of tech enabled opportunities digital marketing like we talked about in our deal educational technology. So. It was just there, the growing comfort level on this new this new space, this new arena.
Izach – 00:22:08:
Yeah, yeah, and for me, I think it’s just so smart what you’ve done because these… You know, in my mind, if I’m putting my banker risk hat back on. You know, these companies that have gotten to… $2 million in EBITDA and up, right? They’re much more robust businesses. They’ve got a lot more infrastructure. They’ve got, like the one we’re working on, there’s 40 employees, they’ve got a real CFO involved, they’ve got more sophisticated financial reporting. That business has a pretty strong recurring revenue model. So if I’m at a bank looking at this, I’m going, damn, that’s a pretty good business. Yeah, there’s not… Yeah, there’s not forklifts in trucks to collateralize against, but there’s a reliable income stream that you can monetize and secure a loan against.
Stephen – 00:22:55:
Yeah, and beings are very reluctant, though, on asset-like businesses. They just are by nature. So, you know, we necessarily, you know, so from that standpoint. Although we do work with some traditional banks, it’s mostly… you know, SBICs and other private equity firms basically that are comfortable with the online businesses that do. Some would understand online businesses and again, they’re, they’re learning more and more about those things.
Izach – 00:23:24:
So, but I’d much rather have a, an online business, with strong recurring revenue and a 10 or 15 year track record of stability of earnings right now, then I would have a shopping mall, with an appraisal from 2016. So, collateral, it’s an interesting thing. And I’ve always thought this was a little bit of a… an overstatement in traditional lending because collateral valuation can be very volatile. Really what banks rely on, primary source of repayment is always income from operations. That’s really where the primary focus for underwriting is for every bank, is primary source of repayment. Liquidation of collateral is always like a secondary or tertiary source. I think the businesses that we’re working with have really strong income generating history and potential. It’s just so exciting to see the ability to put some leverage on these deals in this space because we can put so many deals together. It’s opening up the whole market for us by being able to have access to capital in this lower middle market space for e-commerce and tech businesses. So, kudos to you for putting this together. I’m excited. We’re working on several deals with you right now through Website Closers and… I think there’s a lot more to come.
Stephen – 00:24:58:
Yeah, and also from a buyer’s standpoint. We’ve had several buyers come to us, looking at opportunities, below that $2 million SGE, and but they had incredible liquidity. Well, we pushed them all up market. We’re like, well, John, why are you trying to buy a $3 million business when you could have you can buy a $10 million business. And it’s really been cool because It’s like, they’re like, well, I never thought of that, but I know. You know, SBE financing is only up to five million. It’s like, well, we have our Capital Access Program. You have a liquidity. You’ve done this before, you’ve exited businesses before, you have the skill set. Let’s go.
Izach – 00:25:37:
Yeah, and by the way, you’re not gonna have to PG and put your house up when you buy it.
Stephen – 00:25:41:
Right. And actually, the client that you and I are working with, which I will not name. He was one of them.
Izach – 00:25:48:
Yeah, yeah, very cool. And I’m not sliding the SBA program at all. That’s been a tremendous program. We’ve done, I know your firm’s done hundreds of those deals. I’ve been working with SBA loans for… for many years and I’m a huge fan of the program, but it does have limitations because it’s made for a specific purpose. And this program that you’ve got is really made for a different purpose. So it’s. So that’s pretty cool.
Stephen – 00:26:15:
And just, yeah.
Izach – 00:26:17:
So this was something I was thinking about the other day and we exchanged emails on it and never got to talk about it but I thought, hey, we’re going to be on a podcast, we can talk about it then. So I’ve got two clients. I’ve got one, it’s a sell-side engagement. We’re actively under engagement marketing their company. Another company came to me, same category, they’re both in sports equipment. Just to make the math easy, let’s say they’re both. $1.5 million EBITDA businesses. And so the owner of, I’m going to say Business A and Business B, the owner of Business B said, Hey, I want to acquire your, your company that you’re selling. Now, if I put those companies together, we’ve got $3 million EBITDA and there’s probably a bunch of cost savings there too. They’re similar businesses, but with different customer bases that could potentially leverage customers on both sides. My question is, could Company B, $1.5 million EBITDA sports equipment business, buy company A and put those two together and say, hey, we’ve got $3 million EBITDA and now we do a full refinance of, know, the existing debt on the acquirer, and the buyout debt for the business that’s being acquired. Is that a potential option? Have you done that yet?
Stephen – 00:27:28:
Absolutely, yeah, we have, so absolutely.
Izach – 00:27:32:
Yeah, because that’s another avenue that I think, you know, that’s a strategic, that’s a strategic acquisition, when I look at those two businesses together and we’ll, you know, we should talk about some of the specifics offline that are, you know, kind of more, more confidential for those businesses. But, they would fit together perfectly. There would be a great combination of businesses for a lot of variety, for a lot of reasons, but customer base, even the cash flow that the two products are generating, a lot of recurring revenue from both businesses. And so I thought there’s a case where you’ve got a million and a half dollar EBITDA business, but potentially it falls into this bucket of being able to go through your Capital Access Program because if Company B acquires Company A, when you put them together, you’ll have probably more than the sum of the parts. More than three million, it’ll probably be like 3.2 million. You could get rid of accounting and some of the marketing functions that both companies are paying for independently right now.
Stephen – 00:28:33:
Yeah, and that’s… You know, that’s definitely a compelling story, but that’s definitely something that we’d look at.
Izach – 00:28:40:
Okay. All right. Cool. We’ll, we’ll, we’ll talk about that and I’ll make it.
Stephen – 00:28:44:
Only like, let’s just say we had a client that… was pursuing a business that was just shy of the $2 million EBITDA. Maybe, you know, maybe he’s looking at two businesses that are just shy, put those transactions together now. Hard to coordinate two simultaneous transactions, but it can be done. So that’s another, another, you know, you know, something, that we can definitely work with.
Izach – 00:29:09:
Yeah, great. What else does a buyer need to be thinking about if they’re interested in this? Because I think… You made a comment early on, you said it’s about the horse and the jockey, meaning it’s about the business and the operator, especially in the space. Banks are looking at the buyer and saying, do you have… skill set to be successful with this acquisition, because the bank’s making an investment in the business too, what type of skills are they looking for? And it’s probably deal dependent, but if you could generalize, who would be a perfect candidate for this program on the buy side?
Stephen – 00:29:48:
Well, someone direct skill set, really, you know, industry experience, a successful track record. Now many of our clients have exited, now they’re looking to buy something more upscale or upstream. Um, And someone who’s looking to buy multiple businesses over time generally, know, acquisition entrepreneurs, for example, where they’re buying businesses over time. It’s not a one and done situation, because ultimately, you know, when we finance somebody’s acquisition, it’s going to be, growing relationship, they’re scaling the business. So they’re gonna come back to the trough for larger, for more money to continue to help scale the business. In addition to that, oftentimes, as you know, they do… require, businesses, additional businesses to kind of tack on to their existing, business. So we’re looking for that. We’re looking for somebody who is realistic that has, you know, has, equity to put into the transaction. We have a lot of people calling us that, hey, I’m looking to buy a $20 million business. And okay, how much equity do you have to bring to the table? They’re like, none. We just want to like somehow figure out how we, can buy this business without any money out of pocket. It’s not gonna happen. It’s literally not going to happen. So someone who has capital and or committed capital ready to go.
Izach – 00:31:19:
And what amount of capital as far as a percentage of the transaction value is it 10% you’ve got to be putting into the deal or more?
Stephen – 00:31:26:
Generally 10% of the cash at close.
Izach – 00:00:00:
10% of the sales price or the enterprise value, but 10% of the financed amount.
Stephen – 00:31:39:
Yeah, generally 10% of the cash at close, right? Of cash at close, I gotcha. Finance and what equity they bring. Yeah, so. 10% of that is generally what we look for. And someone who has a viable business strategy, like, hey, I want to buy this business and here’s what I intend to do with it. So it’s a lot about the narrative or the story behind, why a buyer wants to buy the business and what game plan he or she has post acquisition. And that’s what really our capital providers really, sink their teeth into. They want someone with a clear, concise ability to convey the convey the message or convey the. The proposition. And we’ve struggled, you know, a couple of times we have struggled with with some of our clients where they’re not really good about conveying their intent, with the business. We’ve had to coach them over and over again in some cases. So. So that. That’s a lot of it’s about that. Whereas on SBA financing, it’s vastly different in the sense that, you know, for the most part, yeah, you can have indirect skill set, you don’t really have to convey things really well. And it’s just kind of It’s checking a box where with the lower middle market type transactions, you’ve got to really sell yourself, and what you intend on doing with the business to capital providers, be it ours or any others.
Izach – 00:33:02:
Yeah. So yeah, because on the SBA side, you know, I’ve done a lot of transactions in the past where it’s maybe a first time business owner, they might be an executive, you know, at a larger company and they’re kind of getting out of the corporate world and going, you know, following their entrepreneurship and might be the first business they’re buying. That works great for SBA buyers. That’s probably not the right fit for this Capital Access Program. Is that fair?
Stephen – 00:33:28:
Yeah, it’s fair. I would say with one caveat that if someone doesn’t have that direct skill set but their team does, because oftentimes it’s a group of people, acquiring a business. As a team has good rounded skill set and something that, can continue, that can actually work within the new business, then that’s acceptable. Okay. But if it’s just someone going, Hey, you know, Izach, I want to get out of my corporate job. I hate sitting in the cubicle every day. I’m looking to buy this $30 million business. That’s generally not going to work.
Izach – 00:34:00:
Yeah, yeah, that makes sense. Okay. All right, and then another potential use for this Capital Access Program that I thought of and you touched on it are these bolt-on acquisitions, right? So let’s say you’ve got a client like the deal we’re working with, they acquire $2.5 million, $3 million EBITDA business, and then a year from now, there’s an opportunity for them to buy a $1 million EBITDA business. And it’s strategic to the business they acquire, meaning that it’s going to add value to their existing business as well as improve the operations. So could you come back to that client a year later and refinance the existing debt and give them another $3 or $4 million to acquire? this other business that adds on to their existing business.
Stephen – 00:34:48:
Yeah, we’d renew their existing debt. We’d make it a bigger, debt facility, for them. Yes. Okay. We wouldn’t necessarily, I mean, so we would basically, lend them more money.
Izach – 00:35:00:
Yeah, same kind of leverage guidelines. You’re just the cash flow that you’re basing the leverage on is increasing.
Stephen – 00:35:09:
Yeah, and as you know, there are a lot of people out there that are… you know, acquisition entrepreneurs looking to buy multiple businesses over time. And this program’s perfect for those types.
Izach – 00:35:21:
Yeah. Cool. I’m excited to… get a few of these deals under our belt and help some people acquire some businesses and help some sellers sell their businesses. And it’s just a great, it’s a great fill for a need in the market. There’s absolutely a need in the market for this. And I’m really excited that you rolled it out and that we’re working on deals actively and you’re doing these deals right now.
Stephen – 00:35:49:
Yeah, and from a seller’s standpoint, let’s talk about that a little bit if you don’t mind. Yeah. But, you know, with this program just vastly opens up the buyer pool, to your sellers, to, to the buyer pool exponentially increases, because now you have, you know, buyers have the ability of financing. $10, $20, $30 million, acquisition whereas before they might have struggled with shorting out financing.
Izach – 00:36:15:
Exactly right, Stephen, because I think before what we were seeing is we were really limited to private equity groups, family offices, institutional buyers that had their own financing already in place. They had a big… They had bigger credit facilities that they were using, and most of those guys candidly want to play in the $5M and up EBITDA space. There was this gap of these lower middle market deals. And you’re exactly right. It brings in a lot of buyers who are strong buyers. The now have access to some financing so you can put some leverage on these deals at this space. Hey, the other thing I wanted to just mention while we had you on the show here is there have been some updates in SBA guidelines. I saw there was an article in the Wall Street Journal, I think yesterday, just saying that the SBA was kind of streamlining a lot of lending processes. Any pertinent updates that we should be aware of? and be thinking about.
Stephen – 00:37:16:
And they came out with some, updates in May. And unfortunately, they’ve rolled back some of those guidelines. So for example, You know, up until May, seller equity roles were forbidden with SBA financing. So May, I think it was 13th, they said, actually, we’re going to allow. Sell our roles. And then the question was, okay, you allow seller roles. You know. Do sellers have to guarantee the loan? And the answer was, well, the seller has, moving forward has less than 20% equity stake in the business. They do not. Well, they changed that. Now they’re saying basically if the seller… had more than 20% equity stakes, prior to, the transaction, then that person would have to guarantee the loan. So what seller is going to guarantee a buyer’s loan? So that really,
Izach – 00:38:09:
Or what seller has less than 20% before they sell business, then they’re not the seller. Right.
Stephen – 00:38:13:
Right.
Izach – 00:38:14:
It’s always the person that owns the business that’s selling it.
Stephen – 00:38:17:
So I know. So basically I think they, they unrung a bell. They successfully unrung a bell, unfortunately, because. You know, it was. The way they initially came out with the guidelines in May was made total sense. The fact that… You know, a father could sell the business to a son. Maybe the son worked for the business and now could actually take over the business. Um you know, but now the father would have to still guarantee the loan, which makes no sense. Or maybe it’s an employee. Let’s run the business for several years, who is interested in buying that whatever. Let’s just say auto shop from the seller. If I wanted to keep the seller on and now they’re not able to. So it’s just, it’s unfortunate. Some of the other things did stay in place, for example, the seller, seller note can contribute to a buyer’s equity, or injection, which is huge in theoretical, seller could potentially buy a business with the little, I’m sorry, buyer could potentially buy a business with the little as 5% out of pocket and the other 5% would be, a seller note on either, to your standby, which means no payment or interest only, now be considered as part of the equity injection. So that’s state in place. So that’s good news. Um, We’ve come across situations before May where a buyer had too much money to qualify for an SBA loan. Believe it or not. That rule went away, the SB got rid of… It was called the credit elsewhere rule. They got rid of that, which is great because we did have several situations last year where we had sellers that have tons of liquidity, but, didn’t want to use up that liquidity to acquire a business. So that stayed on the books. So yeah, some changes. But unfortunately, the changes I was looking for prior to May was the seller, viable seller equity role. Secondly, the SBA to allow earnouts, which they still don’t. And lastly, for the SBA to bump up their maximum loan amount from 5 million to 10 million. Izach, do you know they haven’t changed that number for 20 years?
Izach – 00:40:35:
Five million was a lot more money in 2003.
Stephen – 00:40:40:
Right. And they should at least, they should have it at. Even 20 million. At least 10 million. That was somewhat of a disappointment, but again, it’s a government, and They guarantee the loans. It’s a fantastic program. Very few countries, actually no country really has a program like this. We’re very fortunate to have it, you know, they’re. The SB is very inflexible and very antiquated and they don’t listen to, people that are actually making those loans. Unfortunately.
Izach – 00:41:14:
Well, the good news is, I’ve got another deal that e-commerce lending is working on financing for that was impacted by those changes. We’re able to get that renegotiated. We’re moving forward. We’re back on track with that. I feel good about that. You know, the changes on the CFO, there’s always these little tweaks and you have to just kind of make sure you’re playing by the rules and moving forward. But, you know, we do get a lot of deals done that way and always appreciate your help getting them over the line and getting them funded. So that’s, yeah.
Stephen – 00:41:48:
No problem there.
Izach – 00:41:49:
Yeah, it’s just kind of making sure. I think the thing that’s always been important for me is that… I don’t have the time to follow those guidelines and rules. I’m not on the conference calls. I don’t know those. So I kind of rely on you and your team to say, Hey, this is what changes is what you can do. This is what you can’t do. This is how this is what would work. This is what won’t work. So that’s been, that’s been really valuable just to know, you know, even if, even if I don’t particularly like the rule, it’s just, it’s important that I know what it is so that we can, put a deal together that’s going to work if that’s what we’re trying to do. Because otherwise, I think you can get far down the line if you don’t have a good advisor that is really knowledgeable and up to date on the SBA process. You flagged that issue for me right away, and I was able to go back and get with the buyer and seller and renegotiate the terms around what we could get financed. If we didn’t have that information, we could have gotten all the way down the road and then realized it wasn’t going to work. And that could have been a… It would have been harder. Like the longer something like that goes on, the harder it would be to renegotiate the deal. So right.
Stephen – 00:42:57:
And that’s, you know, that’s one reason when I heard the, uh, the rule change of the rule change. I It was just a verbal, on an SBA call. I recall with the SBA, immediately, obviously, I reached out to you going, You know, we’ve got a problem here.
Izach – 00:43:15:
Well, what was kind of cool about that, Stephen, is that you called me and told me and you’re like, I think this is going to happen. It’s not official. I called my buyer. I called my seller and I said, guys, look, I think there’s going to be a change. My seller called his attorney and his attorney said, no, there’s no change. And I said, no, I think there’s going to be a change. We want to get in front of this and make sure we’re following it. And then sure enough, it was. So I think because I knew that that was coming early, you know, I was like, okay, I’m going It enabled me to renegotiate the deal based on that change. It wasn’t the best scenario, but it ended up with a good outcome because you kept us at the front end of the curve.
Stephen – 00:43:53:
Plus you look like a rock star because you were in the know.
Izach – 00:43:57:
Yeah, that’s exactly right. Yeah. And I took full credit for it. No, I told him, I told him you gave me a call and said that you, you know, that you were, you had confidence that this was going to be changing, but we actually knew about it, you know, two or three days before it actually got changed. So that was, that was cool.
Stephen – 00:44:15:
And unfortunately, we had to wait, what, a month and a half before it was actually put, before the SBA put it on paper. So that was… That was a challenge because everything else was just kind of like. Rumor. Almost rumor. I mean, I was on a phone call with the SBA, but. Nobody knew, nobody had written confirmation of it, and it just came out, yesterday. I mean, officially here we are, you know. August 4th, it came out, I think yesterday, yesterday. We had to wait a month and a half, that are a little over a month. Yeah, to actually, you know, you have confirmation that it was indeed, situation where. The SBA was unringing the bell.
Izach – 00:44:54:
But there you go, Katie, right? By the time that actually was documented, I had time to go to my buyer and seller and their attorneys and both of their CPAs and restructure that whole deal, get the LOI updated, and we had that all done before the actual change even was documented because we were working with e-commerce lending through that transaction. So, that’s a big value add. Otherwise, I could have just been sitting there, not even known that was coming up until today. And then we hadn’t already negotiated the APA. We had a draft APA, but it hadn’t been like red lines back and forth. So the benefit there is we didn’t waste legal expense with that change. It didn’t cost anybody money. And that’s where people obviously get disappointed if you have attorneys review a document and then you’re like, oh, wait a minute, that doesn’t count. We have to get a new document and start over. So it was really helpful that we knew about that early. All right, anything else, Stephen, that the listeners should know about with either capital access or SBA program?
Stephen – 00:46:03:
If they have questions about either program, you know, reach out to me, Stephen, with a Ph at ecommercelending.com. And we have our SBA website at ecommercelending.com. We’re rolling out our Capital Access Program website here shortly and so stay tuned on that.
Izach – 00:46:28:
That was Stephen Speer. And if you’re looking to make a purchase and need financing, head on over to ecommercelending.com. Thanks, everyone, for listening to this episode of The Deal Closers Podcast brought to you by websiteclosers.com. If you like the show, be sure to rate us, write a review, and press the Follow button and share it with your network. And of course, if you’re looking for help selling your e-commerce or technology business, be sure to visit websiteclosers.com. This episode was edited and produced by Earfluence. I’m Izach Porter. Follow me on LinkedIn and we’ll see you next time on The Deal Closers Podcast.
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