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 give stock or some combination of stock and equity in their own company. While some transactions do take place like this, most of the transactions 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. He’s here to tell us 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! Izach Porter hosts this episode of Deal Closers, which was brought to you by WebsiteClosers.com and produced by Earfluence. Let’s go.
Stephen Speer has funded companies with over a billion dollars in online and eCommerce business acquisition loans, and he’s here to tell us how 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. While some transactions do take place like this, most of the transactions that we’ve seen at Website Closers require some amount of financing to get over the finish line.
Over the years, online business acquisitions have really evolved, where acquisition prices have drastically increased. For the last 10 years, we’ve been in this space of SBA financing of up to $5 Million, which pretty much covers all acquisition transactions. We started a few years ago when small business financing options were in the range between $7M – $12 Million, and really, SBA financing wasn’t. During the last several years, we’ve been on the hunt to find financing to fill the void of going from a low market to a lower middle market type of situation where you’re having acquisitions, $10M – $30 Million. Online businesses generally have an EBITDA or SDE of about $2 Million or more. We have put together a program called our Capital Access Program to help business owners. However, we do our due diligence on the business to ensure they meet the standards and requirements needed.
When it comes to buying an eCommerce business, understanding the financing landscape is crucial. Many capital providers set a minimum EBITDA of $2 million, with some requiring up to $3 million. This threshold ensures they focus on substantial transactions, typically with an enterprise value of $7 million or more. For smaller deals, the SBA often steps in, but we’ve successfully filled the gap in the eCommerce lending market.
Our approach is precise—we conduct thorough due diligence on both the business and the buyer. This enables us to identify the right capital providers who match the business model. We engage with them in small groups, refining our options to a shortlist of financing facilities that align with our clients’ goals. After gathering initial interest, we guide our clients through the process, from creating a pitch deck to participating in conference calls with potential lenders.
Once positive feedback is received, we arrange calls between our clients and the capital providers. These calls are pivotal—akin to a job interview—where we coach our clients and offer constructive feedback to secure financing. Meanwhile, clients are concurrently working on their quality of earnings report, a critical step in the due diligence process.
The timeline for securing financing is typically shorter than an SBA 7A loan, ranging from six to eight weeks. Once a letter of intent (LOI) is signed, the process moves swiftly, with pitch decks, teasers, and lender meetings happening in quick succession. Our goal is to ensure that by the time the due diligence and quality of earnings reports are completed, our clients have strong financing offers in hand.
This streamlined approach mirrors the “green light” process familiar to many in the banking industry, where initial approval signals a high likelihood of deal completion, allowing buyers to confidently proceed with due diligence.
With these steps and leveraging our expertise, buyers can navigate the complexities of small business financing options with greater confidence, positioning themselves for successful acquisitions in the eCommerce space.
In eCommerce business acquisitions, each deal is unique, requiring a tailored approach to financing. After initial conference calls with capital providers, we often face follow-up questions or additional discussions to refine the deal’s structure. This process culminates in negotiating financing terms and eventually receiving a formal loan proposal.
Unlike SBA loans, lower middle market financing involves significantly less paperwork. The focus is on the quality of earnings report and a background check on the buyer. This streamlined approach, coupled with the absence of personal guarantees in our Capital Access Program, makes the process more client-friendly.
Our financing structures are highly customizable, often involving creative deal elements such as seller notes, earnouts, and flexible cash-at-close arrangements. This flexibility allows for more innovative deals compared to the rigid structure of SBA loans.
When structuring a deal, we often use what’s known as the 3-1-1 approach—three times cash at close, one turn of seller note, and potentially an earnout on top. While earnouts aren’t always included, they can be a valuable tool in aligning interests between buyers and sellers.
For more complex transactions, such as those around the $20 million mark, we explore various capital structures including senior debt, seller subordinated debt, retained equity, and mezzanine financing. Each of these levers can be adjusted to optimize the deal, providing flexibility in reaching a total valuation that aligns with both buyer and seller expectations.
One interesting element we sometimes incorporate is a seller equity roll. In this scenario, the seller retains a percentage of the business post-acquisition, usually around 10%. This not only mitigates risk for the buyer but also keeps the seller engaged in the business, often continuing in a key role such as CFO.
Traditional lenders are often hesitant to finance online businesses, especially in the $2.5 million to $10 million EBITDA range. However, our program fills this gap by partnering with capital providers who understand the unique dynamics of eCommerce and tech businesses.
These companies, particularly those with strong recurring revenue and a solid track record, present a lower risk profile than traditional asset-heavy businesses. By focusing on the business’s income-generating potential rather than collateral, we can offer financing solutions that were previously unavailable to many online business owners.
Our Capital Access Program has been instrumental in enabling buyers to pursue larger acquisitions than they initially considered. By eliminating the need for personal guarantees and offering flexible financing options, we help clients move upmarket and capitalize on larger opportunities. This approach has opened up new possibilities for eCommerce and tech businesses, allowing for more robust growth and expansion in a space that was once limited by traditional lending practices.
In this segment, we explored a real-life scenario involving two clients in the sports equipment industry. Both companies are valued at $1.5 million EBITDA, and there’s potential for a strategic acquisition where Company B seeks to acquire Company A. This would combine their customer bases and potentially yield cost savings, resulting in an EBITDA greater than the sum of their parts.
Absolutely, this is a feasible option and a strategic move for businesses in similar positions. By merging the companies, the combined EBITDA would likely exceed $3 million, allowing for a comprehensive refinancing of the existing debts. This approach not only streamlines operations but also enhances the financial leverage available for future expansions.
Buyers considering such acquisitions should possess a relevant skill set, industry experience, and a solid track record. Many are acquisition entrepreneurs looking to scale by purchasing multiple businesses over time. Financial readiness is key, with buyers needing to bring at least 10% equity to the table. Additionally, having a clear, viable business strategy post-acquisition is crucial for securing capital.
While SBA financing is an excellent option for first-time business owners, it might not be the best fit for more complex acquisitions involving higher EBITDA businesses. However, the Capital Access Program is designed for those with more experience and larger ambitions. It opens up financing opportunities for lower middle-market deals, which were previously accessible only to private equity groups or institutional buyers.
Recent changes in SBA guidelines have made the financing landscape more flexible, though not without challenges. For example, the introduction of seller equity roles was initially promising but later rolled back, complicating certain transactions. Despite these hurdles, the program remains robust, with options like using seller notes as part of the equity injection staying intact.
Whether you’re a seller looking to broaden your buyer pool or a buyer aiming to scale through strategic acquisitions, understanding the financing options available is crucial. Programs like those offered by eCommerceLending and partners like Website Closers can significantly impact the success of these transactions. Staying informed and working with knowledgeable advisors is key to navigating the complexities of business acquisitions and ensuring a smooth and successful deal.
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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