Business is a lot like a game of Monopoly. There are properties and companies available for sale and sometimes you have the money, sometimes you don’t.
But unlike Monopoly, in real life, you don’t look to Rich Uncle Pennybags for cash and get out of jail free cards. In reality, when it comes to business, you get a lot of help from the banks, the Government, and brokers.
On today’s episode, of Deal Closers - A Tech & Internet M&A Discussion we’re taking a closer look at SBA loans - which weren’t always around and buyers used to have to search for other ways to fund these major deals - and Jason and Ron, from WebsiteClosers.com, explain the process very well.
[00:40] What is SBA and how it started?
- The Small Business Administration (SBA) is an arm of the US Government and they put together something which is very unique to the world. It’s basically an opportunity for banks to have coverage as long as they follow certain rules of the US Government when they loan money to businesses;
- The reason they started the SBA is because sellers would get ready to retire, they would own a business, they would employ people, and there would be no mechanism at the end for them to turn their business over in an organized fashion to another person, meaning that they either shut the business down and laid the people off or they would hand it to somebody and get a very small down payment and then rely on payments over a long period of time – so it didn’t create any retirement mechanism or anything for a seller.
[02:38] Why the banks are interested in the SBA process?
- The bank doesn’t have a lot of downsides;
- Usually, 75% of the loan is guaranteed by the Government. If there’s a recession, that amount might even go to 90%;
- It doesn’t take them long to recoup the original amount that they have at risk.
[04:50] What are some of the rules of the SBA process?
The SBA lenders are required to use tax returns – they’re everything to the SBA process - for what is called, “A debt service analysis”;
- You have 10 years to pay the debt off;
- The interest rates are anywhere in between 6-8%;
- The banks are lending based on the historical cash flow of the company and not some assets that are on the books and on the balance sheet as collateral;
- You have to have a resume that shows that you're not necessarily experienced in the industry, but that you have life experience that would accommodate the new company that you're about to take on;
- There's going to be a Q&A and even smart people sometimes are asked questions that they're not ready for.
[11:45] Why the SBA route is attractive for both buyers and sellers?
- From the buyer’s perspective, they’re getting to amortize this over an entire decade, which makes it a lot more likely they’re going to be successful paying that debt.
- For the seller side, they’re getting 85-90% of the entire deal in cash, at the closing table – and that’s a bit rare in M&A, especially as you get to larger deals;
- A buyer is going to be a little bit more flexible than they otherwise would, since the vast majority of the deal is going to be a loan, so they might be willing to even go up 10% higher than they otherwise would, because they know it’s going to be amortized over an entire decade – so from a seller’s perspective, this should look very attractive.
[15:56] In addition to all these rules, what are some things buyers wouldn’t expect, that are good to know?
- A buyer that has had no experience at all, first of all, needs to go and talk to a business broker. I would not talk to an accountant or a CPA or an attorney or a bank - especially not a bank because if you walk in, without any experience at all, or any relationships at all into a bank, your disapproval rate is over 90% - you are highly unlikely to get approved for an SBA loan if you don't have those relationships;
- If you have collateral, the bank is required to take it. That means, if you have more than 20% equity in your home, then the bank is going to put a lien on it - and that's for all of the owners involved;
- The one thing the banks don’t go after are the retirement funds;
- You’re going to be personally guaranteeing the loan, so it doesn’t matter how the company does, one way or the other, you’re still personally liable to the bank for those funds;
- You're going to be asked to fill out a personal financial statement. Obviously, you want to be very honest on that document, because it is a bank document, which would be a federal offense, should you not be honest on that document.
- The SBA requires certain insurance documents, such as life insurance;
- The banker, in all these deals, can be an asset or a liability. As a liability, they're trying to sell a product they're commissioned, they have to turn paper and they don't stay employed unless they do, so they have to find good loans, submit them to the underwriter and get them approved and into the finish line. So a lot of times a banker will tell you everything you want to hear to try to get you to submit a loan to him, but he isn't sure if he can get that deal done or not.
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