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Financing Acquisition, Welcome 06854
Tell me more about you and your background.
Do you have an Accountant?? Have you seen prior year tax returns??
How about a Lawyer?? Can SCORE help?? SCORE is FREE
Good luck, LUCKIEST
Good afternoon, hope all is well. You would be considered a startup company though the business has been around for a few years. Lenders will consider you in this category until you have operated the company for at least 2 yrs.
SBA loans are the best loans for new businesses. Have you talked with anyone about an SBA loan?
No, I have not spoken to anyone about an SBA yet. Should I have a business plan ready for that discussion? I'm not quite there in the process yet ...
Yes you do need a business plan but you dont need it for the discussion. We simply talk to you first to discuss your business and where its going.
How much of the purchase price do you think I would be able to finance given the existing cash flow i.e. what percent of equity will I have to put up to secure a loan? If you dont own an existing business that compliments your target acquisition, a bank will sometimes not be comfortable with your ability to take over the business and maintain the current level of cash flow. You'll need to put down a large chunk of cash to even have a bank consider it, especially with no collateral. There is no formula, but I would want somewhere in the 30% - 50% range.1 of 1 people found this helpful
Given the current credit market environment, what interest rate should I model and time to maturity? You should be looking to finance the business with a term loan (usually up to 7 years) or a commercial mortgage (if there is real estate involved). Banks usually wont go out beyond 20 years on a commercial mortgage. Rates vary...but honestly, if you find someone to finance the deal, i wouldn't argue about rate as long as its not something ridiulous. I'd think up to 10% would be reasonable
Will I have to sign a personal guarantee? What if I have no personal collateral to offer? Yes you will have to personally guaranty. Not having collateral could be an issue since the business has no assets. Service companies are especially hard to finance because the most valuable assets walk out the door every night. Banks have no assurance that people won't quit the moment you take over the business. You can retain key employees with incentives and contracts as a way to mitigate this risk.
Would I have more success to secure financing with the use of an investment banker (for capital raising purposes)? What do they typically charge (is it similar to what they charge on a sell side service)? This deal may be a bit small for an investment banker to look at...
Although the current owners will say they dont want to hold a note, you should consider asking them to do just that. This is very common with small business purchases.
These are all good questions and some good answers too. You will need to put down 10% if you there is real estate included in the purchase and 20% if there is not. You may be able to get away with 15% down if the seller takes back some paper, but the senior lender is going to make the seller terms somewhat complicated. You will need to personally guaranty. The loan will be for 25 years, fully amortizing, with real estate collateral and a maximum of 10 years without. The loan will have to amortize over the remaining lease period, unless you can renew or extend the lease.
The rate will likely be close to Prime + 2% floating if there is no real estate and you may be able to fix the rate if there is real estate. You will need to have experience in the field or something very comparable and a timely payment history. Make sure to include enough income in your projections to cover your personal expenses. You will not need a business plan but you will need to put together some projections, a resume, a personal financial statement and tax returns.
I can walk you through the process if you have any other questions. Call me at 305-672-8850.
How much of the purchase price do you think I would be able to finance given the existing cash flow i.e. what percent of equity will I have to put up to secure a loan?
I have ten years of commercial banking experience with Bank of America, and I was as aggressive a lender as there was. With that in mind, you will have a very difficult time getting this deal done -- anywhere. This is a 100% cash flow deal, meaning that the only source of repayment for the loan is cash flow from the business. Usually, for a commercial bank (or any traditional lender) to do a deal like this, they need three sources of repayment: (1) cash flow from operations, (2) realization of collateral, and (3) resources of guarantors.
As you have already said, the business has no meaningful assets that can secure this loan, and you don't have the kind of net worth or collateral (personally) to support this loan. This is going to be a very tough deal to do.
Given the current credit market environment, what interest rate should I model and time to maturity?
As I said, I don't think this deal can be done at any price, but if you could get it done from a traditional source, then I think you're looking at prime plus 2-3%. Some lenders might use LIBOR as their basis, though. I think you'd be lucky to find someone who would do this over a 5-7 year fully amortizing period.
Will I have to sign a personal guarantee? What if I have no personal collateral to offer?
You would almost certainly be required to sign a personal guaranty. One of the reasons this is required is to ensure that you are helpful should they have to liquidate the business. You are not going to impair the value of the business when it is in your best interest to get as much cash from it as possible. Not having any personal collateral is definitely a strike against you.
It sounds harsh, but the reason that not having collateral is such a strike against you is that, what the bank is really saying is, "What have you done with you life professionally such that you don't have any assets to show for your effort? If you have not been able to build your assets and net worth so far, why would that change?" You need to show that you have a history of being the kind of person who makes smart moves with his finances, and it's hard to show that when you don't have any assets. Again, I know that sounds harsh, but it's reality.
Would I have more success to secure financing with the use of an investment banker (for capital raising purposes)? What do they typically charge (is it similar to what they charge on a sell side service)?
I would be very, VERY cautious working with an "investment banker" or other broker, consultant, or intermediary. Regrettably, many people in this business are dreamers who do not have good connections or capabilities. In some cases, they are honest people, but they just don't know how to get deals done. In other cases, they are nothing more than scam artists, who try to whack you for an upfront fee, then fail to deliver anything. That is not to say that all upfront fees are out of line. When I used to do this sort of work (after my Bank of America days) we would always secure a small fee not only to cover our out of pocket costs for memoranda preparation, etc., but also to know that there's a committment on the part of the client -- that he is not shopping the deal all over the place. But please, please, please do your homework before working with any intermediary.
A lot of places are still using "the Lehman formula" (although now that Lehman is in Chapter 11, maybe they will change the name) of 5% for the first million, 4% for the next, and so on, down to 1%.
I've got an SBA lender that will consider a cash flow only secured loan for a business acquisition at no more than Prime + 2.75% with standard SBA guarantee fees added on top. The loan would be for a maximum 10 year term on a floating rate basis. The target company would have to generate approximately $325 thousand a year of free cash flow to service a loan of up to $2 million, the maximum supported under the SBA 7a program. You'll need to invest at least 20% of the purchase price.
As an unsecured loan, you will have to have appropriate experience in the industry of the target company and strong personal credit in support of your personal guarantee.
Please feel free to call me at 310-371-4011 if I can help.
In my opinion, Marshall's post is the most accurate reflection of SBA loan guidelines.
In general, SBA guaranteed loans:
1) Max allowed rate is prime +2.75%
"Traditional" bank loans are harder to come by and they are reluctant to lend on cash flow. Too bad since cash flow is what pays loans back not collateral (how many houses are banks holding right now?).
Thanks for everyone's thoughts and ideas. I appreciate your insight.
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I am currently evaluating a small business to acquire as a private buyer and would like to get an idea of terms I should expect before starting an aggressive search for financing (assuming they accept the bid, agree to terms, etc). The business has no capital assets and is a people business that provides professional services to a diverse set of blue chip clients. The business was started in 2002 and has a 5 yr growth rate of ~40%; it generates approximately ~$300 to ~$500K of cash per year and currently carries no long term debt.
The questions I have are:
Any answers or direction would be greatly appreciated!
Thanks very much.
The questions I have are:
- How much of the purchase price do you think I would be able to finance given the existing cash flow i.e. what percent of equity will I have to put up to secure a loan?
- Given the current credit market environment, what interest rate should I model and time to maturity?
- Will I have to sign a personal guarantee? What if I have no personal collateral to offer?
- Would I have more success to secure financing with the use of an investment banker (for capital raising purposes)? What do they typically charge (is it similar to what they charge on a sell side service)?
Any answers or direction would be greatly appreciated!
Thanks very much.