is 90% SBA Financing to Buy a Business a Good Idea?
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- Опубликовано: 2 июл 2019
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Is borrowing 90% of the purchase price of a business a good idea?
Currently, American entrepreneurs are able to put only 5% down and borrow 90% from a bank and 5% from the seller to buy a business.
This is a lot of borrowing. Otherwise known as leverage.
Is borrowing $19 for every $1 of your own money put into an acquisition a good idea?
Does it matter WHO you borrow money from?
I answer these questions and more from a viewer who worries about the risk of a big bank loan.
Check out the conversation here: • is 90% SBA Financing t...
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"And this is 2019 if you're watching in the future...the likelihood another recession is coming is very good." I'm eating cereal mid-apocalypse while watching this. Good call. Great video. Thank you for sharing.
Yes. I believe that Covid is just the trigger. The conditions for a recession were already there waiting. Now the leaders can just blame everything on a virus. Better than war, I guess.
Reading this mid-Ukrainian conflict…the foreshadowing is unreal…on a completely unrelated note, do you happen have any stock or possibly options chain predictions for next year? Asking for a friend
@@DavidCBarnett speaking of war...
@@navalofficer1 lmao
Clear, concise & helpful!! Thank you.
Glad it was helpful!
Love your content! Keep pumping out these valuable videos, please!
Thanks, I'm glad you're enjoying them. Remember to sign up for my email list at www.DavidCBarnettList.com
My old business partner got totally screwed when selling his business. The business was approved for SBA financing, but he got talked into doing seller financing by his business broker. The guy he sold the business to, who had "personally guaranteed" the loan, ended up getting charged with fraud and having all his assets frozen, then going to Federal prison. I would only ever sell a business for cash - letting the buyer making payments is just letting them use the business to pay for itself; you might as well just hold it and bleed out the money yourself.
This is the danger of doing 100% seller financing and stories like this are why so few sellers would agree to it. If a seller is to finance the whole deal, then it has to be the right buyer, for sure. The normal formula I recommend is for a buyer down payment, bank financing on tangibles and a degree of seller financing for the goodwill such that the buyer is protected in the case of material misrepresentations from the seller. This is all a fine balancing act of risk vs. price.
In an all-cash deal, the buyer would want to discount your price so that they're comfortable with all risks.
The seller 'bleed out over time' is actually a common strategy for exit. I call it the 'wind-down.' and discuss it in my exit planning course over at www.HowToSellMyOwnBusiness.com
Cheers
Thanks. I’m planning to get a business and the information have been haven sent. Going to get the books and as soon as I can gonna register for the class. 🤓
I'm glad you're enjoying them. Just trying to help people avoid bad deals!!
This all makes sense and is very thoughtful and important factors to consider, appreciate the expert education .
Just wanted to pose a secondary thought as to which SBA program could be a better fit for a business acquisition ; there’s programs that allow for a 25 year term same or similar loan to value when there’s commercial real estate involved in the purchase. This is a different program that could help mitigate the risk for the buyer as they will also be acquiring a strong asset.
Thoughts please. Thank you.
Just watched the other video: should a business own real estate- so that basically helped clear what I was thinking - as it depends on each unique situation.
Hi, if it makes sense for a business to own land then a mortgage is fine in my opinion because of the asset. The long amortization can help with cash flow but keep in mind that most commercial properties need some significant rehab long before 25 years.
Great video.
Thanks Shalina, glad it was helpful.
Just like the real estate boom...was created by the banks willingness to finance buyers that were not fully educated...
Definitely like seller to be financing a majority of price unless you are getting a massive discount on the price of the business...
The seller has more to lose if they finance the new buyer, and more incentive for the buyer to successful.
Yes! You want the seller's interests to be aligned with yours. You want them to become a coach/mentor/source of info and be happy to see you succeed. Great points.
Great video. Good content. Thanks! (Please turn the gain on microphone down if you're this close to it to avoid that fuzzy overdrive sound 😊👍)
Yes! I found that knob a short while later...
David - Thanks for the response. I have been surprised by many "burned out" sellers that have unrealistic expectations because they believe someone can get an SBA and therefore pay at level not warranted for the risk. Wanted to make sure I wasn't missing something or looking at it in the wrong way. Cheers
It's just their hopefulness or lack of understanding. If the seller helps you with the risk by offering to finance more of the deal, they can usually sell for a higher price. Many times, it's inexperienced business brokers who get used to the sba financing that create the expectation. Ed Pendarvis gave a speech about this once that I was lucky enough to attend in Atlanta.
Interesting as always and completely coherent. But what happened to the pink room?
The pink room now houses my daughter's bed. I was removed to the dining room for a bit while I painted the new grey office. The office is also supposed to house step-daughter when home from college so look for new and interesting shooting locations this fall.
Hello David, really enjoying all your content, been watching it for years.
You stated that SBA loans will go up to 10 years, which made me wonder something. Had a question related to the life expectancy of buyout businesses. I have seen research that shows the average life expectancy of a business is about 7.5 years, but that includes start-up businesses. However, I was wondering what the average life expectancy of businesses are after they have been bought out. So in other words what is the life expectancy of businesses that are successful enough to be bought by a buyer.
So if I buy a successful business how long can I expect (roughly speaking) that business to last before it is no longer a viable business to own?
In my own experience as a broker, almost all the businesses I sold were still open after two years, but after five a few had closed. 10 years is too long. In Canada, for example, business loans only go for 7 years with most only being 5 years.
10 years almost guarantees that you'll need to bring the business through at least one recession as the average business cycle has traditionally been about a decade... also not good.
@@DavidCBarnett Excellent David Thank you for the reply, I used to work in banking. In my experience, if a bank won't go out longer than 7 years on certain types of loans then there is a good reason why. Makes me think the 7.5 year life expectancy may still apply to buyout businesses. Which would explain the historical price multiples you have spoken about.
Thank You very much
Can a business get a loan if the first 2 years it had no revenue but on year 3 it takes off? I am trying to decide if there are benefits to keeping the current 2 year old failed startup (such as meeting the 2 year time in existence requirement on loans) OR if I should start a new business altogether and terminate the old non-revenue producing entity because I honestly would prefer a different name (and currently owe $350 in late fees). Old business has no bank account activity. I would like to apply for business loan in 3-6 months
I think you should invest some money in beer or lunches for some local small business banking officers. Much of your assumptions are based on information that can vary from bank to bank. For example, any business may be able to get a loan with personal guarantees from an owner who has other assets and/or wealth. But I don't think that's what you're looking for. Longevity of an entity is important to some, many just look at the last two years of performance, again, it depends on where you're applying.
Basic economics. If the government subsidizes the cost of a good or service, the price of that good or service will increase.
In this case, the availability of financing causes prices to go up. The government involvement is to distort the true cost of risk. In a free market, a 90%LTV loan on a small business would have a very high interest rate because of the risk. The government magically takes this away ;)
David, could there be a 4th reason why sellers do not want to finance the sale? That being; I'm retiring and I want all my money upfront so I can move to the Caribbean and never look back :)?
Sure, but a person retiring is hard pressed to get a bank savings rate over 1.5% whereas seller notes are written at 5, 6, 8, 10% etc. Seller notes are a great investment unless the seller knows there is something wrong with the business or buyer that will cause the business to fail.
David - can you tell me what you meant by your explanation regarding goodwill at the 5:44 mark, please? I am used to thinking about goodwill in a different way (accounting definition), and when I considered your comment in that context, I got a little turned around. Help.
I'm talking about the goodwill in the accounting definition. When you buy a business the purchase price should be more than the value of the tangible assets if it's a good business. The difference between the purchase price and the value of the tangibles is the goodwill. If you buy a pizzeria and change the sauce recipe and the customers go away then you've ruined the goodwill. Hope that helps. There is a whole section on this topic in the course at www.BusinessBuyerAdvantage.com
@@DavidCBarnett Thanks. That's pretty much how I was thinking about goodwill, except for this concept of ruining goodwill. From the moment that you buy the business at a premium to the market value of the assets, and record goodwill, you lock goodwill in as a long term asset, and you sever the link to that asset's market value as it relates to the financial statements. Under GAAP, goodwill is recorded at the time of purchase and expensed over time. In that way, goodwill is always "ruined" by virtue of the passage of time. Moreover, there is never a scenario that the goodwill itself would be ruined or improved by the performance of the business. Changing the sauce recipe in your example would simultaneously impact sales adversely, reduce the sales-related assets (cash, A/R), and reduce the amount of generated equity/profit.
Unless I am missing something goodwill itself is not affected by decisions that the business owner makes post-purchase.
Am I thinking about this the wrong way?
Your like nostradamus with this video. You knew 2020 was on it's way. Smh...
Maybe. Too bad my crystal ball doesn't work every day!
Do sellers of franchise businesses typically offer seller financing in your experience if it’s a hot, in-demand franchises? Or do mostly offer sellers financing for mom and pop types of businesses?
Great question. Sometimes the franchisor doesn't want seller financing in the sale. They don't want the old franchisee to have any claim on the business in the case the new person fails. Especially if relations between the seller and franchisor are not good. I've also seen franchisors tell sellers that if they ever try to foreclose on the new franchisee that they'll have to reapply to be franchisees and may be rejected! Franchisors have a lot of power.
I want to buy a business but I just want to partner up with the owner. What SBA Loan can I apply for? Would that be advantageous for me and the owner in the long run?
If you find an owner that wants to partner up and have you buy them over the long run, you don't need a loan at all in many cases. check out this video: ruclips.net/video/FmF7XJjXYhg/видео.html
David - in the video, you mention a deal should have a "good chunk of seller financing." Is there a typical percentage (or range) of seller financing we should be looking for in a business acquisition? Thanks.
I made this video about it years ago... ruclips.net/video/sfcVeAacOSY/видео.html
You can still do an sba loan with high seller finance.
Just do 90/30/5 with the 30% being a sellers note.
This leaves us with 125% financing. Use the extra 25% as working capital.
Hi, yes, you can do larger seller notes even with SBA financing. Most people don't think of this as the banker wants to write the biggest loan possible usually and the seller wants a lot of cash.
Also, you're confusing the purchase price paid to a seller in an asset purchase vs. the total investment. I'll add this to the video list.
@@DavidCBarnett
Can you elaborate on what I’m confusing?
@@RomilCPatel I'm going to make a video about it. The amount you pay to a seller in an asset purchase is not the 'investment' because operating capital is not being transferred. When you present to a lender it's always about the total project and lending is in relation to the opening balance sheet of the new entity.
Hi, what if I do both? Let’s say I want to buy a business that’s $1M so I have $50K so I get a $500K loan from SBA and the other $500K on seller financing? Can you actually do this?
Sure, they'll finance less than the maximum. This is why you want to have an actual relationship with a lender who you can run scenarios past.
There's one Catch 22 and that's called that 10% down that most people don't have. Because I don't know if a single job that will pay you 2 million dollars to be able to put down on a $10 million dollar business. And that's a small business it's not like you're trying to buy a 5.6 billion dollar sports team.
Or even worse trying to buy something big like a tech company like Tesla or Amazon or Facebook or google. Those are in the hundreds of billions of dollars. A 10 million dollar business is very very small and most people don't have the down payment.
Rob, we're talking about Main St. businesses here. $10M is considered mid-market in this space.
Thanks for this guidance. I’m looking to acquire a chiropractic wellness center, add at least 100 telemedicine patients, and ultimately convert it into a wellness + tech company. The company has been in business for 40+ years. I’m looking to increase revenue to $300k in medical Billings, which would create a valuation if roughly $3m. (20 x $150k).
To my knowledge, med tech companies have a valuation multiple of 20x. Am I right here?
Is there anything off about my approach?
Tech solutions or Saas companies get those high valuations because they are infinitely scalable. In your model, each new customer will require some degree of new inputs and so it's not as scalable as a Saas.
Just ask yourself, how would someone pay $3M for the business and service the debt from that cash flow?
@@DavidCBarnett thanks David! My main thought is that it’s predictable cash flow based upon the thought that we could treat each patient weekly via telemedicine.
After proving the model in one state, transition to other states. Not sure if I’m thinking correctly here. I thought that’s how it could work.
im looking for a loan amount of $200K, with a payback period of 24 months. The business equipment can be the collateral, any help on where i can get a loan? do a pitch?
For equipment, the easiest financing to qualify for is often a sale leaseback. Contact an equipment leasing agent near the business.
Hahae so good
Thanks
Dave you've worked on a lot of deals. Have you ever witnessed anyone losing their home on a failed business deal?
No, I haven't seen anyone lose their home, but I've seen many people close businesses and then get jobs to service their fully-mortgaged house. If employment can be found, bankruptcy laws often allow people to keep their homes if they can service the debt on it.