Post for those who love biz sale deals! Creative selling structure needed

[ledbythespirit]

I’m selling my CPG brand (asset sale). Our goods sell e-com and wholesale.
Buyer has worked for me for 10 years & is CEO right now.
She also wants the bld (i personal own it debt free). I think she wants the bld MORE than the biz.

Heres the situation. For those who love deals like me - let’s go! Help me problem solve pls.

1. She was gonna do SBA 504. SBA broker says ‘we lend on fixed assets so you inflate the cost of the bld + machinery (almost no machinery). (so we rolled 60% of the biz selling price into the bld) Property values have gone up like mad so ‘no problem.’ this feels wrong but hey - it’s not on me.
2. I did a lease to own 9 years ago on the bld. Bought personally. Biz paid $3k a month for 60 months ‘rent/lease’ then i personally paid the balloon at the end to own. $225k total/ $14 a SF. Amazing deal.
3. I have basis points of plus improvements & have taxes all figured out.
4. This is in a rural area edge of small town - steel frame bld, concrete floor, rubber roof, 2 semi high bays, 16,000sq total - 2,000 sq is office and a kitchen plus bathroom. Unpaved front lot - big grassy back lot. 50k sq feet lot. Bld 30 yrs old but pristine. Honestly, companies in cities 50-200 miles should buy this for cheap storage!!
5. Comps are allll over the place from $30sf to $190sf. A nice bld like this with a ramp for semi’s is hard/impossible to find in rural areas!!
6. A really dilapidated 80 yr old brick bld in town 30 min away just sold under SBA 504 for $250sqft. Night club / lunch place. Shocking BUT it was the same trick… 504 so the biz was sold for pennies but the bld sold way over priced. (i think this is a bad trend ala 2008 recession vibes but that’s another thread)
7. Problem! 504 guy is GTG. Those deals are 50-40-10 (bank/sba/buyer). And I am doing a second purchase agreement for Assets of the business on a seller note (not what I want to do but the only way she can do this). 10yr 9% interest. Personal Guarantee. I figure if she pays HALF i’m fine w/ that.

The bank seemed on board and pulled the plug at appraisal time 6 weeks in and didn’t do appraisal. Told the buyer ‘we use a calculator and the debt service is too high’ they wouldn’t tell her what number worked which is crappy for a rural small chain bank (i did 2 loans with that bank)

1. She said ‘this makes no sense bc when I submitted the Proforma and pulled out your salary & benefits, the ‘mgmt fee’ to your S Corp + your monthly loan payment - that’s $25, 000 a month. My new monthly debt svsc is $24,000 so it should be fine’

So she’s off to two more banks - but process is 45/60 days. I think they will all give her the SAME answer bc they use the same logic and banks don’t take many risks…

It’s bad financial planning that she’s putting the bld ‘mortgage’ on the business - that number is much higher than the $3k a month rent the biz pays now.

BUT, She has future income planned using the bld for other things that I should have done but haven’t bc I’m 1500 miles away - but we know banks don’t care about future.

My biz is national. She could cut it in half and do multiple small town things and will do great. She’s a leader in town and has great ideas and is really suited best for being that rock-star local biz owner. I am absentee and all employees are long term and want to work for her.

1. I want to sell to her. 2 years ago she took over running it and I started a new company. I also have a 3rd company.
2. My last year as CEO sales were 10% up and net profit at 12% (7% is goal and average ). The last 18 months she has had sales declines but really cut expenses too. Sales down 20% in 2023… profit at 2% - she did excellent expenses cutting. Not sustainable for how I operate and heartbreaking BUT if she had free rein to do the local things she wanted - she would have made up the b2b sales slump and more. I am just not comfortable with those new things bc I’m so far away. Others in our category also down the last 2 years. (giftable food) i’m not concerned long term - but it is stressful and I want to move on and focus on my other 2 businesses.
3. I have $175k in debt - not bad!

I have had a tough 8 months bc of this - stress , fear, etc. Giving up control is really hard!

I got honest with myself - I love to have ideas, create and operate for a short while and let someone else soar. So, I need to sell.

I have sold 2 other business to female employees and I love that.

I want out, now and want the cash for the next adventure! The employees want to stay with her which is a big loss for me but I think that means I created a strong culture and cultivated a great leader in my buyer.

There are 5 employees - great employees (small town). She desperately wants to buy with a fully clean break . I am not going to own with her / neither of us wants that.

I take a hefty salary + benefits and really do very little any more.

Normal situation i’d have laid ppl off and obviously a big change would have occurred - BUT I have been ‘eye on the prize’ for both of us. so supporting her, etc so we can get the deal across the finish line. She has new revenue lined up waiting for her to own the company (storage, small 3pl work, etc)

Price we settled on is very good. So, it’s a great deal for me and the building is a gold mine for her.

So bank backed out, she is hustling for other banks but our P. Agreement expires in days.

Company cash position is low- but we are q3-4 heavy. For her to be strong we need to sell now she can plan asap for her improvements and she isn’t held back by me.

I need to tell her that I’m not waiting for bank do-over. I have to tell her she needs to do the SBA 7a. BUT that’s $3k MORE a month in interest and it’s too much. (10.5% interest) But, i’d get all my $ up front for sure and no seller financed.

I prefer a win-win.

That 10.5% is kinda crushing.
With 7a’s does anyone know if they always fund it all or could/should I do some seller financed?

I can also tell her she can only buy the biz now and rent to own the bld which she will hate & i’d love for her to have it.

Would a 7a likely work for her with the bld included ? Ideally she needs the bld for collateral overall)

I need to stop being patient so she can get all she wants (that’s my personality ) and get the deal done.

Long story but many here LOVE deals. I need to get 100% out of the biz. I’d LIKE to sell the building but don’t have to.

We have worked so hard on the deal so the bank backing out really stinks. She wants the 504 to work and doesn’t want the 7a bc of the higher interest and bc ‘she isn’t comfortable with the 7a guy.’

I don’t want her to be uncomfortable with the 7a person and I am not sure what’s up. The 504 guy is separate from the bank but I thought 7a lenders WERE the bank… maybe not?

Gimme deal structure ideas!!
(she’s 33 with a $140,000 house and no other assets).

What else can I do to make it happen? Honestly $300-400k is as much as I want to seller finance. w/o the bld as collateral I’m worried that SBA 7a won’t do just a loan for the business acquisition for her. I have owned 6 companies but never done an SBA loan.

There are no brokers so it is just us.
She cannot get cash from family - could maybe get a loan co-guarantor.

To make this game easy.

Biz sale $2m
Bld sale $1m

SBA 504 guy having us do this:
Bld sale w/ bank & sba $2.5m

then a separate owner financed sale of the company Assets.
Biz sale 100% seller note $500k

*i am also worried that the bld may only appraise at $1m

 

[artlicbunny]

@ledbythespirit SBA 7a Lender here - This one is tricky, the 504 lender backed out before appraisal but likely not before the loan went to underwriting for the first time. My guess is the underwriter looked at the last 18 months compared to the preceding period and then combined with the worry the building would not appraise out and pulled the plug.

What I am seeing a lot of is loan officers being excited about a loan, issuing proposal letters and then having the deal die when it hits the first underwriting review. I have been encountering this on business transactions where the other lender says they can do the deal at great rate with lots of working capital and then underwriting sees it and says nope.

Although I review all loans with credit/underwriting before issuing proposal letters so a sudden decline does not happen post letter.

The 7a lender is the bank / non-bank lender and fund the loans. There is a possibility the person claiming to be the 7a lender is a loan broker who is working with a 7a lender and claiming to be the lender rather than the go between.

The issues I see from a 7a standpoint are:

• If the building does not appraise out and you are firm on the business sale price this will need to be two loans. One for the business on a ten year amortization and the other for the building on a 25-year. The blended payments are going to be high.
  • The purchase structure could be $1.75m for the building, $1.25m for the business. An appraiser might see this and give the ideal value. This would qualify the structure for a single 25-year 7a loan.
  • Working capital could be included with the loan, the issue here is this will bump up the business side of the loan and the goal is not to push the loan into a situation where it needs to be broken up.
  • I should mention here that the condition where the loan would need to be broken up is when the business only (non commercial real estate portion) is greater than 50%.
• While not an issue, you are going to need to seller carry on this one. The decline in sales the last year and a half is a problem and credit/underwriting is going to want to see the seller have skin in the game to retain an interest in the business's success.
  • The seller carry is going to need to be on full standby for two years. This will allow it to be counted as part of the equity injection. Perhaps only a portion will need to be, but in the interest of setting expectations I would assume it all will be.
• The drop in sales the last 18 months is a red flag and you are right that cost cutting only goes so far. The borrower will need a solid business plan to explain what happened, why it will change and how the change will happen.
  • This should also account for adverse market conditions
  • There needs to be an understanding why the sales have dropped under her leadership. In the case market conditions have changed the concern will be how will the debt be serviced if the don't improve or change for the worst.
  • Credit/underwriting does not like downward trends which overlap with leadership by the borrower.
• You are correct about 10.5% interest on this one. Possibly a lender could come in at a lower rate but the declining sales is going to heighten risk and likely hold the rate at 10.5% or prime and 2.00%.
  • Note that if this is split into two loans she will likely be looking at prime and 2.75% on the business only portion and prime and 2.00% on the building portion.
• Not an issue, just a heads up, the lender will take a lien on her house. This loan is going to be under collateralized
• This is going to take 45 to 60 days for a lender to complete this loan provided the borrower is fast and everything goes smoothly.
• At this commercial real estate purchase price there is the possibility the lender will want a phase one environmental report on the building. Unlikely to happen, but again, setting expectations
• There is not an issue putting the mortgage on the projections for the business, this accounted for when evaluating debt service coverage so the loan payment is only counted twice
  • Speaking of projections she is going to need realistic, attainable and solid ones. The assumptions will need to be detailed and make sense. There is no way to pencil whip these.
• Another thing to keep in mind is with 18 months of declining sales the business valuation portion of the appraisal may not come in at the value you are looking for. This will make it hard to lend on more than the appraised value of the business and you may need to carry the difference.
• There is no mention of her liquidity situation. Given she was looking at a 504 I will make the broad assumption she has 10% of the purchase price on hand. Do you know how much additional cash on hand she has. As a lender there is significant concern when a borrower is tapped out on closing.

My take home thoughts

Good things

• There is real estate in this purchase to help collateralize and possibly provide a longer term for the loan.
• The borrower has experience running the business
• Seller carry is available

The challenges

• The borrower has overseen a decline in the business over the last year and a half
• The loan is really dependent on the real estate appraising out
• There my be post close liquidity (cash on hand) issues
• Time is short
• Others in the business area are down right now too

Is this a doable loan? Maybe if things appraise out, the seller carry is right and there is a strong plan to turn things around. I don't foresee a situation where the borrower does not have to inject 10% even with seller carry on full standby. The drop is sales is a big hurdle to overcome. In the case she has strong liquidity post close and the building has a favorable appraisal than I think this one can get over the line.

Say this does not work right now because of the declining trend in the business. Given she turns around the business in the next six to twelve months and can show strong financials, ideally a tax return the conversation will be very different. I realize I am saying if she can't secure funding for this you might have to wait a while.

I really hope this helps out and provides a 7a perspective to the situation. Good luck.