Acquisitions Anonymous - #1 for business buying, selling and operating - SBA Loan 101: How to finance a Seasonal eCommerce Business (Re-Release)

Episode Date: August 30, 2024

In this episode, Bill and Heather talked about the key strategies for structuring an SBA loan for a seasonal eCommerce business. They also discussed the challenges of managing inventory and working capital and offered practical advice on how to approach lenders and structure your deal effectively.  If you want to learn more about SBA Loan and Heather's work, visit her website Visocap.net Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome to another episode of Acquisitions Anonymous. Bill and I took a gift basket business today and kind of diverted into SBA 101, how to structure a deal around SBA loans. We talked about seasonality. We talked about inventory. It was a really, really good discussion, so I hope you enjoy it. Our sponsor for today is Rejig, a platform that is built for searchers who want to meet directly with small business owners. They have an in-house team doing outreach, finding owners who are, excited to meet with people ready to buy their companies. Searchers join their platform and often

have five to ten meetings scheduled directly with owners for the very next week. Learn more about rejig's model at rejig.com slash a-A, and again, that's R-E-J-I-G-G-G-com slash AA, and Rejig does the calling. You do the closing. Hey, Bill, it's been a while. It has. I'm so glad to be back on my own podcast. I know. Where have you been? I've been all over the place. I took basically the month of October off from the pod,

which means you guys got a number of episodes in the can without me. I was at an e-commerce conference. I was at a menser street in Texas, put on by our mutual friend Chris Powers and traveling a fair bit, working hard too. But I'm back in the saddle. It's nice to see you. Good to see you, too.

So what have we got today? Do you find us a deal? I did find us a deal. This is one from our first. friends at Quietlight brokerage. We're fans of the folks of QuietLight. If you are buying or selling an e-com business, is kind of where they specialize.

So I really like to check their teasers out for the show. So this one is, and it's on the screen if you're watching this on YouTube. This is an SBA pre-qualified, which I'll let Heather comment on, a nine-year-old Amazon FBA, category bestseller, brand leader, 77,000 reviews. It has 13.3 million in revenue, 2.2 million in SDE, and they are asking $6.1 million plus inventory,

which makes it a multiple of 2.75x. So this seems, you know, on the face of it, attractively priced. Of course, they've got kind of that plus inventory in there, so we can talk a little bit more about that and how that affects purchase price. But on the face of it, a 2.75x multiple. Here's a little bit about it.

This nine-year-old enterprise began selling on Amazon in December 2014, and since then, the owner has heavily focused on creating great images, building up 77,000 positive reviews across 87 skews, earning the bestseller badge in grocery for their main product and multiple sub-300 bestseller ranks, which means it's in the top 300 best-selling products in a category, and they offer their products at competitive prices. Over time, their listings climbed to the top of the organic rankings in their category

and sales increase rapidly. The company operates out of a fully equipped 58,000 square foot lease facility in the Northeast where their team of 25 employees assembles a variety of snack boxes and under their private label, snack boxes and gift baskets under their private label trademark brands to be sold on Amazon, Shopify, and Walmart. Amazon is 94% of revenue. Shopify is 5% of revenue, and Walmart's about 1% of revenue. All logistics are performed in-house, and the operations are very lean and closely monitored

for speed, accuracy, attendance, and quality. Very lean, still 25 employees in 58,000 square feet for what that's worth. Though the business has recently reached annual revenues of over $15 million, and they've got it listed at $13 in the listing, and gained a large chunk of market share for their category, there are lots of growth opportunities which are apparent, including creating more holiday-themed products because the seller believes a major gap exists in the market with little competition for quality-holiday-themed snack and candy gift products. Number two, performing social media and pay-per-click marketing off of Amazon, especially for the holiday-themed products.

Sensing a holiday theme here. And three, creating more year-round products, non-holiday products on Amazon, which has shown lots of early progress as of July 23 and can likely generate an additional $2 million of revenue each year as the strategy is employed. Number four, try to grow the Shopify, as every Amazon brand always says. And number five, adding new revenue channels. The owner currently spends 30 hours a week managing the business remotely, but does visit the warehouse a couple of times a month for four hours per visit. The owner's been owned this for a decade and is ready to pull his chips off the table and reinvest the proceeds into commercial real estate. He must have been following some of our friends Mitchell Baldwin on Twitter,

perhaps. All right. What do you think, Heather? Well, this is an interesting one. I mean, it isn't the easiest business to run 58,000 square feet and 25 employees. It sounds like probably, did it say how many skews? It's an 87 skews. 87 skews. Okay, that seems like a fair fair number. It's a 16.5% margin is what they are sort of showing here. If we're looking at what they've got at the top there on that 13.3 million revenue, which seems like a good margin. So on the surface of it, the multiple sounds actually pretty good, except for I'm concerned about the plus inventory part of it, what that might do to the multiple. It's seasonal. So, because it seems like they're really emphasizing these are all holiday themed. And so then you have to get into, okay,

which holidays are the big sellers. And you've got seasonality in the cash flow, which is always a super challenge. And then you've got, they're saying that they're SBA pre-qualified. Now, this is a kind of a big, is that a thing? What is that?

All these listings say that. It's a marketing thing, right? So they're not, this, nobody in an underwriting or credit position in a bank probably ever looked at this. something that a broker would have shown a salesperson, the salesperson would have gave a cursory look and not ask too many difficult questions and say,

oh, sure, we lend on that if, you know, if everything is great. The thing that I'm finding interesting, though, here is this size of this business for SBA is kind of iffy to me. Because at 2.2 million, let me see, what's our purchase price? You know, SBA maxes out at 5 million, so 2.2 times 2.75 is 6.1. Yeah, six one, plus inventory.

Yeah, plus inventory, right. So if you're going to go SBA, your max debt here is $5 million, which is only a little over two turns of that net income that's shown. So meaning you're, you know, depending on your, you're going to have to pay quite a bit of equity. Are there, I've heard, I know your old bank used to do kind of an SBA plus where they do the $5 million of SBA and then, you know, some extra, an extra debt facility on top. Is that still out there in this environment? or now? It's harder to get.

It is still out there. It is still out there. I've done a few already this year, and I have a few more in underwriting now. It's harder to get. The banks that do it, there are only really kind of three that are regularly doing that program,

and they're each very picky when a deal is of that size and they have to take that kind of exposure. So it gets hard. To really get kind of your average SBA underwriting, you need to not need that Perry Pesoup piece, regular $5 million SBA is all you're going to be looking at. As soon as you're outside of that, it's a lot harder.

So you really start to thread the needle when you need to borrow more than $5 million. Correct. It's got to, like a lender's got to really like it. Really like it. And like you as a borrower for it and like your personal financial statement and your assets and whether it goes on and on and on. So they have to really, you are definitely threading the needle at that point. When I see something over $2.2 million in EBITDA, anywhere between two and three,

I kind of call that in my head no man's land for SBA and conventional. Too small for conventional, maybe getting a little too big for SBA. Even with a great company in that size range, financing will be difficult. That's the first thing that I kind of internalize when I see a company of that size. I feel like this is just like one of the huge inefficiencies in today's M&A market, and it has persisted at least for the last decade since I've been doing it. This has always been the problem in that your SBA debt, maxes out at 5 million. And, you know, that, so that implies kind of an EBITDA range of,

you know, one and a half million or so for a small business transaction. Yeah. So at over above one and a half million of EBITDA, SBA is not really a choice. But then private equity doesn't really get interested on the low end until about three to five million of EBITDA, you know, so you kind of have this between one and a half and three to four, you know, that is no man's land. To your point, nobody, the small business people can't buy it because they can't get enough leverage, and it's too small for private equity. So you're stuck. You can't sell your business.

Yeah. And what I've seen people do is they get really attracted to a business in this size range. They're great businesses, usually. And they waste a ton of time finding out that answer, that they can't finance it in a way that works for everybody. And it's terrible. Do these often end up getting sold with a $5 million max SBA and then a subordinated seller note for the bridge?

I think that's the only way I could pencil it, right? Right, right. The seller has to come in and cover that difference. And I was going to say for Perry, what we call that, that SBA Plus, we call it Perry Pesou. But basically, to get that in e-commerce is really going to be hard to because lenders aren't really fond of it. We've talked about this before. Lenders aren't really experts in the e-commerce industry and they have a really hard time with it. So this one would be really tough for that reason.

Yeah, everybody hates e-commerce, I know. Yeah, sorry, Bill. I know. I'm trying to change the world, but it's not working there. You can get SBA deals done in e-com. I don't want people to think that it's not possible, but, you know, lenders don't love it as much as they love B-to-B services or software, you know, all these things that aren't so capital-intensive

and not subject to the whims of Google and Facebook and all the risks we take in e-com. Right, right. So let's talk about this business-specific. specifically. So yeah, the size is a little tough, but the multiple seems fair. You mentioned that it is seasonal. Seasonal scares the crap out of me from a working capital perspective. And seasonal when it's food and thus could expire even harder, right? Because the way seasonal business typically works is you do very little revenue or EBITDA all year. And then in Q4 for Christmas,

you have to basically spend all your money in October to bring in a bunch of inventory, and then you do a full year of EBITDA essentially in November and December, and you hope you had not too much and not too little inventory. And if you have too much, you're stuck with it. Maybe it goes bad in this case, or the very best case, you have to sit on it for a full other 10 months, and you can't get your capital out. Not great when you need to be servicing your SBA debt every month from January through October. Right.

So it's a financing problem for sure. It's a major, it's a working capital problem on its own, and then it becomes a double problem if you're trying to buy a seasonal business and you have acquisition debt, because you're probably also going to need inventory-based financing, right, to try to spread out that cash need. And usually there's not enough room for both types of debt on a business with the cash flow and all that, and getting the lenders comfortable with each other. It's just very, very hard to do.

Heather, is there, when people can go in, can you go in with an, SBA loan. I know you can take cash to the balance sheet at close, but can you go with an SBA loan and put a line of credit in place simultaneously? So you kind of get rid of that Perry Pesue argument up front. You don't have to, because it's so hard to bring in later, right? If there's already seen your debt, you got to get everybody to agree. You got to kind of do it all at close. Is that possible? Yeah, but I want to be clear. You can't use a line of credit to replace the Perry Pesu, the SBA plus piece because the lines of credit that you might get are not drawn at close. They're literally just for like what you said, inventory or some kind of seasonal need

or carrying inventory or carrying receivables. So yes, you can get them, but it gets really tricky. And I do a lot of work with my clients on this. Let's figure out what kind of working capital situation we have. Is it working capital positive, negative or neutral? And then how extreme is it if it's working capital positive, meaning we're going to need a lot of working capital. then we've got a really fewer SBA lenders we can talk to if we need that line of credit because a lot of them don't provide lines of credit. They only do the term debt so they can't lend to these companies that need the lines of credit. Then the larger the line and the more you might need an inventory advance, that shrinks the number of lenders even more because they get more and more picky about that kind of what we call APL line of credit lending or asset-based lending. So yes, you can.

And I'd say if it's a working capital positive business, you should always close with the line of credit. If it's a seasonal business, you should always close with the line of credit. If you close without and then realize it later, you'll have a, like to your point, you'll have an almost impossible time getting one after the fact. Yeah.

And you can't. It's because, just to explain why it's so hard, the new lender, when they try to come in to do your line of credit, they're going to see existing lender in there in a senior first lien position with all the assets locked up and you can't borrow without their approval and all this stuff. And they go, well, we don't do junior debt. We don't want to be behind these guys, right? And, you know, well, these guys are not going to let us go in front. And so they go, I don't know where I fit in the capital stack as a new lender. There's no assets. There's no collateral. They would be behind

all of your SBA debt. So you've got to do it at close and it's got to be the same lender because the existing lender won't let a new lender in on Perry Pesu's same terms because they're like, that doesn't help us at all. We're not sharing our collateral with anybody. So they have to sort of share with themselves. It's the only way in. Once you have an SBA debt from a bank, that bank is now your only option for a line of credit unless you refinance the entire thing, which is really an order.

Now, sometimes they will carve out. Sometimes your existing SBA lender will carve out the receivables and inventory for a line of credit. I have seen that a few times, but it's extremely difficult. Like, don't expect that to be the case. It's very rare, very difficult to do to your point. And so, yes, as soon as you know, you're buying the kind of business that needs a line of credit, you should only be talking to SBA lenders, or me, me, of course, as well, who will guide you to those SBA lenders that do lines of credit of the nature that you're going to need.

And you have to have all that analysis ready for them because they want you to prove to them why you need this size line of credit and how you're going to use it really from day one. Well, Heather, I would argue if you even think you might need a line of credit, you should try to close

with an undrawn line of credit just anyway, even if you think you might not use it because it's almost impossible to get later. Yeah, I have a funny story because at Live Oak, that's the way we did it.

You have to have at least a small line of credit, you know, just, you know, with small SBA Express line of credit. And I had one borrower who just didn't want to pay the fee for it. I don't need it. I don't want it. and we said we went close the deal if he wouldn't take the line of credit.

And he closed the deal and, you know, I don't know, sometime in that first year, he started drawing on it and he called me and he goes, oh, you know what, you were right. I did need that line of credits and I'm glad you made me take it. That was the only time I had that happen. There's one other little story I wanted to share before I forget when you talked about food, snack products and, you know, your limited shelf life. I had a client in the snack product business at the beginning of COVID. And that was one of the problems is their clients were hotels and golf courses and everything shut down and they got stuck with inventory that they couldn't sell anywhere because it expired. Oh, huge write down.

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They're great folks and can help you on your journey in producing amazing video content to help meet your business needs and goals. And thanks to them for sponsoring today's episode. So let's also talk, I love how this become like a meta conversation about deal structuring and SBA strategy, which I think is why people listen to this podcast, not explicitly about gift basket businesses. But let's talk about inventory and acquiring inventory. So this listing is price plus inventory. So it has always been one of my pet peeves, this plus inventory pricing, because I always say, well, can I buy the business without the inventory?

And the seller, of course, goes, no, of course not. And I go, so you're saying that the inventory is required for the business to run? Well, yes. And I said, so why is it not included in the purchase price? And then they just sort of stutter and they go around and around. They go, well, that's because of the way it's done. The reason it's done this way is because they're trying to protect the seller, from buying a whole bunch of inventory right at closing

and then giving it all to you for free, right? Because inventory purchasing is lumpy and the seller's trying to protect themselves. The buyer would argue, though, I am also not here to bail you seller out of all of your poor inventory ordering decisions. So I once looked at a business was a Halloween business. They had like half a million dollars of inventory.

But when you got into what the inventory was, like, you know, some of it was, I don't know, Spider-Man or Batman or things that were kind of evergreen. But like at least half of it was like the three years ago meme costume, you know, that like no one was going to get the joke anymore. And like, it's just never going to sell, right? So basically what they were trying to do is sell buyer all of the inventory at par, right, at whatever the price of seller paid for it,

So, thus bailing the seller out of all of this slow-moving or unmovable inventory at par. So you, the buyer, have got to say, I'm not just buying your inventory. I need to go through and see how much of this is really saleable. Because in some cases, like the Halloween costume, some of it is just not saleable at all, and you shouldn't pay anything for that inventory at all. You can say, I don't care, throw it in the dumpster before I buy the business, or I'll take it off your hands, I guess, but I'm not paying a penny for it. Similarly, you'll also see stuff that's really slow.

So, like, maybe they've got two years or three years of inventory, right, on a certain product. You know, that's your buyer, that's your buyer capital tied up for a long time. So a lot of times I'll see buyer's structured deals where, you know, we pay 0% for all inventory with more than two years of turns. We pay 50% of the value on inventory with one to two years of turns and full value for inventory with under a year of turn. So you basically discount the inventory, the slower moving it is. So you, the buyer, aren't just taking on all of sellers' problems, inventory problems. That's really smart. I like that a lot. And we bankers call that inventory that you can't sell obsolete inventory. That's our favorite little word there. Is there inventory obsolescence to make it

even more ridiculous the way we sound? But yeah, I think anything plus inventory, it's, this whole argument of networking capital peg, you know, that everyone sort of fights back and forth about, is the seller going to leave you a reasonable amount of working capital, including inventory in this case, in the business, and only take the excess off the table? That would be the ideal situation. Or are they willing to leave you none and make you pay dollar for dollar for anything that you get? There's two schools of thought on that. But the main thing is, as a buyer, you have to be able to identify that that normalized amount of working capital that you're going to need

at close when you're offering at your LOI stage. Obviously, you're going to refine it better as you go along. But it's a need that I've kind of seen more and more is that folks need some expert guidance and assistance with figuring that out early on in their deal so they don't blow up later. And I'm a big proponent of Q of E providers, and getting you engaged as early as possible

so that you can get that help. So this leads me to, I think, kind of like one of the biggest lies or fabrications or misdirections in small business M&A. And that is the SDE multiple. The SDE multiple, especially when a business is priced with inventory. So you got a plus inventory price, and it's quoted as an SDE multiple.

Let me let the Quietlight guys off the hook. They didn't invent this. Every single broker does this. I've had any good nature. conversations with the guys at Quietlight where I say, can we please do working capital peg? You guys could lead the industry in working capital peg. And they basically said, the industry doesn't understand working capital peg at this scale, which is true. So this is the way it's done, but this is the trap you got to avoid as a buyer. Right. So this business

is doing $2.2 million in income. Let's say it's SDE. Let's say, though, the owner is taken out $250,000. Right? And you, the new acquirer, don't want to work in the business. So to get to EBITDA, you've got to take it from 2.25 to 2 is the real kind of EBIT of it if you don't work in the business. So when you got an SDE multiple, you got to understand that it's actually a much higher multiple if you want to not work as full-time CEO. This is way more pronounced in small businesses. If it's got 500K of SDE and you got to hire a $200,000 CEO, your multiple just went up by 40%. what looks like a 3x multiple is actually a 5x multiple, right, when you take that burden it with that CEO's salary. So that's the one thing.

And then the other thing that pushes the multiple higher is the plus inventory. Right. So if you've got an extra $1.5 million of inventory on this thing, that makes the purchase price not 6.1, but 7.6. From a from a cash on cash return point of view, you are putting $7.6 million into this business of equity and debt that and all 7.4.4. $4.6 million requires a return. If you're going to do an IRR calc, you're going to use 7.6 as the invested capital, which

means the purchase price is way higher than 2.75, right? Because the whole one of a multiple is like how much cash flow comes from how much cash you put in. But in fact, there's less cash flow than you think because of the SDE EBIT dot difference, and there's more

purchase price than you think because of the plus inventory. So the 2.75 multiple is way low. And I bet If you redid it, it was closer to four in this deal. It is three. I just did with your math saying, let's just say that the true EBITDA is $2 million after salary. And you had to pay $7.6. I think you said it comes out to a 3.8 multiple.

Okay. Now it's 3.8 for an Amazon business that's mostly on Amazon. So do you really want to pay that? But my point is even that 1.5 in inventory is really literally just an assumption in the beginning. You don't know that number until way later. indulgence to find out all you need to know about that inventory and what it's really worth and how much you really need. And to your point, then, your cost to carry inventory going forward, you know, that

that whole cost of doing business is also a risk that you have to take on. This one's tough. Yeah. So at 3.8, that feels way too high for a seasonal Amazon business. Starts to feel expensive. Yeah. So I guess my point is you've got to understand what the real multiple you're paying because it's easy to see it marketed at 2.75. And of course, I don't know if there's

$1.5 million of inventory here. I just sort of assumed, I bet it would really depend. It's November as we record this episode. I very much believe there's probably even more than that in inventory right now and probably significantly less by February because hopefully they sell all of it through. Heather, so how have you seen people argue about, I would say, I'm going to ask the question, but I'll make a statement first. Some of the hard One of the hardest sticky wickets to ever navigate is the working capital adjustment in a highly seasonal business during high season. Like that's almost impossible.

Like how do, how do buyers? Have you ever seen anyone do it, Heather? No. It is really, really tough. And lenders don't like it, of course, either. For those reasons, it's like a moving target. We don't know what the true up is going to be. We don't actually even know what the final sources and uses are going to be.

I have a horror story of a business, two businesses merged together. This is years ago that I did. And they were in the seafood industry in two different markets. And there's high seasons of different types of fish and shellfish at different times. And they closed at the absolute worst part of the year. And the inventory was way higher than we expected. And we had to, everything had to go up. The loan amount had to go up.

The equity had to go up. It was not an ideal situation for anybody. So I have seen it done very badly, seen it really kind of cause a lot of problems. I've also seen people try to buy at the low season because at least at the beginning of the low season or somewhere around the beginning of the low season, you know where you stand.

There's less stuff going on, right? We're down to where everything's kind of dormant, I guess, if you will. And that's one way to sort of solve it. However, if you do that as a buyer, you're buying at the slow season. So now you need working capital just to carry you through until the busy season. You're going to have to put more cash on the balance sheet and be very accurate with that

because you're going to be burning cash until the next busy season. So that adds to your cost of your deal as well. So it's super challenging. And you have to kind of know or at least have a good plan on what time of year you want to close this deal if this is a deal you're going to be taking on. Yep. I see highly seasonal businesses are like they're huge magnets for seller financing. It's like almost the only way through, right? Is, you know, you get maybe you can get a bank to finance very limited leverage, but you need a bulk of that kind of huge lump and draw down on

inventory to be seller financed. You know, I've seen sellers carry the whole inventory amount. You know, and so the bank is just lending the purchase price. Cellar carries a whole inventory amount subordinated to the bank and make sure the bank gets paid first, all that stuff. Now, Heather, is it possible? Because what you really need is seasonal business, right? You have the long-term business acquisition loan, be a 10-year SBA loan, hopefully. And then what you really need is you really need to close with like a fully drawn line of credit, right, that will get paid in a Christmas seasonal business like this one. You know, if you're going to close November 1st, right, you've got a ton of inventory,

but you're about to generate a ton of cash that should be able to, to pay down a fair bit of that note within a couple months. You know, before again, that line of credit is redrawn next October, right, and paid down. Have you ever seen anybody close with some sort of short-term, long-term type debt structure where most of it is the SBA loan? And then, you know, a decent chunk is a fully drawn line of credit at close that must be paid down in six months? I mean, what you're describing makes sense.

I have never seen a lender be comfortable with that, though. I think maybe a little more upmarket where things are, you know, they've got better systems and more sophistication, more capital. They might do something like that. But down here, you know, in the small end of the market, the lenders are pretty conservative about doing something that cute, if you will, right? They're just worried about any kind of drawn line at close. They'd rather give you a line that's undrawn at close and then you start to draw it up

as you need it. So closing in the high season, I just don't see how you do it. That's really hard. Yeah. I guess it kind of also comes back to, at least in my experience with lenders, they really don't want to do anything that could create a default quickly, right? So something like that, you close a business and then you put a six-month fuse on it where that line of credit has to be paid down.

Like, I think the worst thing a lender could do is originate a loan, and then it's in default six months later because you don't pay down your line. I can't even emphasize enough how scary that is for most lenders that that could ever happen to them, that their name would be on a deal that went south that fast. it is not what they ever want to have happen. So yeah, they're going to be super cautious. Yeah. Yeah.

So this is like the thing you also got to understand as a borrower that I have seen oftentimes. If you don't have, like the people who lend you money are taking reputational risk, career risk inside of their bank by doing your deal. In order to get your deal over the finish line, they are going to have to go to investment committee and pound the table and say, bill is a good credit risk. And I believe in this business and let's do it. And then if you default, it's going to come back probably not just financially on that person in their bonus, but also reputationally because they go, oh, remember that stupid loan he made

to bill on that e-commerce business and went sour in nine months, right? Maybe we don't believe him next time. So that is the importance of finding the right banker who gets your story and will sell it. And if you have a banker that doesn't want your credit, you're not going to get anywhere. you know, like that, like you'll feel it sometimes. You'll be like, this bank should want my credit. I don't get it. And it could just be that the loan officer you've got is not into it. And he's not willing to put his chips in the pot for your deal. Because for whatever reason, doesn't like your industry, your face or whatever.

Yeah. Or he just doesn't have credibility built up in his institution. You know, a younger banker, or had they just moved and that bank doesn't really know them that well yet. You may have a great deal. You go to that guy and he can't get it done because the, And he's still kind of looking at him with the side eye, like, hmm, I don't know about this one. You know, so they have to have some credibility built up, and then they have to try to keep it by doing good deals. So very, very good point.

I found that I've had the most success getting deals done when I realize that it's not me that's got to sell the underwriting committee. It's my relationship manager at the bank, right? And so I'll put together like a pitch. And it's like, all right, man, I'm going to coach you, like, how to sell this to your underwriting guy. Here's why it's a good deal. Here's a whole bunch of backup.

Here's even some slides you can share if you want. When you equip that person to walk into underwriting and sell your deal, you're going to have a way better chance. Totally. Yeah, and I love that. Even do some role playing and have them tell you what does your, what do the people on the investment committee usually, what are they like?

What kinds of questions do they ask so that you prepare them with those answers? That's a great way to go. And you're right. It's how well they can. articulate your story to their team. That's the difference. Yep. I also will sometimes ask the lender, and just for clarity, usually like the relationship person, and then there's the underwriting team. The underwriting team is like the man behind the curtain who you never get to meet, who ultimately controls your fate. The person that you're emailing with as the borrower is the

relationship manager. I will often say to relationship manager, has your bank done any, like, what is your bank like? And they might say, we really like, inventory heavy businesses or we really like Shopify based businesses and we hate Amazon businesses. And then you can help him to position your story in a way that his underwriting guys are going to like it. You can also ask him like, what don't you guys do? Like, where have you lost a lot of money? Like, what is the underwriting committee's particularly sensitive to? And he'll know because he pitches the underwriting committee all day long every day because that's his job. So then to help him tell you how to spin your story. And then you give

it right back to him to take into that investment committee meeting. Right. And if they tell you they don't like your industry or something about your deal, don't try to push that rock up the hill. It's not working. It's never going to work. Which is the benefit to working with a broker rather than just one bank. Because if you work with one bank and you find out they're not into your thing,

now you're back to ground zero. You start with another bank. You find out they're not into your thing. But you go to a broker and they can go, okay, I know what your thing is. I know these four banks are really into your thing. Let's get them to compete and get a couple turn sheets and figure out what works. So there's a ton of value in going through a broker rather than just trying to go to that one bank that you heard did a deal for your friend's business.

Yeah, and there's a lot of nuance. So the bankers will tell you, oh, here's our DSCR limit and how much percentage down. But it's really all the other questions that we learn to ask to fit a particular deal with a particular bank that we know will like it. It's a lot of nuance and very hard for just an individual buyer to figure that out on their own. And they can waste a lot of time, you know, finding out banks don't like something. Gift baskets here. So what do you think about this gift basket thing here, Bill? Do you like this deal? So the things that, I mean, the multiple's nice. I don't love that it's all Amazon. I like the size. I like that, believe or not, I like they got 58,000 square feet and

25 employees because that's a moat. You know, like your Chinese competitors are not doing that, you know, and kidding all that stuff and sending it to Amazon. Like your guy who just took a How to Get Rich on Amazon course is not doing that. You know, there's probably a moat there. So I actually do like that. It's a little bit of a pain and you probably need to live near it and go supervise these people, but it's differentiated.

I really don't like that it's seasonal. It's just so hard. I mean, besides the deal structuring, like your life is always going to be hard. all year, every year. And then, like, if the economy hiccups in November one year and you have a bad Christmas, you just lost a whole year. It just, it stresses me out. It stresses me out a little bit that it's, I think we've done prior episodes on what I call kit businesses. You know, like, if they're basically buying, like, a bunch of Hershey bars and Kit Kat bars and whatever and then putting them in chocolate gift baskets, anybody, like, there's very little enterprise value there. Like, that can be

really hard unless there's, like, some kind of special processing that you're doing that other people don't want to do. So I worry a little bit this might be a kit business, which I don't love. And I also wonder why they haven't been able to grow outside of Amazon. I mean, it's still 94% Amazon, which makes me a little nervous, especially if it's a kit business, and you don't have some like real moat in that 58,000 square feet and 25 people. So those are those other places I'd be digging in on diligence. Yeah. Yeah. And I'm with you. I don't like the seasonality. I think the seasonality and the inventory, the nature of the inventory make this almost impossible to finance, even though it says SBA prequel, which proves my point that probably nobody at the bank

really looked at this when they pre-polled. Because they give it a little bit of thought that this is not an easy deal to get financed at all, probably, probably every bank that I know of says no to something like this unless somebody comes along with just a lot of capital and a lot of collateral. So I think it's a tough one. Because SBA pre-call really means we've read the SBA regs and this business is not prohibited, right? Like it's not a firearms business or a pornography business or it's not, you know, there's a whole bunch of things that disqualify business. But oh, so it's pre-qualified.

So it's not explicitly disqualified. It's pre-qualified. Here we go. Pretty much. That is it. Yeah, that's right. So it's not meaningful. Yeah, tough one, but interesting discussion.

Cool. Yeah, that one was good. And I love how this kind of turned into SBA deal structuring 101. Yeah, I like that too. All right, well, that's how we'll title it then. Okay, good. All right. Well, good talking to you, Bill.

All right. I hope you guys enjoyed this episode. We'll see you next time.