Acquisitions Anonymous - #1 for business buying, selling and operating - SBA Loan Secrets with Heather Endresen - Acquisitions Anonymous e75

Episode Date: March 8, 2022

If you liked this episode, subscribe to our weekly newsletter and receive new episodes, offers and learnings directly to your inbox every week:https://landing-newsletter.acquanon.com/----Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA) and Mills Snell (@thegeneralmills) are joined once again by Heather Endresen (@EndresenHeather) for a special episode on SBA lending and borrowing. We talk about SBA generals, lending, borrowing, best practices, advantages, minimum requirements, and much more.-----Show Notes:(0:00) Morenow.co - Hire Competent Professionals at a Discount(1:47) Intro(2:25) Heather's background & her work at Live Oak Bank(3:53) Who is the SBA and what is SBA borrowing? Advantages of SBA Loans(5:41) SBA Lenders fall into 2 categories: Cash flow lender or collateral lender(6:46) When do I need an SBA Loan?(7:34) How to differentiate a cashflow vs a collateral lender?(9:57) What is going to happen to your personal collateral when taking an SBA Loan as a borrower?(10:31) SBA has black and white rules around collateral(11:32) Refinancing your mortgage while having an SBA loan.(14:10) Advice for borrowers that look for loan exploits(16:20) Is it possible to be disqualified due to the personal wealth level?(17:58) Anyone who is going to be a personal guaranteur needs to fit the qualifications(21:22) Removing the personal guarantee in the SBA: Shorter amortizations, flexibility & covenants.(22:57) Minimum requirements and borrowing limits(25:36) What is the typical order of the process and what are the best practices?(28:36) Are there businesses that are SBA no go's?(32:02) Which businesses are people running towards? Which ones should they be running towards?(33:43) How has COVID affected your ability to underwrite deals?(36:20) What does it mean to do a QAV?(38:42) How to check your Bank for SBA Lending?(40:06) Bank service importance(44:07) Growing by acquisition: If you pursue a second loan in the same industry there is a 100% leverage opportunity(48:00) Further recommendations for borrowers(51:04) Common traits in successful and unsuccessful deals?(52:47) Things that third party investors need to be mindful of if the entrepreneur is using an SBA(54:46) What are the considerations for the seller in a seller financing situation?(57:15) Fixed vs floating interest rates(58:24) Enterprise value minimum-----Thanks to our sponsors!MoreNow.co: We help owners build a high functioning, experienced team by leveraging the top manager/director talent in the Phillippines. Go to morenow.co and fill out the form. Or email [e-mail]. Mention this pod for 20% of your first hire.-----Additional episodes you might enjoy:#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]

Hey, everybody, Michael here. I want to talk to you a bit about one of our very welcome sponsors for today's episode. It's the folks at Moore Staffing, specifically Greg and his team over there have been a great friend of the podcast. And what more helps people do, and you can find them at more now.com on the internet, what they help small business owners do kind of goes above and beyond what you're seeing other folks doing in helping small business owners like you build overseas teams, specifically. in the Philippines. And what they do is they're helping, helping you find not only the people that are basic individual contributors and oftentimes virtual assistance and that sort of thing

overseas, but going above and beyond that and helping small businesses really upskill and hire strong competency and experience, you know, at a discount overseas. So a lot of that is hiring director and manager level folks, people that can, you know, really meet the needs of what you need in terms of running a complex business with complex needs and stuff like that. So a lot of these folks are very experienced, have been in an industry for a long time. So in the end, make your life a lot easier by hiring great people and experienced people in that way. So given what's going on with COVID and remote work becoming more normalized and more things getting pushed into different corners of the globe, more has turned into a great

resource for a number of folks. I know a number of listeners of our podcast have signed up as customers there. And we're grateful to Greg and his team. You can find them at more now.com. Take a look there. tell them we sent you. And if you're starting to build not only a basic fundamental level of team overseas, but you want to bring on people who are more experienced as well, this is a great resource to go check out and definitely friends of the pod. So thanks to them and check them out. MoreNow.com.

All right, welcome to Acquisitions Anonymous, the internet's number one podcast about small business M&A. There's reasons we're number one. The biggest reason is we're the only one, but we enjoy it a ton. I am here today with my co-host, Bill DeLessandro, and we have a special guest because today's episode is all about SBA borrowing and lending. And we have Heather Anderson, who, by the way, is one of our most popular guests so far.

Heather, I think your episode got more feedback than I've gotten on any other episode. So we're excited to have you come back today and help us go through this SBA journey. Just quick about Heather, she runs search fund lending. She's a director there at Live Oak Bank, which is a very big SBA lending bank. And they really focus on acquisition financing. And she's been, well, the bank has been evolved in lending for over 30 years around SBA. So they have a ton of experience. And today we're just going to really dive into SBA lending and borrowing and how it can help you unlock and go buy the right business for you.

So Heather, thanks for being here today. Thank you for having me. I'm excited. Cool. Do you want to take a quick second and tell everybody how you got to where you are today and what you do every day? Yeah, absolutely. So I have been in banking over 30 years. I started out as an SBA underwriter and ended up managing SBA departments for a variety of banks for most of my career.

About 11 years ago, I met up with my business partner Lisa Forrest, and we decided to differentiate ourselves among SBA lenders and only focus on acquisition lending. And around that time is when we discovered the search fund model. We embraced it. Three banks later from that time, we came to Live Oak about five years ago and started up the search fund lending vertical. And Live Oak is the number one SBA lender in the country, and we do it by verticalization. So each team, you know, either focuses on an industry or something very specific and niche that's very specific.

And our team focuses on search funds. That's awesome. Okay. Well, so let's start maybe with the basics. who is the SBA and like what is SBA borrowing? Like if I go get an SBA loan, who is the SBA and then what do I, what do I need an SBA loan for? Yeah, so you just want to think of the SBA is a government agency that sits behind a bank and provides a percentage guarantee to the loans that the bank makes within their program.

So usually it's 75% guaranteed. So it means that there's a lot less risk when the bank uses the SBA to guarantee a portion of the loan. But then we have to follow all their rules. So the SBA has a couple of different programs. You know, it very simply, it's either the 7A program where you could use it for a lot of different things, business acquisition, working capital and real estate. And then it also has the 504 program where you can really only use it for real estate, owner occupied real estate. I should say commercial owner occupied real estate and sometimes equipment with long, useful life. But generally speaking, think of 504 for fixed rate, commercial real estate, 7A, kind of for everything else.

Got it. So if I want to go, say, there's an owner retiring of an HVAC business or an agency or a janitorial services business, and I want to go buy that business at some multiple of earnings, and I don't have a ton of assets to back it, right? Because I'm potentially not a bankable person early in my career. The SBA loan is kind of what I go after. Is that the target market for it, or is it broader than what I just described? It's broader than that, but certainly that is a hot spot within the SBA world right now because there are so many companies that are transitioning and buyers that need leverage. So the way to think of the advantage of the SBA loan there is that you're going to get more leverage than you would with a conventional loan, you know, so definitely more leverage.

You're going to be required to present less collateral. And I do want to touch on that for a second because when you talk to SBA lenders, you're going to find that they fall into one of two categories in terms of their credit appetite. And that is they're either a cash flow lender or they're a collateral lender. So a cash flow lender is not concerned about collateral. They're concerned about the deal structure, the cash flow coverage historically, just the quality and the durability of the earnings of the company, you know, all of those types of risks they're going to underwrite really hard.

An asset or a collateral lender is an SBA bank that's doing primarily real estate loans. and anytime they try to do something outside of real estate, the first question they'm going to ask you is, what kind of collateral do you have, how much equities in your house? If you're doing a leverage buyout of a small company, you do not want to go with a collateral lender. It's just not going to work.

You're never going to have enough, or almost never going to have enough collateral to satisfy them. And they're going to perceive the risk completely differently. And they're going to underwrite it completely differently because they're thinking collateral. What if this goes bad? What do I liquidate? So a cash flow lender is where you want to be

when you're doing those leverage bios. But in general, what you're asking is, you know, when do I need an SBA loan versus not? The simple answer is if you're a company or you're buying a company with less than 1.75 million of EBITDA. Almost every company under that size is going to very likely rely on SBA funding. There are not a lot of conventional programs out there

for small companies outside of SBA. So, Heather, I want to dig on in this collateral lender versus cash flow lender distinction because in my experience, I'm, by the way, a veteran of four SBA loans and love the program and built my company on the back of SBA loans. So love the program, have borrowed from a bunch of banks and have not had the pleasure of borrowing from Live Oak, although I regret that because I've heard nothing of my great things. My experience has been many, many, and I don't want to say every, but almost every bank will tell you they are a cash flow lender and then dig in super, super, super, hard.

on the collateral. So how can you tell the difference between a bank that tells you there a cash flow lender and is actually just relying on the SBA backstop to get them there in collateral versus a lender who is actually full of it and just cares about your business assets? I think that is a great question because I'm going to answer it a couple of different ways. First of all, the practice of just kind of reeling you in with telling you what you want to hear is unfortunately very common in the SBA industry because most, almost, almost all SBA lenders are on commission. They're commission salespeople.

They're competing even internally with each other for the SBA, you know, numbers that they're supposed to produce. And a lot of them, unfortunately, have a tendency to tell you what you want to hear, get it in the pipeline, and then let credit tell you the bad news, you know. So that happens a lot. A lot, a lot. And I will say this as a little plug for Live Oak. Live Oak is different because we're the only, and we're the number one.

We're the only bank in the business that doesn't pay anybody commission. That's not how anybody's compensated in the bank. We're compensated well, but we are not on commission and it does affect behavior. We don't want to waste our time. We don't want to waste your time. So that's important. You kind of have to feel that out. Is this a salesperson that just wants to get me into the pipeline or are they telling me

the truth, the hard truth? So how do you tell? Well, if I don't want to waste your time or mine, I'm going to ask you a lot of questions before I say yes, yes, yes, right? I'm going to do a lot of vetting of that deal with you to make sure it's going to fit my credit guidelines. If I'm a cash flow lender, I need all that information because if we're underwriting cash flow, we need to know everything about that business. We need to know, you know, about concentrations.

We need to know a lot to be comfortable without collateral. If I go kind of light touch, that's the kind of a sign that I may be just a collateral lender. I'm looking for just, does it get, you know, do I make the debt coverage work? And then let's start talking about collateral. And that's kind of how a collateral lender will tend to underwrite, real light touch on the business and then a deeper dive on the collateral than they're comfortable. So I think that's maybe the best way to tell. While we're on the topic of collateral, should we talk about kind of what's going to happen to your personal collateral when you take an SBA loan as a borrower? So people can kind of understand what's market, what do banks have to do?

Do some banks do they don't have to do? You know, what should you expect from a collateral perspective? How do banks, even though your cash flow lender, you're going to think about collateral and you're going to try to perfect your collateral and the SBA requires you to do some things? So just can you share with people what's going to happen on the collateral side even when using a cash flow lender? Absolutely. So the SBA has some black and white rules around collateral. So whether, even for a cash flow lender like us where we don't care if you have the collateral,

we still have to follow those rules. So every bank will have to follow the same rules that I'm going to say right now. So that is anyone with 20% or greater economic benefit from the business, that's ownership or other type of economic benefit, must provide a personal guarantee. It's a full personal guarantee. It's not limited, even if there are multiple partners. Everyone's providing a full personal guarantee. It doesn't have a burn off or anything like that.

And for each of those personal guarantors, we're required to look at your personal financial statement to see if there's any real estate that has at least 25% or more equity. Now, this has got to be real estate that you own yourself or you own with a spouse. If you're in a partnership on some other investment property, we can't use that. But usually it's your house, right? So if it's got 25% or more equity, you're going to have to pledge it. The bank is going to take a junior lien. And what happens?

Okay, so now you've got the SBA loan in place. We've got this junior lien and you want to go refinance your mortgage. technically we will allow you to do that and what we have to do is remove our lien let the new mortgage lender record theirs and then we put ours back on some mortgage lenders don't even like the fact that we put it back on later so that can sometimes be a problem for them and if you sell the house if you're not if you're going to take the cash out well you're going to actually have to use that cash to pay down the SBA loan at that point if you're going to move the equity to another property we will move our lien along with you, and that's really the easiest way to go. But if you were going to sell the

house and use the cash for something else, you would actually have to use that cash to pay down the SBA lot at that point. So that is really important to know for people going into an SBA loan. Question, Heather, you said that they have to have at least 25% equity in the home. If they do not have 25% equity in the home, they will still do a blanket personal guarantee, but you won't take a second lien on the home. Is that correct? Right. And that's where the, being a cash flow lender matters. So we lend a lot of times to folks who do not have that equity, don't have a house at all, and it doesn't change our decision. But an asset lender, it would. They look at that and say, well, now maybe this loan doesn't look so good anymore because you don't have that equity.

But, yeah, the SBA says it's not a condition of the loan that you have to have this equity. It's just that if you have it, you can't leave it on the table. That's kind of the way to think of their rule. Gotcha. I have heard from some borrowers, because it's so, difficult to refinance your mortgage once you have an SBA second lien in place. I've heard people do two things. One, refinance your mortgage before you get an SBA loan is definitely the easier thing to do. The other thing I've heard people do is to get a home equity line of credit put in place on their house, which is basically a second mortgage, but not drawn. And that the balance of the HELOC can take you below 25%, thus avoiding the SBA lien. And then you can close the HELOC after

originating your SBA loan. Is that really frowned upon? Is that not officially endorsed, but might work? It's not officially endorsed. Let's put it that way, but you are correct. Anything that if you come to the bank and you're leveraged 75% or greater on your real estate, whatever it may be, then the lender's not required to take a lien on it. Now, you can't come and apply and then go get the home equity loan.

So you know, take that for what it's worth. But if you're leveraged over 75% when you apply, it's not required. It is a pattern I've recognized in life, and you've been in banking for 30 years. But whenever I've tried to borrow money or seen somebody else borrow money and they had to go through like crazy hoops to get it done or to comply with rules like that, stuff like that always puts off my like, oh shit, like I'm going to regret this alarm. So I don't know. I mean, what's your take on people? hear stories about this all the time about people like, well, okay, I'm doing this crazy thing to get 110% and we're going to exploit this loophole. Like, what's your advice for borrowers that start doing that kind of stuff?

Like, no offense, Bill, like this HELOC thing sounds to me like something like it violates not the letter of the law, but kind of the spirit of what they're trying to get out. So what advice do you have for people around that? And am I crazy? Should I just be more aggressive? No, I mean, this is easy for me to say. But if you're very confident in the cash flow coverage that you're going in with and you're very confident in the business, it's less scary, obviously, to have to pledge that real estate. On the other hand, I will say this as well.

If I was to borrow as an SBA borrower buying a company, I would rather be early in my career where I don't have the real estate yet. And so a lot of our borrowers are those search funds who haven't bought a house yet. And sometimes they're waiting to buy the house until they buy the business and find out where they want to live. Great. You know, that's a perfect time to get into an SBA loan. You have much less to lose if things don't go well than someone who has a million dollars of equity in their house is maybe a little bit later stage in life. So they have to take, you know, that personal guarantee quite a bit more seriously. You have to take it seriously either way. But I think it's just all a matter of

what risks you're comfortable to taking. And I think that's also where underwriting, in my experience, really matters. So if you have a bank that really kicks the tires hard, that's going to be a cash flow lender again. That should give you some assurance because we look at a lot of deals and our whole business is about not having loans go bad. So if you kind of work with a cash flow lender, there's an extra layer of comfort. Maybe that should give you that you're getting into a situation that has a very low risk of default. Heather, you mentioned people who might be further in their careers. Is there a point at which, you know, maybe a level of personal wealth or sophistication at some point you are no longer eligible or SBA loan does not make sense or can anybody get an SBA loan?

Well, there is a wealth level that makes you ineligible. Not many people know about this one and doesn't come up very often. But if you have personally, if you're that 20% or more owner that's going to have to have the personal guarantee and you have more than 1x the project cost of whatever you're borrowing for, in personal liquidity, you're ineligible, unless you use some of that, you know, reduce the liquidity and kind of balance it out. But if you have, you know, you're looking at an acquisition where the total project cost is $3.5 million and you have $4 million personal liquidity, not counting retirement funds, qualified plan funds, then you're not eligible. So can you define personal liquidity? Would that include public market stocks or is it just cash

on hand. It would be public stocks, cash on hand, everything except for qualified plan. Okay. So basically, if it can be liquidated, it counts. Yeah, exactly. Do privately held equities count towards that? Or no? They don't. Yeah. Okay. Just check it for a friend. That's right. Yeah. So basically, cash and public equities count. And if you have more than, if you could buy the business, by selling all those things, the SBA, will not loan you the project cost. More than that is too much. That makes you ineligible. That's helpful. I have seen people get disqualified from SBA loans, not because they tripped the threshold, but because they had an investor who was going to be over 20 percent who tripped

the threshold. And then they were unable to use SBA for that project. That's correct. So anyone who's going to be a personal guarantor is subject to that one X rule, individually, each individual personal guarantor. So if you're going to trip that, you've got to keep them below 20%. That's right. So, Heather, you mentioned you guys do, in your group at LIBOC, you just do search funders, which is great. What are the other verticals that Live Oak operates in in terms of their underwriting for SBA lending? So we have over 35 industry verticals. I won't even be able to remember them all, but there are, you know, some typical things. We have a service contractor vertical where all the HVAC deals go. We have wireless internet service providers. We have, I can't even remember all of them.

Government contracting, that's a big one for us. Senior care, home care. It goes on and on. So we've got also a generalist vertical where they kind of do everything else. And then my team is just acquisitions, mainly search funds, but we do also work with a few, you know, independent sponsor models and a few small private equity deals will do those as well. Right on. And then so what, you know, are there other limitations as let's say I'm a business buyer? What other kind of barriers on, you mentioned $1.75 million in EBIDA, $10 million, I think total loan size or is it $7 million? What are kind of the numbers or the pocket that, you know, good deals for SBA fit into? How do I kind of quantify that as I'm looking at something to buy?

So the SBA's limit is $5 million. And most banks will stop there. But Live Oak has a companion loan program. So we'll add on an additional conventional loan of up to another three. So you could have a total package of $8 million in debt for an otherwise SBA deal. That's about as far as anyone will go is five plus three. And 1.75 EBITDA is our limitation for conventional. So everything over one, you have to be at least.

$1.75 million EBITDA to get a conventional loan. And I think this is a good topic to think about here. So a lot of folks go in, they acquire a loan, a business with an SBA loan. They're giving the personal guarantee. They may or may not be pledging collateral with that personal guarantee. And they're thinking, you know, when can I refinance into conventional? How long should I think of, you know, that I need to have these personal guarantees hanging out here? Really, the simplest answer is at least close to two years, because no one's going to want to refinance you out of an SBA loan when it's kind of less than two years of your own ownership. So about two years and 1.75 million EBITDA is the answer. You've got to be able to grow to that

point. Occasionally, you'll see a bank refinance out of SBA into conventional when the EBITDA is smaller than that, but they'll keep a personal guarantee in place. So there may not be as much advantage to doing it at that point. But that's really the next step to kind of graduate up and out of SBA and personal guarantees is to hit $1.75 million and at least two years since your acquisition. And I assume at that point your terms are going to get worse, right, by removing the personal guarantee and the SBA guarantee? Right. So the trade-off is when you go to conventional, you're talking maximum seven-year amortization. Many banks will do five. So shorter amortization and then covenants. So when you're when you have an SBA loan, the beauty of it is if you had to shrink the EBITDA after

you bought it to make some investments so that you could grow, great. As long as you're making the payments, the bank is not going to have anything to say about that. When you're in a conventional loan, that's not the case. Now you have covenants. Now you have a fixed charge covenant. Now you have a total leverage covenant. You might even have a liquidity covenant. So now you're operating within the lane that the bank has set for you and it might make some of those investments a little bit more difficult for you. So just so I'm on the right page, so conventional is a loan that the bank is making and that's on their books or maybe if it gets bigger, they might syndicate it to other people.

But that's what when you're saying conventional, that's what that is. And that can be conventional with or without a personal guarantee or with or without collateral, depending upon how the bank wants to underwrite it. Is that, do I understand that right? Right. And basically, anything that's not an SBA loan, I refer to it as a conventional, which just doesn't have that government guarantee. So the bank is doing it at their own risk.

Got it. And then in terms of like, so I'm just kind of doing the math in my head, right? Like I can borrow up to $5 million with an SBA loan. EBTA kind of tops out at $1.75 million. Above that, it's not really qualified anymore. So, you know, what kind of, what kind of way should I think about, okay, if I'm putting together the capital stack for, let's say, a deal, I'm going to pay $5 million for a business that earns a million dollars a

year or so five times, five times sellers earnings. You know, how does that cap stock kind of set up? Like, so typically how much of the total amount would I be able to borrow, you know, and that sort of thing. And I know the numbers are all over the place, but just a rough kind of idea of how somebody thinks about financing a deal will be helpful. We have a good rule of thumb for that. So first off, the SBA requires at least 10% down. You've got to have, you've got to come in with at least 10% equity. That does not have to all come from you. It could come from you and your investors. and most of the deals we do, it comes mostly from the investors. So that's perfectly fine.

And they don't have to own a percentage of the business that's in proportion to the amount of the equity that they put in. So you're going to structure that a little bit, however, makes sense, however you can negotiate it with your investors. Then outside of that, how much can you borrow? It's really a function of turns of EBITDA. At least that's how we think of it in the conventional side. And it kind of applies to the SBA side too.

So on an SBA deal, you can borrow for the SBA portion about four and a quarter turns of EBITDA. So if you had a million dollars of EBITDA, you could borrow about $4,0250. That's about what would work. Now, you can test it out. The way most lenders are really going to figure out whether they'll lend $4,0250 in that case, is through their own debt coverage model. And they're going to be trying to hit 1.25 or 1.5, whatever they're in turn. guidelines require, and they're going to make sure that it works. But for a 10-year loan,

it generally will shake out to about four-and-a-quarter turns of EBITOF for the senior debt, for the SBA debt. You add on the seller note, it'll take you to about five. As long as your seller note is at least five-year amortization or longer. So to really know the exact number, we'll run through a model and make sure we get to for us, 1.5. And again, we're a cash flow lender, So that's another way to tell back to you, Bill, on how do you tell if your asset lenders, collateral lenders, they like skinnier cash flow coverage. They'll say, oh, yeah, we'll get you in at 1.2, 1.25. You know why?

Because if you go, the loan goes bad, there you have collateral. Right. When you're a cash flow lender, you're not going to do that. We're going to, we're going to be at 1.5 because we want the chance of you ever going bad as a loan to be very, very low. So we're underwriting to 1.5. debt coverage. Super cool. So maybe switching gears a little bit. I'd love to dig into, so I'm somebody going out to buy a business. I'm a search funder or self-funded search or any of

those kind of things or just an entrepreneur. Like I walk me through the flow, right? So I find a business that I want to buy first or do I talk to a lender first? What do you recommend in terms of the flow there? And then if it's not then, when do I get involved with a lender to start to underwrite the bank? Is it after I sign an LOI to buy the business? Is it before? You know, what are the best practices there? And what is the typical flow that you're seeing? So we think the best practices get to know the lender first when you start your search

because you've got to figure out which lender is going to be right for the deal. And the first thing you're trying to figure out is which one is a cash flow lender. Maybe you're looking at a particular industry. Does that, you know, you want to find a lender that likes that industry or even has expertise in that industry. So I'd say, talk to the lender first. We have a very specific program we put everybody through when they start their search. We have weekly Zoom calls.

We do all the FAQs. And we actually provide all of our searchers with a model so they can actually do the debt coverage and see if a deal will work. A deal teaser example. And we give them a M&A questionnaire that we've developed over our last 12 years of doing these kinds of deals. We update it all the time with kind of new things that we've learned. And so it'll give you really the question.

qualitative side in a questionnaire and the quantitative side in a model so you can become pretty efficient at knowing what the bank will and won't do. I think that's the best way because then you're not going to waste time trying to negotiate an LOI that you find out isn't really bankable or is really tough to bank. So I'd say always start early, make sure you get a complete understanding of what that lender's guidelines are. And then the next step is pre-screen pre-LO deals. So if you wait until you have an LOI, you're still kind of in the dark about what the bank's credit appetite is. So our method is we give you those tools

to make it more efficient for us and for you, and we ask you to prescreen LOI deals with it, pre-LOI deals with us. So we can give you that feedback. And you do that a few times. You get pretty good at understanding at least what we like, you know? So now you have a clearer view on what's bankable,

what's financeable and what the terms will look like. Then from there, you know, now you get a signed LOI and you have a relationship. You not only, you know, could anticipate how to structure it in a way that the bank would approve, but you also have a relationship with your banker. And that is needed, really, because the next 90 days after an LOI, you got a lot to do, a lot, you know. And so you want to be able to focus on your diligence and, you know, have really good smooth communication back with your banker so that everyone's on the same page. And if you just met your banker at the time of the LOI, I think that's a lot more difficult than if you develop the relationship early. Are there other kinds of businesses that are just kind of an SBA no-go, even if financially it pencils, you know, are there certain characteristics where people have just, you got to deny them because it's either incompatible with SBA or it's not financeable for non-purely income statement, cash flow statement reasons?

Like, what are reasons people don't get SBA loans done even if it kind of pencils on the financial statements? Yeah, so first of all, when you say pencils, it means something very specific to SBA banks. It has historical debt coverage. So it's not projection-based. So there's almost no SBA lender out there that will do something that's projection-based. You know, you couldn't have paid the debt when we look back, but it could because we're going to make all these improvements. Almost nobody will lend that way. So that's what we mean by pencil.

Then outside of that, there are, you know, there are some SBA. ineligible businesses like non-profits or not eligible or, you know, anything involved in gambling if they have too much of their proceeds from things like that, stuff that you would probably think you wouldn't probably be looking to buy. Then it really gets down to the preferences of each individual bank. So, for example, we have stayed away from car washes and gas stations. We're sort of thinking about car washes differently now that they sort of have subscription models and more of them are reporting their earnings. But by businesses that just, you know, have a lot of cash.

And the other thing that turns a bank off from an industry or a deal is battle scars. So frankly, every bank has battle scars, deals that went bad in certain industries. And you'll find that that bank won't lend in that industry again. You know, the word internally is don't do any more deals that look like that. Even though there might have been something very specific with the one that went bad and that's not really the same characteristic of the one you have, it doesn't matter. That's the way big, that's the way credit minds kind of think. You know, if we got burned on something, we're going to stay away from that for a good long while. So that's another reason why you kind of have to get to know your banker because that's not something that's

stated in a credit policy. You know, that's something you kind of get to know by talking through deals. I ran into this with e-commerce a couple times because some banks have gotten smoked on e-commerce and don't want any more of that. However, some banks have made. tons of money in e-commerce and love that. So it's amazing you can take the same industry and some banks will love it and some banks will hate it and it will totally color the entire underwriting process. Totally. And sometimes like we will, we hate certain types of e-commerce and we love others. So we will give you like certain characteristics if it's, you know, not Amazon, if it's, you know, D to C or D to B, whatever, you know, and has certain characteristics.

then we're okay with that kind of e-commerce, but we're not okay with others. And, of course, the Facebook changes have made e-commerce even more challenging lately. But yeah, you can go from one bank to the next and find that one bank loves landscaping. And another bank had a bad landscaping deal and doesn't like it at all.

And again, it won't be stated in the policy. And you need a good lender because sometimes the less experienced lenders, they don't even know that internal knowledge until they bring a deal in that's in that industry and then they find out that it's not wanted. Do you ever look up and given you have a perspective on so many deals happening on Main Street businesses

in the market right now and be like, oh, people should be buying X and they're all trying to buy Y? And if so, what is it? Oh, boy, I see a lot. It's a very fun job, I will tell you, because we see what everybody's running towards or running away from or not noticing. definitely. So what, gosh, I can, off the top of my head, I can tell you what a lot of people are

running toward right now, and that's med spas. That's the hot one. Everyone's really interested in that space. And I think, frankly, COVID changed a lot of people's perceptions because it did really well. Once, you know, the clinics could be opened up. They, they're booming. So that's one that everyone's running towards the HVAC, I don't know if I would be jumping in on that right now because there's some institutional capital going towards it. So like my rule of them, if I were to give advice is what makes the small business space so attractive from an acquisition perspective is the lack of institutional capital. If institutional capital comes, they're going to drive up prices and it's not going to be the same value. So they're doing that in the HVAC, not maybe not as wide a

scale as they could or maybe they eventually will. But when you see that start to happen, they're cherry picking some deals and I wouldn't want to compete with them. There's so many other industries and businesses where you don't have to compete with institutional capital and still get a three to four multiple and have tons of upside. That's that's kind of where I'd focus in those little niches that nobody has really totally noticed yet. Yeah. Well, and then how how has COVID and the COVID bump affected your ability to underwrite deals. Because I'm, you know, I was talking to a buddy I'm working with on a deal today. And I was like, the first thing we got to figure out on this is, is this really sustainable?

Because they're EBITDA doubled in 24 months. Like, is this going to continue? And now they're wanting us to pay multiple of that. Like, so how has that affected your ability to underwrite, do loans? And then also, like, are people staying sane in that environment? Like, are they figuring it out as buyers? or is the mania kind of catching them?

Yeah, it's interesting because there's a few things we try to do. We obviously just dig really deep on anything that had either a headwind or a tailwind. And now the further we get away from COVID and COVID-type restrictions, the more we're able to see what normalized cash flow might be.

So it's getting easier. You know, it was certainly a lot tougher even a few months ago than it is today. So, you know, we try to underwrite to a TTM if we can. where there's some normalization occurring rather than the old school where it's one tax year to the next and we just line three years up and see how the trend looks. Well, that's not really going to tell us much today. Right. So we have to understand what were the reasons behind the headwind or the tailwind

and where do we stand with that today and really try to do a TTM underwriting. If we're underwriting to TTM, then we should have a quality of earnings. That's one thing people maybe need to connect. So old pre-COVID SBA underwriting was tax returns and maybe an interim. And we never could, we never verified the interim, but we did verify the tax returns with IRS. So now if we're doing TTM, how do we know that the TTM is right? Well, we should have a Q of E, a third party, you know, come in and and give us, you know, some assurance that that's right. So that's kind of my advice. And honestly, I will say about quality of earnings when I guess maybe.

years ago or more, there were very few providers that would do a limited scope Q of E for these small deals. So almost nobody even knew what they were. I would say even bankers didn't know what they were. They were only being done by private equity that could spend $35,000 and up. And so now you've got at least five good providers that will do good work, limited scope, costing you about $12,000 to $20,000, depending on the complexity of what they're doing. And I think it's worth every penny because I definitely have seen some bad stories where it could have been solved had they done a Q of E. Heather, can you kind of help people understand what it will mean to go through Q of a Q of A. What does that mean? What is having a Q of E done mean? What will the provider do?

So it's it's financial due diligence by by an expert who just does that kind of diligence for acquisitions. So it's not your CPA coming in and helping you out who never does acquisitions. I think that's the first thing is you're getting an expert who knows exactly how to look at these numbers and how to verify them. So they're going to do proof of cash. They're going to do a number of things. And you can tailor the scope of work with your QV provider to whatever the issues with that particular business are that you want to test out. But it's forensic accounting for acquisitions. So it's not about gap and tax reporting and all that good stuff. It's really about free cash flow and durability of cash flow.

So will they actually, they're not going to tell you whether they think it's a good deal or not. What they're going to tell you is here are the financial books. Like we've looked at all the books, the bank statements, etc. Here are the financial statements of the business

and we're going to sign them so you know what you're buying. That's really what you're getting, right? They're not really signing them. So it's not like when a CPA signs off on your financial statement. This is more, this is the ebidah you can rely on.

And it's not just, you, the Z of Da'iou and the bank can rely on. So the bank really likes it because, you know, it gives us quite a bit of assurance. So, and when you say they don't really tell you if it's a good deal, no, they don't get into the structure with you, but they know a lot. And if you, if you choose the right provider and you have a few conversations with them, they actually can tell you, yeah, I've done, you know, I've seen, you know, 15 businesses in this industry recently, and here's something to watch out for that I've seen. And so I think that they can, they can, they can be very valuable from that perspective.

What providers have you worked with from whom you've seen really good reports? I know you can't endorse anybody, but who have you seen that really good work product? Max Lomis, I think his company is LCS, but Max Lomis, definitely one of the best. Jerry Zoh, Bill Worsima, Bill, I forgot the name of his firm, but we do provide a list, you know, anyone reaches out to us. We're happy to provide a list of Q of Q of V providers that we recommend. Awesome. So switching gears a little bit, Heather, you know, as people think about what lender they should go after, you know, how should potential borrowers think about that, right?

Yours is a specialty bank that focuses on SBA lending. Big banks do a lot of SBA loans but are historically terrible at them or you hear horror stories. You know, how and when do you think about kind of those into the spectrum and how should people evaluate what sort of bank to go, you know, to go consider for themselves? So if you're going SBA, the first thing I would do is check out where they stand on the SBA top 100 lender list. Not that you have to be with the number one, but they should have a sizable program, right? If you're trying to get an SBA loan from a bank that's way down on the list, doesn't do a lot. I would stay away from that. That just means they haven't dedicated many resources.

They may not have the best people on it. And ultimately, it comes down to people. It comes down to your banker. So even somewhere kind of midway up that list might have a great banker. and they have a decent enough size program that they'll have a good back office, they'll have good servicing. So make sure they have a sizable program.

Make sure you feel confident in the lender that you spend some time with them and get to know them. You feel like they're a straight shooter. They're not trying to reel you into the pipeline like I explained before. And then, you know, then it really comes down to what you're looking for

and how well that matches up with that bank's credit appetite. Final thing you should ask about that, nobody asks is what about servicing? So a lot of these banks with small, you know, not much staff dedicated to it have terrible servicing. It's like nobody's job to take care of the SBA loans. So when you need something, you can't get it done. And I have horror stories. People reach out to us from other banks and can you help us? No one will call us back. We need to do something or we need more money or the other thing about is, excuse me, is if you want to do a roll up strategy, are you talking to a bank that supports that?

I have folks reach out to me. They did close their first deal with a bank. They're not real happy with that bank. They want to do a second deal. You're kind of stuck then because the second bank really can't come in and share a UCC filing with that other bank. So once you choose your SBA lender, you're somewhat stuck until two years and $1.75 million of EBITDA. So whatever you want to do, additional borrowing, servicing needs you may have, need to make sure that the bank has the staff to support it and or the credit app site to support your roll-up or whatever else

you want to do. But nobody ever asks about servicing. And you should because you're going to get the loan done in about four to six months. You're going to be serviced by the bank for five to ten years. And that's a long time. What should I care about on the servicing side? What what questions should I ask? What makes a difference? Can you introduce me to the person that's going to be servicing my loan? Because it's not going to be a commission salesperson. I guarantee you that. the commission salesperson is gone as soon as your deal is done. I mean, they might take a phone call here or there, but that's not going to be their focus anymore. So introduce me to the person that's going to be responsible for my servicing and kind of interviewed them too. Okay. And speaking of

post-close, you get one done. I know a lot of people, a lot of our listeners are hoping to pursue a roll-up, you know, maybe doing several deals back-to-back. How does that interplay with getting an SBA loan? Is there only so much you can borrow from an SBA? Well, you have to to refinance every time or can you have multiple loans with the same bank? Or, you know, how does it usually play out when people do a roll up back by SBA? So you can have that $5 million from SBA. If it's a bank like us, we'll add another three onto that. So you might have eight.

That's your runway. And you can have as many loans as you want within that $5 million. That's the way SBA works. If you pay down, if you got borrowed $5 million from SBA, you pay it off, you have another $5 million again. So that's the way it works. You have $5 million of runway outstanding at any given time. after that, roll up is all about timing as far as the bank is concerned. Banks are going to be worried if you try to do something too fast that that might introduce

some risk. So if your strategy is to move at a very rapid cadence from your first deal to your second deal, you know, you need to have a conversation with the bank before you close that first deal to make sure that they're behind you on this, that they see your pipeline, that they see what the strategy is, not just that you call them six months after the closing of the first deal and say I have another one. A lot of them are going to say, whoa, you know, that's too fast. Our credit folks are worried? So, so cadence is really important. Overall strategy, you know, are you going to have a shared services model? You want to share all that with your banker before

you go into it. And I will say this. We get a lot of folks that say they want to do a roll-up strategy and we don't have that many clients doing roll-up strategies. A lot of people just think they will, but it's hard, you know, they're going to run a and they're going to do, you know, try to make some improvements in that first company. So I think, you know, for most people, the focus just has to kind of stay there. Yeah. Finding one deal is hard enough. Finding a series is even harder. So do you see people that end up like they might, the first deal is two million? The next deal is two million. Do they end up with two, two million dollar loans? Or is it typically a refined one single four million dollar new loan?

Good question. It'll be two separate loans. So unless you were able to somehow close them simultaneously, which I don't, I don't recommend trying to do. you'll have separate loans for each transaction. Now, the SBA has a little advantage there, too. So I forgot to mention that. If you're a strategic buyer or you're on your second in your roll-up series, as long as it's in the same industry, the SBA doesn't require that 10% equity on the next deal.

So it's considered, yeah, then it's considered an expansion rather than an acquisition. So there's no equity. Technically, you're contributing the ebidah of the existing company. so you know you can afford a little more leverage you should be able to and you know you're contributing that that equity that you already have in that business so you can actually borrow 100%. So we see this is something that we're hoping to see more of, which is strategic buyers. So there's so many search fund type buyers out there buying their first business. They don't have that experience.

This is going to be their first experience. And we see so many founders who could be taking advantage of the SBA program to grow by acquisition and not even have to put any equity in. So we're starting to see a little more of that, but we'd love to get the word out to more of the existing business owners that they could be doing 100% leverage and grow by acquisition, buying companies in which in most cases, which they already know really well, and also being able to take advantage of, you know, cost saves by integrating. So I that, so this is a bait, I have to press on you further here, because this sounds almost too good to be true,

to be able to do an ad acquisition with 100% leverage with the SBA terms with an SBA guarantee, with a long AMOR and a low interest rate. I mean, that is really powerful. Are there, is it really just a question of debt service coverage? And if you can service it, you get 100% leverage on deal number two? That's right. It really is.

And we can factor in, like I said, the cost saves. So if I'm buying my first deal, I have no. cost saves. If I'm buying my second deal, I do. So I'm going to increase the EBITDA immediately, right? This is an exception to what you said earlier about not lending on pro forma. Kind of. I mean, you know, we still have historical debt coverage because we're still looking at your existing company EBITDA, plus the new EBITDA, but yes, we could still also factor in. I guess we would call those ad backs rather than projections, but to your point, you're sort of right on that one. Yeah, wow, that is super cool. You taught me something today.

I'm sure a lot of people can take advantage of that or will be fired up to take advantage of that. And they should call you first because it sounds like you want to do them. Please, yeah. We'd love to do them. We're seeing them. We're just starting to get more. We're actually starting a new Zoom call where we're trying to attract sort of that audience, the folks that are already running a company, want to grow and don't realize or don't know

the roadmap for how to finance it. They might know how to find the deal. They probably know how to find the deal better than everybody else because they know their competitors in their industry really well, but they don't necessarily know how to finance it, and we want to help get the word out about that. So last one, I'm sorry. I love this topic. So you can go up to $5 million total exposure through the SBA.

For doing a strategic add-on, can you also then tap the incremental three to five through the live of the kind of SBA Plus program? Well, you can get the plus, but the $5 million is per guarantor. So, you know, whoever the personal guarantors are, once that, individual reaches 5 million outstanding from SBA, then you're out of runway with SBA. But yeah, we could add on our companion loan after that for another up to three. And that up to three would be the same 100% leverage as well. Depends. I mean, it's going to be a seven-year amortization. So with the debt coverage,

you might end up having to put some equity to get to the debt coverage multiple. It just sort of depends on how the math works out. Okay. That makes sense. Okay. I'll stop. That's fascinating. Thank you. Yeah, so, Heather, in terms of the things you would recommend borrowers do in order to increase their chance of success, you've talked about some of those things, like start to work with a banker earlier, understand, you know, the laws and the rules and stuff like that. Are there any other things that come to mind that you're like, man, I wish everybody would just do these things because it would just help improve their success rate? You know, every deal is so different. There's no one thing that, you know, that I'm seeing as, you know, that I'm seeing as, sort of the common mistake. I think just understanding the qualitative questions to ask, I think is probably one, you know, it's kind of why we started our M&A questionnaire, to be quite honest. As lenders, we were,

Lisa and I were just trying to remember all the questions to ask each time, and that's never a good, a good strategy. And we finally realized, you know, even we're forgetting to ask sort of obvious questions when we get caught up in all these deals. So let's kind of codify this. What are the questions we really need to know the answers to? So we, for us, we, developed our questionnaire. You might develop your own, but you need to make sure you hit all the important questions up front. And frankly, the failures that I see involves investing too much time in a deal that's not going to go forward. And it's probably the hardest part of search is to learn how to be efficient and when to let go of something and try to get the information that you need

as quickly as you can get it so that you can make those decisions whether to keep going or whether to stop. So for us, it's really the qualitative questions and knowing, you know, to get those answers as fast as you can so you know that you have a green light or a red light. Yeah, super cool. So we do have some listener questions and we're coming up on 50 minutes. You've been amazing, by the way. I'd love to dig into the listener questions and then we'll go from there. So we went out on Twitter and asked people what they had as questions. And I think some of these we covered already. So we'll go over softball one first. This actually came from a business broker on Twitter. How does she structure $7 million deals so above $5 million? And I think we talked about that, right? So just maybe talk

about that again. That's the SBA loan part and then there's some other stuff. Yeah. So if it's a deal that's going to require more than $5 million of debt, we're going to add on our companion loan, which is, again, it's going to be a seven-year term instead of 10. SBA is going to have 10. So what that means generally, well, two things. When you're looking at it, a bigger deal, you're probably paying more than a three to four and a half multiple. That's where most SBA deals fall. They're mostly between three and four and a half. So if you have to pay more than that, then mathematically speaking, that 10% equity is probably not going to work. You're going to need more than 10%. You're also going to need them more than 10% because of the seven-year term

on the companion loan. So that's going to cut into your cash flow coverage. So you're able to do those deals usually with about 20% equity, maybe 25. It sort of depends on how the cash flow model comes out, but they definitely can be done just not quite as high a leverage point as an SBA deal might be on its own. Dig it. Okay. All right. Any common themes among very successful acquisitions, cautionary tales of failed acquisitions with

the P.G for the borrower and Fallout? I don't know. This was written on Twitter, so it's kind of bad. But I think they're asking, like, are you seeing themes of success, you know, deals that turn out to be successful for the borrower versus kind of ones that go poorly? Yeah. I think fortunately knock on wood, most have gone very, very well. And it's really where there's low-hanging fruit to professionalize or bring in technology,

you know, to that business. And honestly, one little key to success is that there's a good relationship between seller and buyer, that the diligence has gone smoothly, there hasn't been friction. And that generally speaks that there's going to be a nice transition in that training period, which is so critical is going to go well. So those are sort of the things I see in good deals. Bad deals, I haven't seen too many. These days, luckily, we're in a time of economic expansion,

so take that for what it's worth. But where I have seen something not go well, and I think I mentioned it earlier, was when they used a cash to accrual conversion. They tried to do it themselves and bought the company on an EBITDA that they sort of had calculated themselves, found out it was wrong.

And it would have, so it was over leveraged, can't make the payment. You know, basically it's going to be a business failure. So that one, I dug in pretty deep because I really wanted to understand what had gone wrong. It wasn't a loan that I had personally done, but got connected through someone else. And I believe in that case, had they done a Q of E, they would not have over levered the business. So are there things that third parties investors, so people that are investing, say behind a search funder or somebody acquiring a business through a leverage buyout, are there things that third-party investors need to be mindful of if the entrepreneur is using

an SBA loan? So they're investing in that deal. So you have two types of investors in these deals and two categories that I would say is, one is the serial search fund investors. And they know the rules of SBA and they will stay below their 20% ownership in order to not have to give a personal guarantee. They know that the CEO is going to have that personal guarantee on the line and, you know, it factors into the negotiations for how much the CEO is going to get to own. And quite honestly, that rule, I think works well for searchers. They end up being able to own more of their company because of the SBA rule. So it's kind of nice in that regard. You know, the other category of investors out there is friends and family. As a banker,

I don't necessarily love to see friends and family unless they happen to be experienced entrepreneurs. And even then, I will want to have a conversation with them to see if they did any diligence on the deal. I would be especially cautious as a banker if I find that there's investors on the deal that didn't do any diligence, whether they have experience or not, they just like the person or whatever it might be, and they're putting their funds in. So I think it's just important. And I think the serial investors,

their bandwidth is getting stretched these days. There's so many deals and only so many people with expertise. So I think that's kind of a trend that we're seeing too, is that there was a lot more coaching maybe two, three years ago than there is today because it's just not enough bandwidth of experts. Yeah, they get. So switching from the investor side to the seller side, one of our listeners asked if a seller is doing some seller financing

that will be behind an SBA loan, what are the considerations the seller should be thinking about in that situation? And I know there's some limitations on exactly, like it has to be called a certain thing and it has to be no interest and full standby and stuff like that. So could you maybe walk through, what are there special considerations for the seller? under an SBA, you know, type deal.

So there's two types of seller notes. Well, there's actually three, but if you're putting 10% down as a buyer and the seller carries after that, there's no need for a full standby. They can be receiving P&I immediately. And that's the case in most of our deals. We require the 10%,

the seller starts getting paid right away. There's another scenario where the SBA allows you to put only 5% if the seller will carry the other five, as long as that note is on full standby for the life of the SBA loan. So that's a scenario that the SBA allows. We don't generally use that unless it's a key manager that's buying out their founder, their boss, because there's low transition risk and sometimes, you know, below market price. But for a third-party buyer, we don't do that five-and-five scenario.

So if you're doing the 10% equity, you can start paying your seller right away. The other thing I want to tell people to watch out for with seller notes, a lot of sellers get really worried. They don't make me don't understand the reason that they're being asked to carry. It's not really because we need their funds. It's because we want them to have skin in the game. We want them to have something to lose if they don't support you through a transition or if they're selling, if they're making a bad deal, you know, they know there's some risk in the business that they haven't told you about. That's the reason for a seller note.

It's not for funding. I see a lot of people get really confused about that. So sellers will come along and ask for a personal guarantee or even collateral. And my advice to everybody is, why would you do that? If this business is not what you hope it will be, then the seller note should be defaulted on. They're losing. They don't get that money if you're not successful. That's the reason for the seller note.

So I think it's just a lot of buyers and certainly a lot of sellers don't necessarily understand that that's the mechanism. we're looking for. Super cool. Another question was about fixed versus floating interest rates. I understood SBA loans were just fully amortized term loans with fixed rates, or are there other products that people are using SBA for? Most of them are actually variable rate. Okay.

So most SBA loans are variable. And so here's what, because we're in a rising rate environment, a lot of crazy things going on out there in the world, I think you have to realize that. banks have a limited appetite for fixed rate SBA loans right now, more than ever, right? They had it back when we weren't in a rising rate, things have changed. And because if we lock in a rate here and, you know, our funding costs are going to go up, then our margin is going to get compressed. So we're going to be, all banks are going to be doling out the fixed rate very carefully going

forward. So everyone will take their own, you know, they'll have their own appetite for doing that. But generally speaking, it's got to be a really strong. strong deal. It's going to be really, really strong deal to get the fixed rate. So everyone's not going to be able to negotiate a fixed rate as easily as they could have before. Dig it. Okay. Another one here. Is there a sweet spot around the amount of EBITDA slash sellers earnings that seems to work better for first time acquirers and operators? So I guess they're asking, like, you know, is it sub a million? Is it sub 500,000? Is it 1.5,000? Is it 1.5

million, like, or does it just depend? So I guess they're asking, like, you know, where, where's the sweet spot seem to be in terms of people being more successful? So I define it more as enterprise value. And if you're paying a three, you know, the smaller the deal, closer to a three, multiple, three-ish, you might be. But we're looking for an enterprise value minimum of a million dollars. Anything below that, you've got a couple problems. Anything below that, it's kind of considered very risky because it's such a small business that you're levering up and any little hiccup could cause, you know, you just default on your debt. That's the way a lot of banks will look at that.

And secondly, the amount of work that goes into underwriting a cash flow deal is a lot for a bank. So there's kind of a fixed cost for us to take these deals on. And banks aren't going to want to take on really tiny ones that represent more risk and less reward because of our fixed cost. So I'd say minimum enterprise value of a million dollars. If you go too much below that, you're going to have a hard time finding bank financing. You might have to just go all seller financing. Makes sense. Okay. I think in terms of the listener questions, that seems like most of the good ones. There's some very narrow, like, people are like, okay, I have 700K in collateral and I'm buying a business of Topeka. I don't know. That's going to be that interesting to the listeners.

So, you know, one quick question and then, Bill, if you have anything more, I'd love to give you a chance to ask too. But, you know, as you think about the stuff we've covered this hour, Heather, is there anything that comes to mind that you're like, man, I wish they asked me about this? Because usually, usually we don't know what we don't know. But we do these weekly sessions every week and we just, we get a lot of questions there. Now, I covered asset and cash flow lenders. I can't think of another one. Heather, I have one question. I have heard tell or rumors of a 20-year amortization SBA loan.

Did that ever exist? Or is it only the 10-year? It's only the 10 years. So the way, well, let me answer it this way. The SBA breaks out the maximum amortization by use of proceeds. So 10 years for enterprise acquisition, 25 years for real estate acquisition. But there's a scenario where you might. want to buy both at the same time. Most don't. Most folks elect not to do that. But if you do,

then you have an interesting scenario. You could combine both of them into one loan. If the real estate is worth less than the enterprise, then it'll be a blended average term. So you might be 15 or 14 years, something like that. If the real estate is worth more than the enterprise value, you actually have an advantage because you can combine them in one loan for 25 years for the whole thing. Wow. But it's only in that scenario. Buying them both together and real estate greater than enterprise value. Interesting. Man, 10 years is pretty good, but 25 is really good.

It's really good. And there's a three-year prepay on that, but it's only three years. It's 5-3-1. So, you know, after that, you can prepay at any time without penalty. That would be 5% of the loan value if you prepay it in the first year, 3% of the second year. That's only if the term is greater than 15 years. For the regular 10-year loans, there's no prepay penalty at all. You can pay down any time.

But there is an origination free, typically, which is effectively a prepay. You wouldn't want to just take out a loan and repay it within a couple months. Right. And I think someone on Twitter asked about this. So the fee that you pay on an SBA loan is called a guarantee fee because it's actually going to the government. And it's a prescribed formula. It's kind of a sliding scale, the larger the loan, the larger the percentage of the loan.

So it ends up a little over 2% for the government. the larger loans that you're going to be paying and it goes to the government. So yeah, if you prepaid and you had paid that fee, that would be sort of not a great economic decision. But also, the fee was waived during COVID. I think, you know, someone asked about that and asked if that would be coming back. It could. I mean, it's definitely, we follow the politics of the SBA program very, very carefully. And it has been on the table a few times that they would enhance the program with, you know, long term with some of the things that they did temporarily during COVID. But as of what I've heard lately, that nothing really has any traction at the moment. I'd like to maybe expand on that a little

bit if there's anything there is from a political perspective, obviously the SBA program is a government program. I imagine it's a very popular government. I know gets used a lot. It also kind of plays well right in the middle, like helping small business, all that stuff. Are there any changes to the program you think that may be on the horizon? Like, as the SBA may be, any noises about evolving the program, or is this a very stable program that we should expect to be exactly the same form for a while pending no future pandemics or anything really crazy? You know, it is definitely influenced by politics what, you know, what changes occur and when. This is kind of an interesting one that might happen. It almost happened just before the pandemic,

and then they pulled it back because of the pandemic, actually. They were, when you get an SBA, loan, you use investors, you're going to have to give the lender the name and tax ID number of every single investor. We have to get that whole 100% cap table. And that is actually being entered into the SBA database. That started a few years ago in preparation for a rule change. The SBA actually had it out there for public comment and was about to make their final decision when COVID hit and then they pulled it back. And what they were leaning towards, what they were headed towards doing, would it not have been good for the investment side of these deals because they were going to tie together all of the common investors and various SBA deals and call all those businesses affiliates

of each other and then aggregate them and say, ah, this is too big. Because one common investor or these two common investors are in all these other deal. Yeah, it would have been a, it would have been, I don't know how they would have even executed it, to be honest. I think it would have gotten extremely complicated, but they weren't really, they didn't, catch on to this concern that they had because of search funds, it was actually came out of the hotel industry. They were finding that there were groups that were really owning a piece of lots and lots of different hotels. And they were saying, well, wait a minute, they're not small anymore, really. They're big and they're just kind of dividing it up.

So that almost happened. Most people didn't know that was about to happen. And then it didn't. So it could always come back. So if you're an investor in search funds, you better hope this doesn't happen because this would basically mean that an investor could not. be exposed to more than $5 million of SBA loan, which would I think. That's right. And it would be, I think it would, it would so limit the liquidity in this space.

It would be a really bad idea. So I was actually, if it ever comes back out for public comment, we would just want to rally the troops and get people to make the comments about how important it is the liquidity in the space. So that's what, that's really what would have to happen. And luckily, it got pulled back because of COVID and it didn't happen at all. So that language actually, as someone who read the entire PPP bill, that language was in there. That's where they had that in there.

That was their affiliation test, yeah. So you couldn't double dip or triple dip or 10x dip on it. Right. So it came from that because they were developing that rule just when it hit. So as if now, they put all the investors in, but they don't try to tie them together as affiliates, but that could change. Yeah, totally take it. Awesome. Bill, any further questions from you? Otherwise, I'd love to ask Heather to give us in the Lister's next steps. Like, how do people track you down if they need to borrow, become a customer? What's best? Well, hopefully you would send me an email. Heather.org. Enderson, I have to spell it, H-E-A-T-H-H-E-R-E-S-E-E-N at LiveOak. Bank. And ask me about office hours.

the best way to start. I'll send you back an email with the registration links for our weekly sessions, and that's where we start everybody. We try to answer your questions and kind of get you into our system, get to know you, and hopefully assist you in your search. That's awesome. Well, thanks again for doing this. Both Bill and I are super SBA borrowing nerds. So hopefully other people will find the same level of excitement that we did from today's deep dive into the topic. And we're so grateful for you doing this and the support you give to everybody. It's pretty awesome. Thank you very much. Thanks for having me.