05 Sep How to Buy a Business
This Business Round Table by Exit Your Way® topic was “How to Buy a Business”. The event featured Lisa Forrest, Andrew Cross and Damon Pistulka sharing information on how to buy a business. They covered the many of the basic considerations for buying a business. They answered questions from the audience and shared their experiences with business purchases.
Damon started by talking about the process of getting prepared for the purchase. When business buyers are looking at how to buy a business many often overlook the critical step of getting prepared to buy a business.
Andrew explained how it is hard to buy a business but how buying a business may be a good way for someone to get into business rather than starting a business. He briefly discussed learning how to buy a business is key to buying a business.
Lisa Forrest explained many of the details around how the SBA looks at funding the business purchase, how working with the SBA will give a buyer a better sense if they are paying a reasonable price for the business, and many other important things for someone buying a business to consider.
Andrew then discussed the letter of intent (LOI) and how it is important for business buyers to be ready to strike quickly on their ideal businesses. The LOI gives the buyers exclusivity to complete their diligence and buyers need to understand how to get to the LOI quickly so they can get to diligence. Competition on the best businesses will prevent you from making a purchase if you do not get to a LOI quickly. The panel then discussed the basic pieces of the LOI and some of the things the LOI will include. Andrew summarized this up by explaining how the best business buyer are decisive and get tot he LOI quickly so they can move on to making sure the business is right for them.
This was a wide ranging conversation about business valuation, debt service coverage, working capital and many other details that will give business buyer information on how to buy a business.
Thanks to the people who attended and who continue to support this group. We all rise together!
Lisa Forrest is Director of Sponsor Finance SBA Lending for Live Oak Bank. Live Oak Bank is the nation’s largest SBA lender dedicated solely to financing mergers and acquisitions and business expansions.
Prior to working at Live Oak Bank Lisa Lisa was VP, SBA Lending for Banc of California and Union Bank. Lisa has been a SBA lending professional for over 30 years and has funded literally thousands of SBA loans.
Lisa Forrest is a frequent speaker/participant in national M&A events and a lending leader for the M&A community in the small to medium business space.
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How to Buy a Business
buyer, business, sba, buy, seller, cash flow, people, debt service coverage, andrew, lisa, strategic, debt service, understand, offer, deal, lender, capital, strategic buyer, acquisition, working
Damon Pistulka, Lisa Forrest, Andrew Cross
Damon Pistulka 00:00
All right, everyone, Welcome again to another business roundtable buy Exit Your Way, just had a brain fart there. Today we’re gonna be talking about how to buy a business. It’s awesome to have you all here. We’re lucky because we get to work with awesome people like Lisa forest here with Live Oak Bank. She’s an SBA banker, she helps people fund the purchase of businesses. So we’re going to be talking a little bit about the process of buying a business. And then Lisa is going to explain, you know what it’s like to do SBA, do an SBA loan to buy business. It’s like she said, when we were getting on, it’s something she does every day all day is explained to people what SBA loans are and how they work and all that good stuff. Then we’re gonna have Andrew talk a bit about you know, the overall process of buying the business and some of the things that that people can get, either should be doing need to be doing. Think about that. Those kind of things. And we’re going to end up today we’re going to try to end up today about 845 and be done by nine, you know, we’re moving our format from what was a couple hours down to an hour and a half to trim this up. And just want to make sure that everyone’s aware of that. So we’re going to finish about 845 do some additional networking so you can ask Lisa questions or us any other questions. And I also want to say too, if if you get onto the topic like this and you need some additional information, feel free to reach out to myself Andrew or Lisa for for more and we’ll do that. So, Andrew, what do you got going for us today?
Andrew Cross 01:38
Yeah, okay. No, this is of course one of my favorite topics, but I spent you know, a lot of times we’re talking about the sell side, you know, the buying a business and the challenges of that too. Now we work at exit your way we work with sellers, you know, almost exclusively but with that said, we you know, in order to make a deal successful, we have to work a lot with buyers. To on the other side about how to buy a business, you know, and help them, you know, it’s not we represent them, but helping them, you know, be successful in a transaction because it’s hard. It’s really hard to buy a business of, you know, what, for every 20 people that decide I want to buy a business, I want to own my own business and buying businesses is a is a great way, you know, to get into business. It’s less risk than starting a business for sure. And that the numbers on that are proven. If you have something that’s already established, and you have the wherewithal and experience to do it, but for every 20 people that go out to do it, maybe one actually successfully, you know, gets a transaction done. And, you know, that’s sort of what we’re here today a little bit about talking about that. And we spend a lot of time working with our clients on who are selling businesses to prepare and get ready to sell Sell a Business, while the same has to be done on the buy side. And so often of the 20 even with good intentions, you may even have the money to do do it or are financially capable, you’re still going to fall down if you don’t, you know, present yourself properly or do all the preparation work to get a deal because it’s, you know, I think too, I mean, in a way it’s compare it to a very competitive real estate market, you just, you’re not going to get a house bought in East competitive markets unless you have your money ready, ready to pull the trigger ready to do your evaluation and go in and put an offer in day one, because it’s competitive, and that’s the way it is today. Not that there. There are a lot of businesses that don’t get sold, but the ones that do get sold, you know, they don’t last long and people are in there, going after them. So it’s it takes a little bit we’re gonna talk a little bit about that the debate about how to be successful in buying a business
Damon Pistulka 04:00
Yeah, yeah. Well, Lisa, it’s awesome to have you here today. We’ll we’ll come around to the SBA stuff. You’ve been doing this a while now. And I mean, I know we’ve all have but but I mean, just to just to put it in in perspective. I mean, how many SBA loans are you closing in a year? Live Oak Are you are just just this?
Lisa Forrest 04:31
Well, I’m so Live Oak. We’re the nation’s number one SBA lender. And I know there’s people on this feed that might not know who we are have heard of us, because what we do is we fund finance business acquisition across 25 different verticals, we’re virtual banks, we don’t have branches. But if you’re doing an m&a transaction, and you need SR SBA debt, then you absolutely get to know us very, very well. So we’re the nation’s number one, SBA lender. I’ll put it in perspective this month in September. Because of the SBA stimulus on getting the no six months of p&i and part of the last stimulus package, like put it in context, we’re going to close Polly 600 loans this month Live Oak Bank this month. So, um, and then I’m a 33 year veteran of this, and I, you know, I can close anywhere between kind of 30 maybe 30 loans a year. Yeah, you know, kind of depending. So I’ve been doing it a long time, and I focus specifically on m&a buyer financing. SBA. I know for those of you new, maybe this is your first acquisition, you’ve never bought a business and you’ve never used financing outside of maybe financing your house, which is up to this point probably been the biggest financial transaction you’ve you’ve encountered. It can sound a little daunting and I know there’s there’s some, maybe a little bit of bad reputation about using SBA, but it’s a terrific it’s a terrific tool to to acquire a business The key is to work with a lender. And this is not a commercial about live oak. There are lots of great lenders out there. We’re very blessed in our Seattle greater region that we have a lot of great m&a lenders, you just really want to work with a lender that specifically does m&a transactions.
Damon Pistulka 06:19
Yeah. Yeah. That is one thing that we run into.
Andrew Cross 06:22
I think dad with that, you know, too, is people need to understand too and we do this on the sell side because yes, it’s a daunting process because yeah, is a government, you know, supported thing. So with that, there’s a lot of paperwork, there’s a lot of steps, you have to go through it and check things off. That’s part of the preparation aspect of it from the buy side but also from the sell side. You know, it is the cheapest money you can get even people buyers who come in to me and say, I’m going to pay all cash. You know, I’m skeptical, skeptical about that, because it really just doesn’t make sense. You know, you need to kind of go through the process and use the so why would you use you know, all your cash to buy something when you can lever it at, you know, a five and a half or 6%. Money is cheap. Now, you know, at the end, you know, we can go through this process with the cash and, and I’ve done that with with buyers who say they want to pay cash, they’ll end up changing their mind, because you know, it just may take them a little while to figure out it really doesn’t make sense.
Damon Pistulka 07:20
Andrew Cross 07:21
yeah. So part of that, that process is understanding what SBA does, but as business owners on this side, there’s a lot of folks on the table here are business owners, some of them are solopreneurs. And they, you know, I wanted to talk a little bit about that Lisa, too. They may not think that there’s a market for their businesses. But there there actually is, I mean, you think of the banks as supporting, you know, without hard assets like real estate or tangible assets, but do if there is cash flow in the business, there’s value. I want to talk a little bit about that, Lisa?
Lisa Forrest 07:54
Sure. And the benefit of of the SBA transaction and my segue was that there’s That kind of reputation, maybe about the SBA. But it’s a great program. And, you know, it doesn’t have to be excruciating, it can actually be a really fulfilling process for the seller, who is, you know, exiting and creating their wealth. And obviously, the wealth generation capabilities for buyer coming in. So it can actually be a really fulfilling transaction for everybody involved. So the thing about the SBA that really makes it well suited is that because of the longer term, you get a 10 year term versus conventional, maybe a five year term, you can really afford a lot more loan because of the term and the purpose of the SBA loan because the Small Business Administration is, in theory, guaranteeing 75% of that loan for the lender, the lender has is compelled to be maybe you know, more aggressive or more friendly to an asset transaction. We’re definitely cash flow lenders. Now you really want to make sure you’re working with an SBA m&a lender because Sometimes, some lenders still want that collateral. But the SBA program is well set up under the seven a program to do asset light cash flow transaction. Yeah, when you’ve got a 10 year term, asset light, you know, we’re gonna, we’re gonna take your house if you have it, but we’re not looking for certain loan to value, it can afford a really nice amount of loan. And because we are looking at historic debt service coverage, one of the governor’s on this in the lower middle market is that the multiples are still in check. It’s a reasonable multiple for the buyer, and the seller still gets to exit with a nice amount of cash and to take their retirement off the table. But it isn’t historic debt service based so yeah, it’s a mix. It’s a nice balance, you get a 10 year term so you can afford more but we’re not in that, you know, 789 10 middle market multiple or in that sort of two and a half if you’re you know in a certain industry. range up to maybe, you know, four or five, depending on
Damon Pistulka 10:03
the industry you’re in. Yeah. Yeah. That’s, that’s cool. It’s some of the details there. And we’ll get into more of the SBA details. I think one of the things that we were going to cover today too, is really, you know, buying a business is not like anything you’ve probably tried before. And and if people here have have ventured down the process, as, as many of us have, the first thing you’re going to going to realize is, you know, you need to be prepared, that it’s, it’s a hard, the search process itself can be grueling, because there’s only about 25% of the businesses that are actually for sale that are listed. So how are you going to find the right businesses, and then you know, when you’re when you’re looking, really understanding what you’re qualified to buy, and and I think that’s a place where a lot of people don’t spend the time because If you’re going to but if I’ve got experience in the construction industry, you say, I shouldn’t be out trying to buy dental practices, even if I’m not going to be the dentist, even if I’m not gonna be there’s there’s different, you know, you’ve got to kind of stay in your lane to a certain extent. And Lisa will spend a bit more time about that when we talk about, you know, industry relevance in in an SBA loan. But you really need to understand where you’re going to go with this, then work with your SBA lender, or think about your financing situation and how you’re going to fund a business because don’t go out and waste your time trying to buy businesses that are $10 million. If you’ve got $100,000 in the bank, it’s just not going to work. You know, you have to figure out your financing package to figure out what you can do in your industry that’s really relevant with something you can make, that you can run and do a good job with. Before you even go live in one You get that and you understand you start looking at businesses, I think there’s a, there’s a process and I let you to answer this a lot better. You got to get through your initial diligence quick on these businesses, or at least have it really clarified what you’re going to do, because you are going to need to look at a lot of businesses before you find the one you like. And you can waste a lot of time, if you go into a deep dive on each one, only to find out that they’re not right. So having your key aspects are real. And I’ll stop there.
Andrew Cross 12:37
Well, you know, I think it’s, um, know what you’re looking for. And then, you know, that comes to another part about us how you value a business. And you know, I’m happy to we want to work with buyers to help them understand that process all the time. Because you’re not going to get you’re going to get a certain amount of information, you know, from a business, you need to know what Look at four and go in there and and make sure that that meets the criteria so that you can then strike fast, successful on the deal. The the in Part of that is not only doing your homework with your bank at the bankers, that’s that’s why even even these entrepreneurs, we’re sitting here to our own businesses. So I talking to your banker now build a business to sell because that’s going to be great, you know, they’re a vast resource of information. And valuation is, is important, you know, and if you can’t get that from the bank, as well understand what your business is worth, and understand how you properly could, you know, could can entertain an offer. That makes sense. And a lot of it has to do not necessarily with the price, it’s the terms that really is what gets the deal done too. So, if you don’t know how to do that as a buyer, then you need to also do your homework with that to you know, maybe get with a professional later. You have to understand to how you’re going to, you’re going to, you know, be competitive in there. So, so many times I, you know, I’m surprised that I have buyers come in and they come in and the offers are not even in the ballpark. And I don’t know where you know it, that’s the problem. Buying a business is there’s just not a lot of information available as parkett about it not like buying a house where you have all the information you need. But these are privately held. They’re very confidential transactions for a lot of reasons. And it’s difficult for a buyer to you know, and again, that’s part of getting ready. gathering all the information you need. Yeah.
Lisa Forrest 14:40
And, and I would say from the buy side, when I’ve got potential clients prospects coming to me where they’re pre yelloweye, and they need some assistance in how do I vet this thing, right. So if it’s first time they’ve done it, I’ve got a pre yelloweye guideline. I’ve got a couple of due diligence questionnaires I’ve got I’ve got a COVID question are now due diligence questionnaire, I’ve got a sample cash flow, I’ve got some details around providing an executive summary to us. So I’m happy to send that to you, Andrew aim and make it available to the world. But that’s so when you come to me as the lender, you have to have a certain amount of your homework done in order to engage me You have to have a certain enough, a certain amount of information for for us to be able to have a conversation. So I’ve got a little bit of a roadmap that a lot of my buyers find helpful. And then I would also share that if you’ve got existing business owners in in the the room here, strategic acquisition, I from the standpoint of growing by acquisition, it is a great time to do that. And I would say half of my deals I’m doing right now are strategic acquisitions where you are efficiently growing organic growth for sure you’ve been doing it for years. But if you’re contemplating a strategic acquisition, I am all in on that. So have also,
Damon Pistulka 16:07
Lisa Forrest 16:08
contacted anyone needs lending for buying a second or third or fifth business or what have you as you grow your EBITDA.
Damon Pistulka 16:14
Yeah. And that’s, you know, we were just talking to a client yesterday that did that. And I think one of the things that that people don’t when they don’t, the perspective that you as a bank, an SBA lender give someone is value, as Andrew said, and that’s really one of the things that a buyer you, you make a lot of your money on the way in, and that means buying it right. It means buying it at an appropriate price. And the bank helps that because you won’t fund beyond what you feel are reasonable values. And that is a real help for an entrepreneur because as someone going into a business because as Andrew said, there’s not a lot of comparable values out there to the general public. So that is one of the things that I think is very helpful and it’s helpful for us as as people selling businesses to because we actually use it with our clients to to go okay. If you’re in the SBA size, which summers are ours are, then you go, we talk with someone like Lisa and we go okay, where where would this be at Andrew kind of comes up with a value not kind of comes up with a value we think it is. And he verifies that we’re within the right range with with someone like Lisa, before we even set the asking price or talk about the final price with the seller. Because on the other end, we have to facilitate a deal that’s going to get done. And that’s one of the things that’s that’s real. Yeah,
Andrew Cross 17:46
that’s good for everybody. But you know, at the end of the day, there’ll be an end up with a bank comes in is it’s common sense. And, you know, the bank, you know, businesses generate cash flow and they have cash flow has to support Now you’re going to be levering a company and taking on you know, significant debt you got your monthly nut you know, the owner understands that you know, they built equity into the business they’re not paying debt service anymore but the person coming in and it’s critical especially in those first two years that there’s enough cash flow to support that and there’s enough cash flow to also pay you know, make the new management you know, or the new owner to operate the business and there’s enough cash flow also the repack reinvest back into the business and you don’t have a rainy day fund you know, so there’s a cushion there so the banks are of course conservative. But if you get into that realm then you can from that you can come back around and see what really is a fair asking price which works for both sides right?
Damon Pistulka 18:44
Well, and and Lisa can expand on this because she sees this i’m sure daily almost, but there are you know, the the biggest reason why deals don’t get done both from a buyer standpoint and seller standpoint is is unrealistic x affectations of the seller on the value and the bank helps to be kind of a conduit between that because no, everyone knows as business owners, we we, let’s see, I’m going to use the right words. We think we know it all because we’ve been business owners forever. You know that’s you run into that a lot and they’ve read as Jennifer j is cool, Jennifer her comments in here because she used to work for an investment bank she’s talking about, sadly, the only thing many people know about valuing businesses is what they saw on Shark Tank and they she says they know, no clue on EBITDA and business valuation in reality.
Andrew Cross 19:38
I think Damon, there was a good example we had yesterday we had a business owner we’re just talking to and what did he because we asked him what he thought, yeah, it should sell before What did you say?
Damon Pistulka 19:48
He was he was thinking it was 14 next if it was really, really good, and I was like, wow, that’s that’s pretty crazy. And it was like, Well, that was a public company and well, okay. If you saw another company gets sold. Yes. Public there’s another company got salt for that as a public company, it’s and you know, public companies are, are it’s a whole different realm from a private company. It’s not even it’s like, you know, stock trades like cash, your value in your company doesn’t trade like cash. And, and that’s the, that’s, that’s the main difference but you will get if you get to get three or four for years, if you’re a public company, you might get nine or canned or whatever, but there’s a hell of a difference is on trend
Andrew Cross 20:29
that rolls back to the understanding of size premium and you know, companies valued you know, bigger companies and I mean big in you know, publicly traded companies are huge. And there’s, there’s a higher you get a higher valuation for that. Yeah. And this is all you know, that scales all the way down, and the smaller the higher the risk, the lower the multiples like we’re gonna talk a little bit about
Lisa Forrest 20:53
my perspective in our lower middle market. I quite frankly don’t care what the multiple is. That’s not my concern. My concern Is debt service coverage? Yeah, a cash flow basically, you know, real simple net income on the tax return plus the Add backs that we’re all going to decide to agree on. Yeah, yes. You know, 100 k for our Rs, you know, new loan are coming in. That’s cash flow. And that needs to cover now, for the last one. I’ve always been the more conservative one in our neighborhood, right? I’ve always wanted 1.5 debt service coverage or higher SBA depends on which lender you’re working with maybe 1.1 1.25. But most of my clients, I’ve got clients that are trying to grow the company, really hard to grow the company at a 120 debt service coverage. I know SBA allows it but you have enough runway to handle a little bit downside in case that comes up time to time and then enough to grow the company. So you’re not just paying me back for 10 years and I sort of gravitated toward a 1.5 debt service coverage. And so if you want to pay a higher multiple for bringing in extra equity, or you’ve structured it with a bigger seller note to close the gap on valuation and debt service. I mean, there’s lots of ways to maybe get the multiple that everyone’s comfortable with. But I will tell you a lower middle market, you know, that’s why we’re not seeing those 1075 multiple sometimes, we’re just not even getting there because of I’m basing it off a cash flow coverage.
Damon Pistulka 22:18
So when you explain, can you explain that the debt service ratio you just talked about or? Yeah, yeah, in banking, everyone talks about it, but I’ll tell you in the business owner world 99% have got no idea what you just said.
Lisa Forrest 22:34
Yeah. It’s um, and I’ll just keep it real plain. It’s a it’s the amount of cash flow and not to confuse that with liquidity or what you actually have in your bank account, but off of the paper, your tax return, take your tax return the net income. And then we understand from a small business perspective, you might be, you know, running some discretionary expenses through, you know, through your account for your tax returns. You know, there’s a balance of limiting your tax liability and it’s all fair we get it. So we, your sell side advisor should be working with you to get a sense of what reasonable add backs are discretionary add backs the buyer coming in, we just won’t be encountering like charitable contributions or maybe you’ve got an extra family member that is a critical to the business that you’re paying for. So we’re going to add certain expenses back. So that’s net income plus your add backs. That’s your cash flow, that that’s how much cash flow excess cash flow you have, minus the debt minus our debt payment, or excuse me, that’s the cash flow, you have to cover our debt payment. Yep. or cash flow over our debt payment plus the seller debt. If there’s a seller note payment in there, we’re going to add my annual payment from the senior debt side to the seller debt. That’s your annual debt. The cash flows got to cover that at 1.5 times or better. That’s it. That’s it. My debt service coverage, your lender may have a different threshold. But that’s my threshold.
Damon Pistulka 24:05
Andrew Cross 24:06
totally ask you something too, because we talked about strategics. The strategic buyer, non strategic buyer, everybody is is not an investor buyer or an individual who’s looking to buy a business, a strategic buyer, somebody who’s already in a similar type of business, that hiring get to grow just a little background there. But if a strategic buyer comes in and there’s some synergies there, the take those into account into your LTV calculations, and therefore maybe you can get a higher price or funding.
Lisa Forrest 24:38
Yeah, with strategics sure, that is one possibility. It depends on what the nature of that strategic acquisition reason is, Are you trying to get extra geography? Are you trying to get a certain revenue stream that you don’t have? Do you have concentrations and the acquisition target is going to level that out? You know, it all depends on what the reason for For the acquisition is and, you know the that company operations in relation to your operations. But yeah, strategic work on a different level. Because we can now take into consideration your cash flow in addition to the standalone cash flow of the acquisition. And in those cases, that’s why, what happens with our individual buyers, especially Andrew and Damon, when you’ve got a seller seller, and you might have a strategy of marketing it to a strategic or to an individual buyer, you know, your strategics are just going to be able to outbid an individual buyer for the most part, unless on the buy side, there’s something intangible or something about that particular buyer coming in that the seller really, really likes. Yeah. And it’s not always about price, but generally strategic is gonna just from a price standpoint and be able to outbid an individual buyer for one buyer coming in but it’s not always about price.
Damon Pistulka 25:56
Yeah, yes, exactly. And
Andrew Cross 25:59
for the most part works talking today to about a mostly for the individuals or people who want to buy a business, you know, and how you do that, but you are competing against strategics in strategic can do as sellers, we love strategics that’s the best kind of buyer. Yeah, as usual, they will pay more, if they have a reason to do it, but for the most part, these are brick and mortar or not, you know, block and tackle type companies, you know, there’s not you know, I have a heavy on AI intellectual property, you know, or those kind of things that actually attract a strategic they’re just good companies out there, you know, with good generating revenue. Yeah. You’re typically going to sell who, you know, not not most of the time gets sold a strategic so those are great companies to buy.
Damon Pistulka 26:43
And you know, and back back real quick on the debt service. For those people out there. They’re considering buying a business. Using that debt service calculation. When you look at a business is one of the key things that you need to think about when you’re buying the business because Okay, King and it’s even more of a king when you’re going to buy business because that business may look like oh man, it’s makes it half a million dollars a year I’m gonna be fat and happy, right? until you realize that Okay, now I’m going to chunk out some of that for I’ve got to pay back myself, someone else the SBA, whatever out of that. And then I have to reinvest money in the business and if you’re looking to expand as Lisa said with some of the other ones, you need to cash flow for that. And then you want to pay yourself on top of it. And then you got to pay tax, you know, that’s your tax situation got to continue your tax situation. I can’t tell you how many people I talked to you when they look at buying a business and think that a $500,000 business is going to be a panacea for them and realize that when you get to the end, it may not be
Andrew Cross 27:48
well you know, we got the Atlanta loan to value ratio. One thing to make sure that that’s in line and this is helps you value you know and understand what a good asking prices, but the other you know The other aspect of it often forgotten, and it needs to be prepared for is working capital.
Damon Pistulka 28:06
Yes, yes. So,
Andrew Cross 28:09
zero, yeah, you buy a business and I think that people don’t they forget about the help for it, that you may you can’t use all your money to buy the book,
Damon Pistulka 28:20
because there’s two checks, you get the right one to buy it and one then to fund it until the money starts coming in again. Can you explain that a little bit, Lisa, how the SBA can help with that?
Lisa Forrest 28:30
Sure. And I would say the working capital conversation has a tendency to be sort of the most awkward, potentially the most contentious buyers never know when they should bring it up. You know, they want to at least get an LSI signed or an IOI accepted and so I think it’s just the most awkward of the negotiation especially for a first time buyer any any buyer even strategics but um You know, and I, I can’t I can’t advise as to when you should bring it up, but it definitely needs to be considered. So if the sell side has decided that they’re going to keep the accounts receivable and the deal needs to be structured where it’s a neutral balance sheet and the working capital the fuel is staying with the seller, then the buyer needs to buy that working capital from me. If the buyer isn’t buying the working capital from the seller in the price, then it’s got to be purchased for me IE term working capital combination term working capital in line of credit, so it’s not free working capital is not free. So it you know, impacts valuation, because now the debt service has to also include the ability to afford line of credit interest and or term working capital principal and interest if I’m building it into the term loan. It depends what industry It depends what time of year you’re buying it, if there’s maybe a season lined out aspect, we’re gonna pnls on a monthly basis to get a sense of what each month profit losses and how much working capital needs to be required to run it on an AS IS BASIS. And then also, if our clients have a growth strategy, then they need maintenance capital, working capital, but then we also need growth capital, then we’ve got to figure out the kind of the line of credit that and I would say, that often makes it a little bit awkward and even for you on the sell side advisory, if you’ve got the first time seller, right, and they don’t understand maybe that working capital is necessary to grow it and also, maybe they don’t, you know, meditational process for both sides of it, I’ll say and they don’t necessarily grasp until you bring it up. That Yeah, the the Accounts Receivable are required to to run the machine. So if making that fuel, then your buyer, you know, needs to buy it someplace else. And now that debt service is not to also think it is because now we’re building at end of the line that was a long day in that
Damon Pistulka 31:16
No, no no it’s all
Andrew Cross 31:19
You’re right, people avoid it. And I see that it’s a deal killer you know eventually so we we work with our clients because they don’t think about houseful. They have a different definition of cash flow. They don’t they’re their cash flow. Understanding sometimes is limited, and it’s not important to them because they’re not paying the debt service that a buyer facing. So especially you’re right in growth can change. You know, that picture significantly. If you’re selling a business that it’s growing, it’s good, you’re going to get more money for people like businesses that are growing, but it costs money to grow businesses, you know, so we we we spend time to figure that out but what to answer what You are saying to as I don’t, we don’t buyers to part of getting ready to buy business is to I say, you know, you address the working capital ain’t your first off, yeah, Want to talk a little bit and shift a little bit away from that and get it out there right away because it’s going to be negotiated. And it’s going to be paid for by one side or the other or combination of both. And it’s part of that front offer, but if I don’t see that, you know, anything addressed in working capital in the first offer, where, you know, we we’re not going forward until it’s it is in most cases, but I know people who do and usually that’s, it really means you’re going to go into diligence and work for about, you know, 30 or 40 days and then the deals gonna fall apart. Yeah.
Damon Pistulka 32:42
Because Yeah, if you don’t, if you don’t get make that clear, right up front, it’s our very early on. You don’t know if you’re going farther and from a buyer standpoint, you got to flush that kind of crap out early because there is no reason to go a minute longer to try to get a deal done. That’s
Andrew Cross 33:01
If you’ve used all your resources to just buy the business, and you don’t have enough left for working capital, you know, you can’t do it. Yeah. You know, that’s in businesses. They do try but you’re overextended. Yeah. You know, and that and so dial it back. And so know what you’ve got to work with. Yeah. And make sure that you prepare that you assume that you’re going to have working capital in there. But again, I wanted to shift pivot a little bit to the LLR. Yeah. offer you know, that’s the thing that and, you know, this is the thing that I talked to buyers a lot about is because they’re very reluctant to put down an offer and an Li, and I don’t think they really understand that. It to be successfully buying a business and time is a big factor is you need to be able to strike. Do all your homework and be prepared to strike with an offer. Again, I compare that to a competitive real estate market because you know, it delta is best for you. Because the buyer comes in and is basically like In the deal, you may be prepared to put some earnest money in, you know, be prepared to show the seller you’re serious and have done your homework and the argument for it. That’s how you get an accepted offer. But what does it do for a buyer is that now that deal is yours to work on, and they can’t sell it to somebody else. While we were while we’re under an Li, maybe we’ll talk a little bit about that. Lisa.
Lisa Forrest 34:32
So and from from my perspective as as the lender we’re, we’re surprisingly busy. I think that there might be maybe a misconception that, oh, there’s no deals getting done. We’re at flow through my original goal for the year. So I’m going to actually close more volume than was my original goal. Even Come September. So it’s all about being efficient. And for me having that LSI in place and accepted giving both parties time to do their due diligence on one another and the business and giving me time to work with my client, having that LSI in place, really allows me to invest my time into it as well, knowing and generally there’s exclusivity. I mean, I know there’s strategies around exclusivity from yourself side, but generally there’s exclusivity for the buyer, where people have time to do due diligence. Yeah, kind of the one minute
Damon Pistulka 35:37
Andrew Cross 35:38
yeah. expressivity. That’s important. If people don’t understand what that means is you’ve you’ve, you’ve presented an offer, and it’s been accepted by the buyer contingent on everything now that the diligence items in your Li, you need to lay out what are those consistencies? Same as buying a house, we’re going to have a home inspection we’re going to have You know, that we’re gonna have so you know, you’re gonna have to repair this, you know, something else, you know, all that needs to be laid out that like, and it’s striking hard and fast, because then that deal is yours, you own it, you know, that’s what the benefit is, is for the buyer. Yeah. Because sellers are not gonna, they’re gonna you know, it all these are structured differently. Some are very organized, and sort of, you’ve got a timeline. Others are, you know, hey, first person who steps up with an offer that we’re good with, where it’s yours, we’re locking it in, and you don’t, there’s so many of them again, that that’s the thing I’m trying to get yourself ready prequalify yourself. Make sure your ducks in a row and get that offer and lock it up because there’s so many of them that are like, Ah, damn, I missed that. Yeah, because I kept it an Li last week. And we have four or five more people and, you know, I’d love to accept their offers, and their offers can come in, you know, higher, but you know, we’re in you know, this Doesn’t matter this is
Damon Pistulka 37:01
Yeah, you know, you know, I mean, I it’s pretty simple actually when you when you look at and you can search and find some forms and those kind of things, but it’s non binding, it just lays out the basic terms of the deal. It talks about the contingencies, as Andrew said that you know, is contingent on your diligence getting done to your satisfaction is contingent on financing. It’s contingent on working out the other details that are unique to the business. And then you lay out the timing for the seller or seller so they understand that you are prepared, because if you can say that I’m ready to close this deal within, you know, 90 days or whatever the timeframe is based on working with your banker for the financing and everything and what you decided there, that’s all relevant to that seller, because someone that comes in as Andrew said, his and Lisa both it’s not always about the price, it’s about if they’re really sensitive to getting out of there, or getting their business sold, you know, before you run into a busy season or just all these different kinds of things. Timing is real important to your contingencies are real important too because if you know that you’ve got a, you’ve worked with an SBA banker and you know that, listen, if the cash flow is like this and I’m in an industry that they’re comfortable lending in and they’re comfortable with me in that industry, and you get and you know, the ratios are reasonable, you can then you can then put a little stronger offer in maybe, and get your get your business done. But as Andrew said, getting locked up exclusive is where you want to go on the businesses that you decide, well, I got to go.
Andrew Cross 38:35
Successful buyers are decisive and know what they’re looking for and go in and can do it. That’s, that’s really an issue too is that you know, buyers tend to want to have a lot of comfort before getting an L ally and that’s okay. But sellers can’t do that for everybody. I mean, you can’t go and do all the things that you do and diligence beforehand, but you know, you need to understand the basics. And again, that’s preparing and knowing what you want and what you’re looking for, but a good professional buyers, you know, can make a decision pretty quickly, is there enough cash flow to support it? Everything else, you know, you know, I know this business Well, I’ve had a, you know, I’ve got because we give a lot of information in advance of an LLC to a buyer. You know, but you haven’t talked to the business owner, you haven’t met the management team, you, you, you, there’s a lot of things you you’re you’re not going to get to do before you have to be able to strike an offer, but you should have experience in that industry and understand, you know, some sort of background and you know, in a strategic a professional buyer just is really looking for five or four main points everything else is based on assumption. Yeah, we’ll assume the management team is good. We assume that what they’re telling us on the cash flow is what they say it is. Even then you don’t always get that information at that time you just assumptions are important. If these assumptions that’s your contingencies, if that’s their at this is my offer, lock it up. be decisive. If my bank will fund this, if if this is all true, and then diligence is where you work all that out, yeah. On that successful fire good,
Damon Pistulka 40:09
isn’t it? That’s a key point, I think that I want to re emphasize Andrew is that because the LSI is non binding and because the LSI is laying all this out, if someone tells you that the cash flow is a million dollars to the business, take that as the truth, but verified and diligence. Make your offer based on the fact that it’s true. Don’t try to figure that out. Before you put the yelloweye in, get a little bit familiar with the business, make sure there’s no big, big, hairy spots that you say this will just turn me away. But assume that stuff is true. Then as you get into diligence, you’re going to be able to verify and that’s one of your contingencies. But if you’re trying to do this ahead of time, I will tell you that sellers will not typically go down the detailed level to review You because we know that it’s it’s too much detail and people will have not looked at it well enough if they if they want to get into that it just did
Andrew Cross 41:12
for the sellers, people have to understand that people have a good businesses good approach about selling. Yeah. You know, so they can’t talk to everybody and, and they also get approached by there’s there’s good buyers and there’s bad buyers you know and good buyers are, you know what we’re talking about today bad buyers are people who who, you know, I’ve been looking for a business for five years and haven’t bought one and we are just curious or worse our competitors who are just nosy and whatever bad buyers, you know, some of them are with all good intentions, but just don’t really have the financial wherewithal to go through a transaction like that. And, you know, or you know, maybe they’re getting supported by their uncle.
Damon Pistulka 41:59
Andrew Cross 42:00
There’s something that if you’re not a principal in this, you know, you know, it’s just like I said if ever Betty with all good intentions 20 people who go out to buy a business one’s actually successfully going to get it done. Very important to present your yourself as a, as a good buyer, a real buyer and qualifiers.
Damon Pistulka 42:20
Lisa Forrest 42:21
We don’t want bad buyers either?
Damon Pistulka 42:22
Yeah, yeah, exactly. Well, we’re getting we’re getting close to the end of time. That’s a great point, Andrew, because I think that, you know, getting prepared allows you to be a good informed, strong buyer. And if you got more questions, reach out to one of us here we can, we’ll definitely talk to the about it. But you know, we’re gonna let Lisa come up with some final thoughts. But you know, think about the SBA as a way to leverage your money, you’ve got to buy a bigger business that can actually, you know, give you a good return on your effort and do that because it’s You just I think that’s a smart way to do it.
Andrew Cross 43:03
If you’re thinking about buying a business, your first step is go to your banker that they got, you know, I want to buy a business and talk with someone like Lisa and go and talk to them about it about how you get ready to buy a business. clutch.
And in that regard, I, Damon and Andrew I emailed you are kind of pre yellow, like prep work. And this is this is the homework. This is the homework for buyers on the buy side, get get this amount, this level, this type of information ready and then you you are in a position to talk intelligently and efficiently with your lending partner. Cool. Thank you for inviting me and thanks for the forum. I appreciated it. It was great.
Damon Pistulka 43:46
Awesome. Well, I’ll put I’ll actually gonna put those files in the chat here. I just have to download them on my computer. So everyone hang around for a moment. After this. We’re going to do a little bit of networking. Lisa Forrest, thank you so much for being here today. Lisa forest Live Oak Bank look look her up on LinkedIn and and talk with her about this. She knows what she’s talking about. Thanks everyone for being here. Andrew, take it take us out to networking.
Andrew Cross 44:15
Yeah, let’s go.
Damon Pistulka 44:16
All right. We’re going to drop right and go. Let’s talk about it.
Andrew Cross 44:21