Over the past few years, FE International has helped many buyers successfully use SBA loans to acquire businesses.
An SBA loan is a small business loan that is partially secured by the government (The Small Business Administration). Working closely with a network of financial institutions such as Ameris Bank, SBA loans are made possible due to partial guarantees from the SBA to these financial institutions. The SBA guarantees a percentage of the loan a small business or buyer receives, so if the loan can’t get paid back, the SBA will step in and reimburse the bank for the predisposed percentage of coverage. An SBA loan effectively reduces risk and enables easier access to capital.
That’s why we decided to once again partner up with Jordan Richmond, Vice President of SBA Lending at Ameris Bank, to talk about how you can utilize SBA loans to acquire a business. In the presentation below you will learn everything you need to know when considering the use of an SBA loan including financing options, lending requirements, the loan structure of goodwill transactions, and how COVID-19 has impacted lending.
Before we get into what listings FE currently has available that are eligible for an SBA loan or what precedent deals have used SBA funding in the past, here are a few of the key takeaways from the presentation. A few may come as a surprise to some buyers!
- Borrowers should be prepared to deposit at least 10% of the purchase price as a down payment, with 15% being ideal
- Interest rates are based on US prime lending rate, with the maximum variable rate being Prime + 2.75%
- Acquisition of a non-US based company is possible
- Acquisition of a business with commingled financials is possible without the need for a CPA to decouple the income statement
- Third-party valuation firms will take into consideration any businesses that experience a sudden spike in revenues due to COVID-19
- All banks will have a separate short questionnaire to ask additional questions on how the business has been impacted by COVID-19 and how the borrower will prepare for the new normal environment
Current SBA Eligible Deals:
- Firm foothold in the Amazon Research Software niche
- Exceptional c.22.5% CQGR for MRR between Q1 2017 and Q3 2020
- Rapidly increasing customer base of c.12,200 paying customers
- High net margins of c.75%
- Firm foothold in the backend-as-a-service tutorial software niche
- Impressive traffic statistics with c.1.9M visitors and c.3.7M page views in the LTM
- Loyal customer following with c.450,000 YouTube subscribers and an active slack chat of c.9,500 users
- Strong membership metrics with an LTV of c.$102 and MRR of $26K
- Five Years of operational history leading to a firm positioning in the Open-source PaaS niche, with over 100 active users
- Included in the reputable YCombinator 2015 batch
- Loyal customer base with a high LTV of c.$34,600 and low customer churn of c.3% over the LTM
- High-quality product offering, with impressive MRR of c.$86,000 generating revenues of c.$1MM in the LTM
- Notable client base including high profile technology leaders within the retail, technology, and logistics niches
- 11 years of operational history leading to a firm positioning in the eyewear niche, helping to obtain a 98% positive feedback rating across three eBay storefronts, and 98% positive rating across 31,000 reviews on the Amazon storefront.
- Wide market acceptance with tens of thousands of 5-star seller ratings on Amazon and several products securing the Amazon Choice tag
- High-quality product offerings driving more than 19,000 monthly orders over the LTM
- Established supplier relationships enabling the business to maintain stable unit economics
If you have any questions, you can reach out to Jordan Richmond directly at firstname.lastname@example.org or connect with him directly on LinkedIn.
Kevin Oh [00:00:01] Hey Jordan.
Jordan Richmond [00:00:03] Good morning, Kevin.
Kevin Oh [00:00:05] Thanks for taking the time here and spending a few minutes to speak with our investor network, just about the SBA program. I guess for those people listening, would you mind giving a quick background about yourself?
Jordan Richmond [00:00:19] As you said, my name is Jordan Richmond. I’m an SBA lender here at Ameris Bank. Ameris has been around for- we’re a large full-service bank in Georgia. We’ve been around since 1971, about 18 billion in assets. And we have almost a 50-year banking legacy. We’re a large national SBA lender and that’s what I specialize in. I specialize in large goodwill transactions, namely the digital space with e-commerce, SaaS, and SEO.
Kevin Oh [00:00:57] Great – Thank you for that. And for those of you listening who are not familiar with myself and FE International. My name is Kevin Oh. I’m head of the M&A team here at FE International. We specialize in online businesses, so e-commerce, SaaS, and content. We’ve been around for 10 years. We covered deal sizes as low as 50K, but then all the way up to 50-100M. But we do a lot of deals in the one to $5M range, which is a good, sweet spot for SBA deals. We also have a good relationship with Jordan at Ameris Bank and quite a bit of precedent transactions as well, which our viewers here will be able to reference in our blog post. But Jordan, thank you for taking the time. There are three areas that I want to cover on the call today. Number one is if you could give us just a refresher of the SBA program because there could be people listening that are not as familiar or could use a refresher. So that would be very helpful. And then number two, we have some common questions that we receive from investors in our network that I wanted to ask you in today’s session. Number three is we know COVID-19 has made a big impact in the SBA industry, and so if you could talk a little bit about what the impact has been and what we should expect going forward, I think that’s a good agenda for today’s session.
Jordan Richmond [00:02:19] Yeah, that’s excellent. I can kind of give a very high level of the SBA program and then drill down into more of these large goodwill transactions that I specialize in. Then we can get granular about specific deals and talk about the actual transactions that we do over here. So that said, the SBA is designed to help businesses succeed. The SBA 7(a)/504 program was designed to give banks the opportunity to make loans that would not be made without the SBA guaranteeing the SBA’s back and backing typically those on the 7(a) side. Those types of transactions are because of a lack of historical cash flow, and in the case of an M&A transaction, almost invariably because of lack of collateral. Right. You guys are buying and selling cash-flow and digital space. There are typically no business assets, no hard business assets to collateralize, although there might be some personal side that is really what the SBA program is there for. So, yeah, as I said, we specialize in those kinds of transactions. Therefore, we’ll do business acquisitions, we’ll do just large goodwill or partner buyouts. And it’s funny, as you go through your career, you carve out these niches that you don’t even know you were going to have. And all of a sudden, I become the expert in e-commerce, SaaS and I’m just in the digital space itself. Terms available are as you said, a 100K-10M in deal size but our 7(a) program, I think specializes in, you know, about that 500K-5M dollar deal range. They’ll do up to 90% financing. And just as a rule of thumb, you know, most banks will overlay their credit policy over the SBA is SOP (standard operating procedure). So there will usually be collateral shortfall thresholds. But, you know, most banks, you’ll find the ability to go up to 1-2M in unsecured transactions and potentially higher for better buyers, more synergistic acquisitions, and that kind of thing. So as far as your buyers and sellers are concerned, the way you’re going to fund a transaction like this, specifically due to lack of collateral and a change of ownership, would be the SBA 7(a) loan program. Before I kind of talk about just the specifics of the 7(a) program, I’ll kind of just pause, check-in, and see if you have any questions just off hand. If not, I’ll proceed.
Kevin Oh [00:04:57] I do have one question, and I think you get this quite often, for borrowers who have a house, is the expectation that they collateralize their primary home.
Jordan Richmond [00:05:08] Yes and yes, in the back of the presentation, there’s a couple of caveats for SBA lending requirements, and yeah, the SBA will take- a lender, the bank that is using the SBA program- will take any and all available collateral up until the loan is fully secured, namely to directly answer your question, potentially personal real estate. That’s said, in the back of the deck, we’ll go into more detail. There are instances where we will write a loan where there is no personal residence and it will be unsecured. But the SBA says if you have it, we have to take it out. I think that answers your question.
Kevin Oh [00:05:49] Okay, yeah. Thank you for the clarification. No other questions at this time.
Jordan Richmond [00:05:54] And as I said, we can go into all the collateral requirements, the guarantor requirements, and things like that at the back of the presentation. But yeah, as I said, the 7(a) program is really the- that is the intangible assets way to finance a goodwill transaction. A lender is allowed to right up to an unsecured transaction. You don’t have to be fully collateralized. This 7(a) program will go up to 5M in loan size. They are fully amortized. Typically, a goodwill transaction will almost invariably be amortized over 10 years. There are no balloons or calls with a 7(a) loan by design, and the loans can be for working capital, machinery, equipment, inventory. And in the case of the business acquisition, it’s almost always going to be that goodwill is the largest component of it and potentially maybe some inventory and working capital as well. And rates will be spread over the prime lending rates, and they vary depending on the amount of collateral in the transaction. And again, I’ll stop right there before we actually take the information we’ve just seen. And now I can actually go into actual business acquisitions we’ve done here. You can see how you can use the settlement program. Before I do that, though, any other questions you want to discuss as well?
Kevin Oh [00:07:20] Not at this time – this is great.
Jordan Richmond [00:07:22] Okay, perfect. Yes, so as I said, you know, we do business acquisitions. That’s almost all I do in any given quarter, about 60% of my business is goodwill, 40% will be franchises or franchise resells, which again, typically have an unsecured component as well. So, yeah, just to name a couple of recent transactions that we’ve done over the last 12 months, which I guess is this presentation is a little old. It goes back 18 months. But a good example is we did a 2M dollar acquisition of a Canadian SaaS company. It was, again, this was a Canadian asset coming into the states, where the end corporation was a US entity, it was a US citizen buying Canadian assets. But it was 2M of just cash flow. It was a 100% goodwill transaction. We were probably unsecured. We had to take a position, as you and I discussed, on the gentleman’s home. But other than that, I believe we were unsecured by roughly 1.5M on that by working in the 15%. And we wrote the loan almost entirely unsecured.
Jordan Richmond [00:08:36] Another good example is last year we did a 545K dollar acquisition of an e-commerce business. We did pay for the inventory and the bar requested an extra 30K working capital. A common question I will get is, “How often can utilize the SBA program?” And I just wanted to point out that in this transaction, this was the borrower’s third acquisition in three years. So, you know, you do want to see that if you have a previous acquisition, the cash-flow has normalized and stabilized from that previous acquisition. And a bank just wants to know that the cash-flow is stable and reliable before you move on to the next project. But, yeah, there is the potential to do these transactions, rinse and repeat over and over until that 5M dollar exposure is reached.
Jordan Richmond [00:09:25] Another one that was a very good example, is a change of ownership that was a partner buyout. It was a health care facility, one partner buying out the other one. We did a 90% financing on that. And again, that was almost entirely goodwill as well. We’ve also done 850K in an acquisition of a SaaS company. There was another transaction from that borrower the previous year and the borrower did not have cash-flow, however, we had a good net worth, good collateral, and excellent cash-flow at the target business. So, we were able to do a second transaction for a borrower within 12 months.
Jordan Richmond [00:10:07] And then, yeah, we will run the gamut of very high, very large commercial deals, typically on the higher end in the 5-6M deal size, you’ll see manufacturing. But yeah, we will do that if we have a fair amount of collateral as well. Recently, well actually we recently approved and will be closing next week, a 4.5M dollar goodwill transaction coming with 300K in equipment and we’ll be writing the loan amount of something like 3.5M and change, and again 100% goodwill.
Jordan Richmond [00:10:44] And then the last thing I’ll just point out, and we can go over this in further detail with other questions because a common one is – earlier this year we did an 800K dollar SEO purchase and that was commingled financials. So the seller had two businesses with P&Ls of two businesses running into one tax return. We were able to decouple those, verify those third party means, and were able to get comfortable with the cash-flow of only half the business. So another common question is commingled financials. Yes, it’s potentially possible and you and I can get into that later as well.
Kevin Oh [00:11:25] So Jordan, let me just pause you right there. Just, first of all, it’s very admirable that you’ve had such success as a lender in the SBA space, especially in our industry. Some of the precedent transactions that you’ve just mentioned have raised three questions and/or comments on my end. And some of these we’ve received from investors. Number one, the first example you gave was an acquisition of a Canadian SaaS company. So it sounds like even though the public perception is that the company that’s being acquired needs to be based in the US, it sounds like that’s not a mandatory requirement. Am I understanding you correctly?
Jordan Richmond [00:12:05] Yes. The eligibility for SBA is that the borrower and entity have to be the United States, so within the states. However, you can buy foreign assets, and that’s specifically what we did. It was a Toronto company. They were buying it. They were not operating in Canada. They were just bringing the operations, goodwill, and assets, essentially digital property, into the states. And we were okay by that. And then the following- the supplemental question is, “how do you know?” The SBA asks you to verify the tax information from the tax transcripts by virtue of form 4506. Obviously, a Canadian company will not have that. But, you know, without getting too into the weeds on how we got through the documentation and we have lawyers, Alpina, we know the SBA, but if you can find alternative documentation, sources of a verified cash flow and verifying the revenue, then yes, there is a potential to write that. And yeah we have- we’re doing an Irish one currently. We did another U.K. one earlier this year. And we have this is a common misconception. And to be frank, many banks will write it, but again, stronger transactions can get comfortable with it, with caveats- yeah we can do foreign transactions.
Kevin Oh [00:13:28] That’s great. I think that will come as a shock, positively, to a lot of our listeners. So I appreciate the clarification there. Just to reiterate, the company not being based in the US is not necessarily a deal-breaker. So it seems like your firm has precedent and experience doing such transactions. So that’s definitely good to see.
Jordan Richmond [00:13:51] Yeah, you know, it comes with caveats. Obviously, that’s not an approval, but it warrants a conversation. And there is a record of it.
Kevin Oh [00:14:01] Yeah, so no guarantees. But that applies to the US deals as well.
Jordan Richmond [00:14:05] Sure.
Kevin Oh [00:14:06] So, the second point I had is there was an e-commerce business that you mentioned where it was the third acquisition for the borrower in three years. There was also an acquisition of a SaaS company where there was a second acquisition for borrowing in a year. Here at FE International, if we work with a repeat buyer, so someone who has acquired a business through us before, we take very kindly to their interest and they do win some brownie points within our network. I wonder, does that apply for SBA loans as well? Do you take kindly to borrowers who are looking for their second or third loans?
Jordan Richmond [00:14:44] You know, it’s funny because you really can assess it both ways, right? You can look at a second or third transaction (and this is directly what I was saying earlier), you look at the second or third transaction, and the first thing I think of when I hear that is either, A) there’s a fair amount of great collateral and a lot of business ownership experience, on the plus side. But on the negative side, as detractors, if the borrower has done an SBA loan and then potentially pledged a home or something like that, now we have no collateral left to secure two. And also, if it was a recent transaction, then the cash flow of the business might not be stable enough to take on a second transaction. And the reason I did mention that is because you see banks that will patently say every 18 months or every two years or every two years fiscal with year-end tax returns to verify the debt service before they go for the next one. I think an analogy that we use internally is that a loan like that would be a snowflake. No two are alike, and I think they all have merits and detractors and there’s compensating circumstances for any deal. So the reason I just wanted to point that out is that we will consider it. We have closed and approved and checked in with those borrowers since then. And those are some of the strongest borrowers that are preparing for the third or fourth or fifth acquisition as they build up a rather large portfolio. So, yes, certainly on the table, certainly something you want to address upfront.
Kevin Oh [00:16:18] Fantastic – that’s good to hear as well. Third here- And so you mentioned about- the last example that you provided was comingled financials. How that’s also not a deal-breaker, and it’s a common misconception that if a business has commingled books and their tax returns do not point specifically to the business being sold, that makes a business ineligible. But it seems like that’s not the case. Is that the correct understanding?
Jordan Richmond [00:16:42] Yeah, and just as I said on the last point about the international transaction, you’re absolutely correct. For deals like this, you do have to be very careful and very mindful and methodical about the documentation. And almost invariably, you’re going to send it to the SBA directly to show them what you collected. But no, that’s a common thing. You see it a lot in the digital space. You see a lot in the franchise space, where someone will have multiple units and then they’ll try to spin one off. And, you know, the onus is on the bank to verify that revenue from the P&L, if we can get comfortable that the documentation is fine and we’re within the cost of goods in the margins the onus is to verify the top line. So, you know, you can do that through sales tax transcripts and do it through royalty reporting (if it’s a franchise). You can do it if it’s, you know, e-commerce, you can do it from an FBA statement. I verified this from Google Ads and statements. So, the short answer is yes, it’s absolutely on the table. The caveats are, one, the SBA has to opine on it. And two, it has to be an excessively strong deal. But we do have a track record of getting those kinds of deals approved here and closed.
Kevin Oh [00:17:59] Okay, great. Thank you for the clarification there. No other questions at this time.
Jordan Richmond [00:18:03] Yeah, and no, I appreciate this makes my life much, much more interesting to actually have a conversation rather than just have this soliloquy, you know, out into a digital space. So, I’m happy we can actually talk about it. And that said, you know, I think the last couple of things I wanted to go over was just some basic, as I said, I was going to circle back to your question on collateral requirements to be a partner and equity requirements common. We can go over a couple just finesse points on these goodwill transactions and then maybe circle back. And then go over some COVID stuff very quickly if that works for you.
Kevin Oh [00:18:47] Yeah – let’s go for it.
Jordan Richmond [00:18:48] Okay – great. Yes, as you said, to get back, there are some requirements on this deal structure types and they become very common conversations that usually in the initial call I have with borrowers, these are addressed so. And so it’s good to have an educated buyer and an educated borrower. And the seller who knows what to expect, so a few just SBA lending requirements to discuss. As we mentioned earlier, there will be an expectation that if you have available collateral, the SBA is going to take it, up until they’re fully secured. And I just want to be ultra-clear. We will not decline a loan specifically based on a lack of collateral. If there is a fair amount of collateral in the deal or sometimes not at all and there are other compensating factors, we can still get that loan. But just for an example, you have a $600K loan amount. You have $400K of available home equity. The bank must secure to that per the SBA and that will leave us then with about $200K of uncollateralized goodwill. That is okay. With all things being equal, if the cash flow there, the borrower has good net worth and good experience that deal is going to get written. But just be aware and be prepared that if there’s available collateral, it must be taken per SBA, it’s not a bank thing, it’s an SBA thing.
Jordan Richmond [00:20:09] Another common conversation is the equity requirements. Everyone wants- and this has changed with COVID too, we are seeing stronger deals and people willing to put more skin in the game. But everyone looks at this 10% deal and everyone sees somewhere on a website that the SBA rates 10% goodwill transactions. And that’s the first thing they want. And they said, “Can I get this deal with 10% down. Because I would love a $1M business with only putting down 100K.” And my answer is, that is in the S.O.P, it is reserved for very strong transactions. I have placed deals at many banks and no one’s doing weak deals at 10%. Those are typically reserved for synergistic or second transactions or someone like an industry buyer. So, yeah, certainly on the table. But the way I frame it in my head is if it’s your first transaction or you are so undercapitalized where you need the 10% to make it work, it’s probably not going to be approved. But it’s a very common back and forth and the borrower needs to know. And the way I say it is, if you get to 15% of your first transaction, we can deliver 10. That’s ideal. But again, you’re seeing a lot more resistance with all banks post lockdown in this coronavirus environment.
Jordan Richmond [00:21:36] And then the last point I just wanted to point out, is you will see this especially, Kevin, in your world and digital, where you see founders who want a rapid exit. They will build something up, they get it stable. It’s growing like a hockey stick, and that’s what they excel at and that’s what they do. And they want to rinse, repeat and have that exit. That is doable with the SBA. However, we really do want to see historical cash flow. And if we do not see historical cash flow, we want to compensate that somehow with either external income, potentially a payment reserve, or something. So I just want to, you know, that’s more of a theoretical guideline to talk about, whether it’s two or three years, fiscal year of debt service, whether it’s less because we have external income and it’s a synergistic acquisition. But that is a very important consideration in your industry, specifically FE’s transactions. We want to look at the recency of the cash flow and where it’s lining up. I’ll check-in for questions and then we can kind of wrap up with the COVID disclosures.
Kevin Oh [00:22:45] You raise a good point. So, regarding the age of the business, the common understanding is that a business needs three years tax returns and if they don’t have three years, then they have to wait and it’s not eligible. Could you comment on that statement?
Jordan Richmond [00:23:00] Yeah. So, without really getting to the granularity of the SBA guidelines, I think the rule of thumb is three years, two years is certainly able to narrow through for a strong deal and potentially less if it was exceptionally strong and you had an exceptionally strong buyer who had external income. Or imagine an e-commerce acquisition that is synergistic to his own e-commerce business and you can actually see, for instance, maybe the accounting and legal line items would go away, therefore helping debt to service. Those are the kind of things you want to see. However, you’ll see many times where you’ll show an ability to service the debt, maybe at the SBA minimum three years ago fiscal year, but now they’re at one and a half times, even in just the most recent year. Yeah, that’s a potential approval. And then again, the reason I mention that is in your world, you see this hockey stick-like growth because the business does what it does, they do the R&D and then all of a sudden performs and you have that comfort- a buyer would have that comfort that there is that reliable recurring revenue. So if when the buyer sees it, when FE sees it, typically the bank sees it too. And along those lines, we have to appraise the business, we have to appraise the goodwill. So many times, you guys are appraising them correctly, and these deals kind of fall into place.
Kevin Oh [00:24:37] Right, so it sounds like it’s a case by case basis, depending on the business, dependent on the buyer, but it’s never just a straight “No.”
Jordan Richmond [00:24:46] Correct. Correct.
Kevin Oh [00:24:47] Okay, thanks for that.
Jordan Richmond [00:24:50] And yeah, there are a couple of other ways to structure deals to get around that. And that was actually one of the last things I wanted to discuss before coronavirus. But if you get a situation like this, and you’re seeing this now because post-March and post-lockdowns, you’re seeing the supply chains and demand just teetering in bizarre ways. And so you’ll see certain e-commerce sites have doubled in revenue because there’s a demand for it. (Whereas, you know, restaurants and hotels, obviously people are not traveling to as much) But you’ll see this recency of cash flow, and one way to circumvent that is to potentially look at a seller note. If the seller note is not stressing the overall cash flow of the deal, that is one way where we could finance potentially the goodwill and the seller could take on some inventory, and that kind of thing. Or in very large structures, sometimes we’ll look at Mezzanine debt or private investment, and that can also work to decrease the amount of goodwill that the bank is actually paying for.
Jordan Richmond [00:25:58] And, you know, other than that, the last thing I just wanted to review before we go into the coronavirus kind of updates, is that, if you do take on private investment, just be aware that if any partner has 20% or more – and that includes, say, husband and wife, each with 10 or 11% -anyone with 20% or more is going to have to sign. So, just be aware of that as you’re structuring your Cap Table, as you’re looking at whose partners you want to be, and really who the operators and directors are going to be too because that will directly correlate with who will have to guarantee. So, mindful conversation to have upfront.
Kevin Oh [00:26:38] That’s a big one. What we’re seeing in this space is more of like partnering up, so it’s not necessarily just a solo individual buyer anymore. People come to the table with a business partner in mind. And so if that’s the case and they own 50/50, it sounds like both individuals would need to guarantee an SBA loan.
Jordan Richmond [00:26:59] Yeah, yeah. And you and I- we probably talked about this three years ago at this point. But, we were talking about how private equity is coming downstream, and getting into smaller deals. Many times you just see equity partners with minority interests who are funding it and that’s fine as long as you keep it under 20%. Conversely, though, I will also mention that if you have an equity partner who is under 20% and responsible for daily operations, is integral to the success or directorship or operations of the business, they can also be asked to sign by the bank as well. That’s more of an ancillary point. You should talk with your SBA lender upfront, know how you’re going to structure the deal, know how you’re going to get approved, and then the way I put it is you have a buy-side approval and a sell-side approval. If you can get the buyer to know exactly what they need and educated to what kind of deals they’ll get approved for, then they can go shop even with the lens of cash flow of what they need to get approved from the bank. It’s super easy. And then you just call me the next day and say, “Hey, you reviewed my buyer financials. Here’s a prospectus.”, and then twenty-four hours later you can have a term sheet out. But the point is, have those conversations upfront.
Kevin Oh [00:28:16] I think it’s very important that if any buyer wants to acquire via SBA loan, they have a conversation with the lender, such as yourself, as early as possible. A lot of the time, what you’ll find is, at least here at FE, we prequalified the businesses. So, before they go out to market we’ll give you early access to the information. You and your team will take a look at it. And usually, within twenty-four hours give us a yes or no. So we do have that check and if a business is deemed SBA eligible, it’s mentioned as so on our website. Then we’ll connect the borrower with someone like you, Jordan, to make sure that they qualify as a borrower, knowing that the business has already checked off all the boxes.
Jordan Richmond [00:28:58] Right. Right. That’s exactly it. Great. The last thing I just wanted to bring up, and I hope we’re not running out of time, but just a couple COVID considerations, if that’s okay, would be helpful for everyone out there.
Kevin Oh [00:29:11] Yeah, absolutely. This is the good stuff. Let’s get to it.
Jordan Richmond [00:29:16] Yes. So, you know, I talk to people in the industry all the time. I want to know what other banks are doing. I want to know what’s in the market. I want to be able to place deals elsewhere. If, you know, there’s a credit box issue at one bank, you know, I know where it goes to another. But one thing a good friend of mine actually brought up, and I think it’s an appropriate way to think about coronavirus and think about the SBA lens post-COVID. Let’s put it quite bluntly, I mean, there’s economic uncertainty and when that happens, banks have been reluctant to lend. Right? And the way a friend of mine put it is, “Look, you know, all banks, including my bank and all banks out there, they’re writing deals. But you have to overlay the COVID-19 considerations over it. And if you can do that, you have a deal.” And I think that’s a very appropriate way to look at it. Is the bank going to write a non historically cash flowing hotel that was performing last year and that’s not performing this year because no one is going? I’m saying that that’s a tougher deal to get done than potentially an Amazon FBA store where sales have doubled in the last 12 months. So obviously there is that kind of consideration and you have to be mindful of that.
Jordan Richmond [00:30:34] And if borrowers or potential buyers actually want to go out and Google the COVID-19 considerations, I would say about a month ago at this point, the SBA has published questions and there’s a whole host of them. But the main question with the supplemental questions revolve around is how is the industry and business been impacted by the COVID-19 emergency?
Jordan Richmond [00:30:58] Does the business have a contingency plan for revenues and operations for the next 18 months? And if you can answer that question confidently with little trepidation for a lender, you’re most likely going to be okay. And again, another thing that the SBA looks at is stay-at-home orders, lockdown’s and businesses and economies shutting down. How will that affect the local market? How will that affect local businesses? And fortunately, in the world of FE and the world of digital, there’s very little impact, so that is favorable to the types of businesses and types of acquisitions that you guys are doing. But it is a consideration. We are at the point where we’re seeing, one, we’re seeing either businesses that have maybe doubled in sales. I’m seeing a lot of Amazon FBA deals that they were doing, maybe 30K in monthly revenue. And then once the lockdown hits and no one is traveling, now they’re doing 60K in monthly revenue. And the question is, “What does that goodwill actually appraise for?” Is the bank going to write that, and the answer is yes. We are writing deals where you’ve had a tremendous spike in revenue because of COVID-19. And my recommendation on deals like that is you do the business appraisal upfront. There’s a large bid-ask spread between buyer and seller because of the recency of cash flow. Sellers’ expectation is while this thing is growing, you look at what the future holds. And buyers’ counterpoint is that, well, this could be a onetime item that normalizes over the next 12 months. And the business appraisal really did fall right into the middle of those two prices, and you’re able to kind of solve for that disparity, which is helpful.
Jordan Richmond [00:32:52] Then the only other thing I’ll mention about COVID is the other thing you’re seeing, conversely, from businesses that have taken off, it’s you see cash flow damage businesses where there was- maybe an online blog or a fitness blog or something where people stopped going to the gym or people stopped reading. For one reason or another, people did not use the services for the months of March and April. That’s another consideration. And we’re looking then in many ways. We’re looking at it, maybe if you show me a deal like that in October, I’ll take out April and May and I will spread it over eight months to see what the cash flow looks like without those fixed costs eating out of P&L for businesses shut down. But we’re still going to overlay that with the SBA’s standard spreads and show what they did here today. So. there are a couple of ways to look at it.
Jordan Richmond [00:33:49] Another thing I’ve been doing through for those cash flow damaged businesses from the beginning of the year, is looking at monthly revenues over the last 12 and 24 months and seeing if it normalized again. And if they have, we’re on a path to improve them. So the message is banks are lending. They do have to overlay the COVID considerations, but for unaffected businesses, I feel as though that’s going to be where a lot of the deals are coming from in 2021 anyway.
Kevin Oh [00:34:21] There’s an underlying theme there that I wanted to emphasize. In light of how a business may have performed either positively or negatively due to COVID. What I’m getting from what you’re saying is that banks are willing to work with both parties to get the deal done. So, if it means an Amazon FBA business, which has taken off in the pro e-commerce environment, you would be looking to make sure that there’s a middle ground between the buyer’s expectations and the seller’s expectations. And alternatively, if a business has declined due to the corporate environment, things such as businesses in the travel or entertainment sector, it seems like you’d also be willing to find a middle ground between the buyer and seller as well. So, I think that’s an important point that I wanted to emphasize there.
Jordan Richmond [00:35:09] Yeah, and just- I don’t know if it’s a commercial for FE or a caveat for looking for banks, but I mean, travel or a hotel or restaurant, that is explicitly a harder deal than it is for an FE deal right now. I mean, all of digital is soaring. You look at what the largest retailers in the world are doing, Amazon, and things like that, in the last few months. It is staggering compared to where these travel industries are. But, yeah, if there’s a willingness and there is a cash flow- a way to understand and extrapolate cash flow- and feel good that the business will be successful, it warrants a conversation.
Kevin Oh [00:35:50] Okay, that’s good. So just- I guess best practices here is, if at any point a borrower has any questions, it’s best to have a conversation with you. Because it sounds like you could provide a lot of guidance. And a lot of things that buyers and borrowers think are not possible actually are possible with a couple of caveats that we would just need to overcome.
Jordan Richmond [00:36:11] Yeah, that’s exactly it. Engage with a lender as early as you can. You know, I have a whole pipeline of buyers who are literally just kicking tires and getting ready for an acquisition, but they have net worth moving through the system. We kind of make them feel good about deal size and then they might come back six, 12, 24 months later and we have a home for them. And that’s the most important thing to do. A buyer goes out on the search for one of the biggest transactions of their life and they waste 12 months, they waste 24 months without even knowing if they can get funded. It’s just not a way to proceed this. It’s a time burn for the buyer. It’s time for FE. And it’s a time burn for the bank because we’re looking at deals that weren’t going to get funded in the first place.
Jordan Richmond [00:36:57] So, yeah, that conversation upfront is hugely important and I’m happy to always have that conversation with buyers. But for the purposes of this call, I would say, you know, connect with me on LinkedIn, follow me on LinkedIn. I try to publish relevant content and keep up to date with these types of transactions more than anything. Obviously, Kevin, I’m always happy to help with any one of your buyers too.
Kevin Oh [00:37:23] Absolutely, and Jordan, we’ll make your contact information available here just offline. And if anyone wants a warm introduction, I’d obviously be happy at any point to make that introduction as well.
Jordan Richmond [00:37:36] Great. Happy to help! You guys have been a great partner of ours. I hope we are the same for you. And, you know, as far as the inventory and the network, FE has it’s really- you didn’t ask me to say this, but it is incredible. It’s second to none. And it’s an impressive situation you guys have over there. So happy to be a part of it.
Kevin Oh [00:37:58] Yeah. And thank you for the kind words, Jordan. I definitely cherish our partnership and look forward to continuing doing deals with you in the near future, COVID environment or not.
Jordan Richmond [00:38:07] Yes, absolutely.
Kevin Oh [00:38:08] Okay, thanks for the time, and thanks for coming in.
Jordan Richmond [00:38:11] Yeah, thank you. We’ll talk soon.
Kevin Oh [00:38:13] Okay – bye Jordan.