Ecommerce EXPERT Stephen Speer Reveals Almost $1 Billion in SBA Loans

Summary

In this conversation, Jon Stoddard interviews Steven Spear, an expert in e-commerce lending and business acquisitions. They discuss the intricacies of e-commerce loans, the importance of business acumen and liquidity, and the role of SBA loans in financing acquisitions. Steven shares insights on the evolving landscape of funding options, including seller financing and equity rollovers, as well as the significance of quality of earnings reports. The discussion also covers the process of closing larger deals and highlights client success stories in the e-commerce lending space.

Takeaways

E-commerce lending has become a significant part of business acquisitions.
Understanding business acumen and liquidity is crucial for loan approval.
SBA loans do not require collateral, making them accessible for many buyers.
Consultation before searching for a business can streamline the acquisition process.
Direct industry experience is preferred for larger acquisitions.
Multiple SBA loans can be held simultaneously, but with a cumulative cap.
New funding opportunities are emerging for larger acquisitions beyond SBA limits.
Seller financing and equity rollovers are common in acquisition deals.
Interest rates for SBA loans are currently around 8.25%.
Quality of earnings reports are essential for larger deals, providing a deeper financial analysis.

 Watch the Interview

Transcript:

Jon Stoddard (00:00.108)
Welcome to the top &A entrepreneurs. This episode is brought to you by the DealFlow system. You want more DealFlow? Go to dealflowsystem.net. Today, my guest is Steven Spear. Steven is founder and CEO. He's an online business acquisition advisor for e-commerce lending and focal point lending. And he does basically SBA for all of that. So welcome to the show, Steven. How are you?

Thanks for having me on John, appreciate it. Yeah. So I got to go back. How did you get into lending? Cause I'm looking at your LinkedIn and you've been in lending forever since San Diego forever. Yeah. So, yeah, I'm originally from Southern California. I went to school in San Diego, school of business, and then met my wife at a wedding. and then she was from Illinois. I promptly moved to Chicago and, we got married and

I lived in Chicago. was supposed to be there just a couple of years. I ended up staying 20 years and four kids later. And it became less and less desirable to live there. And I got to a point in my career where could live anywhere. And we had a second home in Florida, which eventually became our permanent residency here in Florida, in Tampa, actually. So let me start this off by talking about focal point lending.

traditional business acquisition financing. Now that's SBA and other financing or is it just SBA? So what transpired about 10 years ago is I started doing more and more online business acquisitions. Yeah, yeah. And almost did exclusively that, but then kind of our reputation, thankfully, kind of spread.

to the more brick and mortar area, which I've done a ton of brick and mortar &A. And people were getting confused. like, wait a second, I'm buying a manufacturing company, but you're e-commerce lending. So we then pivoted and opened up a DBA focal point lending. Everything runs the same. It's just, it's a branding. You the branding pivot. So yeah.

Jon Stoddard (02:21.39)
Which one do you do more more of the traditional financing SBA lending for brick and mortar or e-commerce? E-commerce. Yeah. We do about 80 20, I would say. OK. But our brick and mortar is expanding, even though we've done I think over my career, I've obviously done more brick and mortar business because, there wasn't really e-commerce, but that's expanding, especially since adding

our nine non SBA lending facilities for the larger deals. We're getting a lot more traction on the brick and mortar side. So what does an e-commerce lending look like? Because normally if somebody goes to a traditional, they're looking for some kind of collateral something. What's an e-commerce loan look like? The size of the loan, what you look for in the founder, all the details like, hey,

I just saw business on Empire Flippers or Quiet Light or Latona's or somewhere. Can I go get it? So I mean, primarily what we look for, let's just say deals from about a million, roughly a million dollars to 7 million. Those are going to be gravitating more towards our SBA facility. That's top line revenue, right? 1 million to 7 million? That's acquisition price.

Yeah, acquisition price, okay. Acquisitions from 1 million to 7 million, that falls in our SBA facility bucket, let's call it. And in terms of collateral, the SBA doesn't require any collateral. So that's kind of a mute issue. The only time they require, not require, but they try to obtain collateral is if someone owns a home, and then they'll lien that property. But other than that, there's really no collateral. We've done close to a billion dollars.

of SBA financing for those size deals. Wait a minute, you've done, how many deals is that if it's like one to seven million? Hundreds and hundreds and hundreds. Yeah. they- That's amazing. So they come to you, they have an e-commerce store. Could it be fulfillment by Amazon and or Shopify or BigCommerce, any of those kinds of stars?

Jon Stoddard (04:42.882)
Yeah, I could kind of walk you through it primarily. First and foremost, we consult our clients prior to them even starting their search. So they come to us. We have a very, I think a very good reputation in the marketplace. So they come to us and they say, OK, I want to buy e-commerce business. It could be a SaaS business. It could be digital marketing type business. And we pre-qualify them. We look at their business acumen, John, and we look at their personal liquidity.

and then come up with a reasonable number for them to go out and look for those opportunities. And we also assist in helping them find those opportunities. We're starting to do a lot more of that. And then they go and look for businesses. And then once they find a business or businesses that they're really interested in moving forward with an offer, then we vet the business. We make sure the business is financeable.

And then we go back to them and say, yes, John, that the business you're interested in is, we could definitely short financing for this business. And then the next step is assisting them with drafting their letter of intent. then they move forward. me, before you go too far, let me ask you about what you mean by business acumen and liquidity. understand the liquidity is like, Hey, how much, how much money do you have in your 401k or how much cash can you put into the deal? The 10 % skin in the game.

What do you qualify as acumen and how do you rate that or score that? First, we look at the potential acquisition price. Generally, any deal $2 million and below, meaning price, we look for direct or indirect business experience. So if someone worked for a company and they're buying something, trying to buy a business roughly with the same type of

skills set that's needed, we're okay with that. As we kind of work up the food chain now, then we're more looking towards direct industry experience or having a partner that has that direct industry experience. We've kind of done it both ways. Well, what do you rate on Scarf? They brought enough liquidity to the business, but they didn't have the direct experience. Let's say they were working at W2 for some other company and they've never owned a business because, you know,

Jon Stoddard (07:08.822)
running product marketing or running Facebook ads for another company, not owning is a lot different than owning it and running, wearing all the hats. That's honestly kind of close enough for us. If that's what you're doing, yeah, we're okay with that. And oftentimes, let's just say somebody just trying to get out of their corporate job and they don't have that even rough indirect skill set.

Oftentimes we'll coach them, like bring someone on that does have that skillset. And in most cases they are able to do that. And then we have a key employee that's able to slot in and provide that direct industry experience. Yeah. And is that a, you said that's a key employee. Would that key employee also be a partner? the, I think the SBA requirement is 20 % has to put up their personal guarantee, right? Well, it doesn't necessarily have to be a partner.

And the person doesn't have to have 20 % ownership at all. It could something less than that. For example, we're working on a deal right now where there's an employee working at this given business. He's going to have 10 % ownership when our client buys that business. First off, he has a vested interest in the business. Secondly, he's going to stick around.

He's the guy person running it, right? Or creating a market. Yeah. Right. He's running it right now. He's going to continue to run it with a new owner. and he's been given 10 % ownership. Yeah. Do you find more people are coming to you after they found a business on a website like quiet light or, empire flippers or flip up or micro acquire or they're coming to you originally. Yeah.

They generally come to us beforehand. I'm not saying that they don't come to us once they find a business, but we're really coach them pretty heavily in the process. And also what's really helped John is that we've laid out the entire process on our website and it's prompted people to go, gosh, instead of waiting to put an offer in on a business, then going to e-commerce learning, gonna have them help us in our...

Jon Stoddard (09:26.803)
acquisition and have them part of our acquisition team. So it's worked out quite well. Yeah, I think that's good because I get a lot of people come to me and goes, Hey, can you help me raise the capital for this offer? And I go, well, congratulations, you structured a deal. It's not going to work. Because there's no bank to lend on that. like, you know, there's a business I was talking to a logistics company, it's an offline business. And they, you know, they had four years of revenue.

they lost money in 2019. They barely made 43,000, 2020, 21 was great. It killed it, 2022 killed it, but they only have really one year and eight months of revenue. And it's not probable with the bank alone on that, because on that kind of Right. Especially with SBA financing and I'll get into our other facility a little bit later in the conversation, but with SBA financing, it's historical.

They look at two years plus year to date. Whereas most business brokers, it's all about trailing 12 months. That's all they're looking at. That's all their sellers are looking at trailing 12 months. Let's put the price determination pegged on that trailing 12 months. Whereas the disconnect here is that that's the broker and the seller. And then with SBA financing, we look at

we look at a historical cashflow. You've got to have at least 12, 24 months of trailing revenue, some type of history. months of basically two years of full years tax returns. Okay. Well, what happens if they change the business model? Like 2022, let's say they had 12 months, but one month was a one business model and one year was a different business model.

of different products. Does that matter? No, no, we've had, we've had clients get rid of a lot of their products. Most recently we had a client have a lot of products that were just low margin and they got rid of all those products. They don't no longer sell the product. So revenue tanks, also I'm sorry, top line revenue tanked, the bottom line revenue actually went up.

Jon Stoddard (11:53.013)
Yeah, I'm kind of referring to a business that let's say was selling physical products to a business that just signed digital products where the margins are higher and they go, okay, we only have 12 months of this and 12 months of physical products. But so we don't have 24 months of, you know, history. Yeah. would be really hard to put a narrative together around that. Yeah. Gotcha. They're completely switching gears. Yeah.

And how many of those e-commerce loans do you do? I mean, how many do you talk to per week, per day, per month that they're in your pipeline? wow. Generally at a given time, we generally have in total pipeline 40 million, 30 million, 40 million. And they're usually around one to 7 million. So that's quite a bit. Yeah. Right. So our average loan amount right now is above 2 million.

Yeah, we do smaller. I mean, we do smaller loans and now, you know, with our capital access fund, we're now doing loans 10, 20, $30 million and up. So this is past that. Let me before we go on to that. Are these first time buyers or they serial acquirers? Or is there a mix of both? Is anything changing in that ratio? No, a lot of both. We have clients that are buying, you know,

a number of different businesses. have a client right now buying three separate businesses concurrently. At the same time? At the same time. Yeah. Was he a acquirer of other e-commerce businesses before or is this his first one? Yeah. No, he owns one right now and he's buying three more. Yeah. Is there any limitation on getting an SBA loan on one business?

and then going to buy, try to buy another SBA loan, having, trying to get another SBA loan on a second business, same time or three or six months later. And the personal guarantee, not able to cover both of those or multiple. You could have multiple SBA loans and so you can have multiple SBA loans, but you're capped at a total of $5 million outstanding loan amount. Yeah.

Jon Stoddard (14:18.165)
I have clients with multiple SBA loans. So you're capped out at the five million that you can lend, but I can have five SBA loans at a time or 10 or 20. Yes, as long as you're below that five million dollar threshold. Well, that's what if well, let's say if I want to buy a bill to 50 million dollar holding company business, I can't. mean, and I'm going to have, let's say, you know.

10, $5 million businesses. Well, let me back up $5 million cumulative threshold. Okay. All loans combined, not $5 million each acquisition. How would I do that? I mean, you know, if I was, how would I buy one company? Great. I got the first company for an SBA loan. It's a $5 million business. I had to borrow $4 million from the SBA. I put 10 % down. got some seller financing.

And then I'm really good at this. I grew it, I buy to build and maybe to sell. And now I want to do it like in a holding company. I want to have 10 others of these kind of like an Andrew Wilkinson does. He's got 40 different businesses. How do I do that with SBA or can I? Well, you can't really, because again, you're capped at a $5 million cumulative low outstanding loan amount. So if you, you just closed on one deal a year ago.

and you borrowed $4 million and let's say still owe $4 million, you only have $1 million left to be able to borrow. so I have to finance the next acquisition some other way. Exactly. Yeah. And is that why you started your fund or is that because you saw people wanting, larger acquisitions? Because there was a real void for the larger acquisitions.

It was very easy to get financing up to 7 million, but we have clients that were looking at 8, 10, 15, $20 million acquisitions, and it was too small for private equity generally, and too large for SBA. So there's this no man's land. And I've tried for the last seven years to try to fill that void. And finally, everything came together this year after.

Jon Stoddard (16:41.717)
turning over many rocks and we successfully put together this program. it's, I think we rolled it out in beginning of May and it's, have hundreds of millions of dollars worth of deals going on right now. So is that a fund you raised or is that a relationship with a, another bank or institution or, or fund? Multiple relationships with multiple funds. Yeah. then

I'm sorry. Go ahead. Go ahead. I was just saying, depending on the deal, we know which which which fund to go to because each fund is vastly different and some some like these kinds of deals, some like those kinds of deals. So we're able to determine where to where to which facility to to go after. So when you say these kind of deals, that kind of deals, are you referring to like, you know, you have a institutional best or whoever it is.

looking for SaaS companies, you have a different fund that only looks for FBA business and a different fund that looks for traditional e-commerce Shopify kind of stores, over 7 million. Yeah. Yes. And it can also be brick and mortar. Right now we're working on a deal where it's an apparel business. And some of our funds don't like apparel and some love apparel. it just, we're able to, depending on the

actual deal and the structure of the deal where we know exactly where to go with that opportunity. does the interest rate look like on that and what are the terms? For let's say SBA is, is it 6 % right now for SBA or is it 8 %? SBA is 8.25. 8.25 for 10 years, right? 10 years. And now this, if I was to borrow $15 million for an acquisition and it's online content site, very profitable.

Guy wants, let's say $12 million for it. Yeah, I would say, one thing about, when you go outside the SBA, SBA is very much cut and dry. It's 8.25%, 10 years, no matter where you go. That's SBA. So with our funds, it really depends on the business. But to kind of give you an idea, the interest rate could be 7%.

Jon Stoddard (19:06.861)
It could be up to 12%, maybe, like a span like that. It could be with different debt stacking. You could have mezzanine in there. You could have an equity role. It's very fluid. It really depends on a deal. Of the deals we're working on right now, there's no one debt structure that resembles another. that's, you know. If I brought you a deal that looked like that characteristics, they are selling for 12 million. It's a content site.

very profitable. And I got you the finances for this, like the income statement, cashflow statement, balance sheet for three years. You need it for longer or just three years? actually shorter. mean, primarily most of our funds go off with trail trailing 12 months. I'd be enough. Yeah. That's, that's really what they peg their decision on, but they do require financials for at least two years. Yeah. And if the deal's above 7 million.

they require a quality of earnings report as well. Yeah. So who would pay for that quality of earnings report? Would that the buyer pay for that? Or can I put that into the sale? If it's, yeah, the buyer would pay for that. Yeah. What are those? What's the level of quality earnings that they look for from a top five accounting firm? Or can I get one from, you know, CPA,

registered, let's say state by state CPA. I mean, it's very lenient when it comes to that. It doesn't have to be, know, it could, it really, it has to look like a quality of earnings report. I mean, it can't come from the buyer. The buyer can't put together quality of earnings report, but as long as it's a reputable firm, good with that. Yeah. But doesn't the quality of earnings report, I mean, they go pretty deep on the financial audit of it.

They go back farther than just trailing 12 months. yeah, they do. But in terms of money decision. Yeah, go ahead. Sorry. So quality earnings report is really to look at the viability of the business. And yes, they do look at the financials, but they really peg their loan decision on, I mean, they really look at trailing 12 months in terms of multiples when they look at how much they're willing to lend on any specific deal.

Jon Stoddard (21:33.229)
They're really pegged on the trailing 12 months. And how much of the deal will they do on this larger acquisition? 100%, 90%, 80 %? I would say you could get creative and I would say 90 % is probably a good rule of thumb. But sometimes there's an equity role. You have the seller staying on and rolling 20 % or a seller note. I mean, you get really crafty with the structure.

depending on the deal. So how much would the buyer need to put in like the skin in the game, their part of portion of equity? But if they're able to do sometimes if they're able to roll, you know, basically roll any sort of equity of their current existing businesses, meaning they own a business, they have very little debt on it, and there's enough equity there, we could definitely include that.

So that's really, and a lot of our clients when they do buy, you know, 20, $30 million business, they have that and they're willing to offer that in lieu of cash. On the cash side, 10 % and it could come from the buyers and or their investors. Any other investors? Yeah. And other investors. they do have, typically it is a group and they are cumulatively putting together the 10%.

And does that group need to look like anything specific requirements or red flags? Not, I mean, it it be a group of 13 investors or a hundred or just a fund? It gets, it gets a little bit more difficult when there are just a ton of people, it's not, generally for what we see generally it's a handful of people, maybe up to five generally. Usually it's not hundreds of investors. Generally it's, it's a group of investors.

Are you seeing anybody leapfrog right into their first, let's say acquisition, a larger one, 12, $15 million and skip the, you know, stair-stepping from, you know, the, I bought a 1 million. Now I go to a 5 million. Now I'm going to a 7. Now I want to go to a 12. Well, what's interesting, interesting that you brought that up and very good question. We have had clients that thought they were limited by a five or $7 million acquisition. And then when we

Jon Stoddard (23:56.713)
explain about our program, our capital markets program, they're like, well, if we look at their personal liquidity, we're like, well, this guy could afford a $10 million business or $20 million business. So we've had a fair amount of clients actually like back to your point leapfrog over and really look at a $12 million acquisition or a $15 million acquisition. Yeah.

I mean, that's the, you're to get higher multiples on that. Let me, let me go back to the, don't know. I'm not understanding the 12 month history because if you're going to take a loan out for $15 million, they're going to want to know your terms are going to be three or five or seven years, right? Something like that. And they're going to want to know that that business has history to be able to do that for three, five, seven years. Why would they only look at, you know,

12 months, trailing 12 months. Yeah, I think there's a little bit of miscommunication. So lenders look at, they do look at, they make sure they're historical earnings. But in terms of their lending decision, they're really, terms of how much they're willing to lend, they primarily peg their decision on trailing 12 months. They're not saying, okay, if your business been around for 12 months, we're good to go. They're saying, okay, we look at, you know, we need historicals, but we're really dial in on the

trailing 12 months. Gotcha. I got you. mean, I understand because like 2020 you throw out with COVID 2021 is 12 months and 2022 is only eight months right now. So yeah, that's interesting. And that is pretty much any type of business, would you say? Or is it e-commerce, SaaS or? No, I mean, we, lend, like I mentioned, we lend in the brick and mortar space as well.

and quite a bit of it actually. So I think the only businesses that people get squirreling on anything dealing with gambling or porn sites or things like that nature, but really wide array. We also have a facility for, not that we're totally getting into it, but we do have a facility for any sort of cannabis business acquisitions, which is

Jon Stoddard (26:15.053)
really hard because if you're a financial institution and you're regulated by the federal government, you're not allowed to lend it to cannabis businesses. So that's something we do have the ability to fund as well. Yeah, that's interesting. know, too bad you weren't around three years ago when I was in the cannabis business. Everybody was looking for loans, but then they would like find a loan. was somebody that's not really a bank. It's just somebody who's going to lend for 15 % or plus.

But we actually have a fund. All they do is lend in the cannabis space. That's all they do. That's interesting. what do you do? I must say it's not my cup of tea, but... Hey man, it's legal in Arizona, recreational and medicinally. So they voted on it. It's legal. We're okay, but it's not federally legal yet. So you can't move that money around. Yeah. So what do you do to get in front of audiences, aside from podcasts like this?

I saw you on a podcast with Quiet Light. I saw you on podcast with the guy I just interviewed from Centurica. Now you did the deal for Centurica. Is that right? We did. Yes. Yeah. How did that go? I mean, what was it like working with? It was great because the cool thing is I'm friends with both the buyer and the seller. So it made it very, very easy. I've known Nate for about five years. I've known Chris Yates.

who formerly owned Centurica, I think I've known him maybe seven years. So it was easy peasy. I knew everybody and we all got along and we got it done. So that was fun. What would you make on that business model of like a multiple on Centurica? What was that? I really can't divulge that information. You have to ask Nate, I'll tell you at end of the day, Chris was happy and Nate was happy.

It really did dovetail very well into Nate's existing business. Sellerplex. sellerplex. was just like a perfect match. So I was happy to see that both parties got what they wanted and both parties walked away very happy and Nate's crushing it. I mean, it really was a perfect fit. was just unbelievable. How long does that process take to, know, Nate reaches out to you and just like,

Jon Stoddard (28:43.805)
This could be anonymous. It doesn't have to be Nate, just like somebody reaches out to you, finds a business. You help them. You now have consulting where you actually help somebody find a business, what they're looking for, and then make an offer, put an LOI, and agree on it, and then start the process. So I'll start from the fully executed LOI to closing with a

you know, working with clients that are completely engaged, it takes about 60 days. We do have clients where it takes longer because they're not engaged. I mean, just like when your accountant does your taxes and he needs information from you, he's working at the same pace as you are. there is a little bit of frustration with some of our clients. You know, their process does take longer because they don't get us what we need and what we're

right out of the gate asked for. it just depends. It's generally about 60 days. What about the process for the larger fund? you have any idea what that's going to look like? Six to eight weeks. And they will fund faster, let's say. Hey, we love the deal. Let's get this going. Let's get the asset purchase agreement.

Is it going to be a stock deal or asset purchase agreement on some of the larger deals? It could be either one. Generally, it's asset. But right now, we're doing a stock purchase on another deal. But I would say there's more front end, but less paperwork. So the process takes about the same. think if you look at the, gosh.

I'll just say the pin in the ass factor is a lot less on the larger deals actually. Why is that? Pain in the ass factor, is, I used to call it this because I went through the SBA process. I tried to buy this portfolio of courses and it was a financial proctology. I mean, both of us, we had a partner at the time, we were over 50 and he goes like, dude, do we really want to sign a personal guarantee at 50 and go after all our assets? Really?

Jon Stoddard (31:00.501)
Well, they won't go after your assets, but yeah, there's a personal guarantee involved because generally when you're buying a business, there's no there there. You don't have assets. The business generally, it's all goodwill lending. So lenders need something to hang their hat on. now our larger deals, we don't have a personal guarantee requirement at all, but we also have a minimum and that's the business has to pull in at least $2 million in EBITDA or SDE.

per year to qualify. So $2 million in EBITDA or SDE. Yeah. Yeah. It translates to about $7 or $8 million in enterprise value, roughly. What's their recourse if the buyer screws it up? Generally, they're non-recourse. Non-recourse. Okay. Yeah. There's no personal guarantee, non-recourse. Right.

Interesting. It's getting more and more attractive because I'm looking at a deal right now at 12 million bucks. So, yeah. It's been really fun actually, John, rolling that out and seeing the response has been just tremendous. And yeah, that's one thing, know, we're specialists over here and we really take a consultative approach with our clients and it's fun. I enjoy coming to work each and every day.

Yeah, if I brought you a deal like that size and what would you need from me? Really at first it would be the financials of the business, maybe a debt that you put together and as well as a SIM. And then we take it from there. We first review all that information, determine the level of interest, and then we'll schedule a call with you and really dive deep in terms of what your

you know, your overall experiences, your overall liquidity, and also what you plan on doing with the business. So, and then from there, you know, we move forward from there. Yeah. And how much score would you get? It's like, look, I'm not going to run the business. I'm in a holding company working above the business. If the guy wants to stay on the roll of equity over one option or be number two person in the business.

Jon Stoddard (33:26.125)
he's staying, I'd like to move him up. Is there kind of like, hey, we love that scenario or? That's a really good question. generally we don't like, regardless of if it's SBA or a capital access fund, we don't like absentee ownership. Candidly, really doesn't, usually doesn't work out very well. So we want the owner to be engaged and be involved with the day to day. So kind of an absentee ownership, no matter

where you go for financing is generally a no-go. So if the owner, the current owner is staying on, it definitely helps. But we also make sure that the new buyer is engaged, is running the day-to-day. Yeah. So what does that equity rollover look like? Are we kind of giving an example of what the private equity does? They'll buy 60 % or 80 % of the business and they, you

give it the seller, the equity rollover. Stay with the business. Your second buy to the app will be larger than the first buy. But that's because there's some kind of liquidity event down the road where a larger private equity firm buys that portfolio or they go public or something. That's exactly right. Right. So you would like to see at that point some type of roadmap for that to be happening.

to say, hey, we'd like to see 20 % equity roll-in. We don't require an equity roll. I kind of like it, honestly, personally. think it gives solace to an underwriter going, OK, the current owner is staying on. He or she is going to keep running the business just like he or she has up till now, or they have. Maybe it's a group of people. And it really helps the deal, I think.

And we generally, if there's not a role and the current owner is not staying on, we definitely look for a transitionary period where the owner will help with the transfer of the business, generally over three to six months, sometimes even as long as a year, to stay on as a consultant and really help with that transition. So we see a lot of that. We see a lot of seller notes.

Jon Stoddard (35:46.349)
which also helps keep the seller engaged. What's the seller note you look for? What's comfortable you look for? 10%, 20%, 50 %? Both with SBA and- Well, let's say the larger one. The SBA I understand is the seller note subordinate to the SBA. I would say 10 % is a common seller note number. 10 % of the acquisition price, that's very common. Even in the larger deals?

Even in larger. Yes. Well, what would you what would you say if it was large if the buyer was to negotiate a higher seller net? Less risk for a lending institution, so we're all good. Yeah. And earnouts are very common. Yeah. How do you how do you handle earnouts and loans? Because earnouts to me, you know, the seller, I the seller is still really involved and you've got to prove that earn out that

those that money's actually cashflow is happening. Yeah. mean, earnouts are very common. I mean, post-act, I mean, obviously we take the earn out into consideration, but it really doesn't, doesn't impact a lending decision. It really doesn't. No. Cause obviously they have to hit certain revenue tiers. Well, it may affect cashflow, if it's. Yeah. Yeah.

If the business is growing, it's not going to be any worse than it currently is. Right. And yeah, the down there's there's no downside. If you structure the year now correctly, if like the business lose money, you don't get any money. Right. But of course, the SBA lenders or the your new funds not going to get any money either. Yeah. So these are non recourse. So that's pretty awesome, That's awesome. Yeah. Yeah. Yeah. What else?

So let me give you a story. We were trying to buy this one business and I'd say we're probably newbies or didn't understand or were aware of funding sources like a family office or something like that. So we hired it in investment bank out of San Francisco. One of the larger ones you could probably identify it pretty easily. And we spent a lot of money on that and they weren't able to find

Jon Stoddard (38:12.909)
a source for funding, but they at the end of their engagement, 90 day engagements, they said, you you are not allowed to contact these banks for one year. How do you work? mean, do you, are you getting points on the commission from the sale of the business or do you charge me $25,000 like an investment bank? So we require exclusivity because at the end of the day, if you're not committed to us, we're

you know, we're not going to invest time in, in shoring up financing for our clients. So we require exclusivity and depending on the transaction, we generally charge our clients a point and a half. And then that gets actually tacked onto a loan in most cases, but we do also collect a $25,000 retainer fee upfront and that gets credited towards our success fee. Yeah. So if I was trying to get a $12 million loan from

going to you and you source it out, I still pay, I'm paying you $25,000 or am I paying you $25,000 after? No, you're paying us. It's a, it's a retainer fee. So it's upfront. okay. Gotcha. Gotcha. the reason we do that is that, like our time's valuable. Yeah. And also our, vast array of lending partners, we don't want a situation where we're

providing them with opportunities and they never close a deal with us. So it makes us look bad. So we collected $25,000 to hedge against that, including obviously our valuable time and it doesn't cover anything. you I get it. mean, like it's, it's, got to ante up if you're going to play cards in Vegas at the big tables. Yeah.

But what we're able to do for our clients is really instead of them going out looking for funding, we take care of that for them. They're able to stick to their day job in running the company or growing their portfolio. And we have a lot of contacts in the capital markets as well as on the SBA side. And we have a 98 % success fee. So. 98 % success rate? Yeah. how many of those deals

Jon Stoddard (40:34.257)
I have to tell you, when we hired this bank and then they couldn't find the money for us for this acquisition. So they said, Hey, we're going to end our engagement. And they sent this list of companies. was a very small list. go, this is all you went out to source to find that deal. And that was it. was like 10 of them were just SBA banks. Like, then maybe five of them were

you know, family offices or some, you know, some other lending institution, which was a lot higher interest rates, like 15, 20%. Yeah. How many do you have to go to? Dozens. Dozens? Yeah. It's rare that we have to though, because we do so much vetting on the front end. We don't need to go to dozens, but we have dozens available. Okay. And generally I would say three to five.

is probably a good number because we're really, again, we do a lot of upfront between vetting the business and knowing we're very much dialed in on where we're going to go to for the financing. And also we have a very good sense of what our buyer profile looks like. So it's rare that we have a situation where we have to shift gears. But back to the bank not allowing you to go direct, that's very common.

Because once that relationship is developed between the intermediary, the lending institution, and the client, that's pretty much cutting the intermediary out is really a full-on Well, let me give you an example. One of the banks they introduced us was Live Oak Bank. And I go, wait a minute, wait a minute. mean, first of all, Live Oak Bank just sent me a login to fill out information and to contact anybody there for questions.

They threatened people at Live Oak Bank from calling me talking to them directly. I go, look, I'm not going to go through a financial proctology and not be able to talk to the bank that's going to lend me money. Yeah. Yeah. Yeah. We've never. Yeah. That was just a weird scenario. But we ended our engagement with them. Yeah.

Jon Stoddard (42:54.049)
Well, that's been really illuminating because, and I'm glad that there's new offers out there for a larger acquisitions. Yeah. And are you actively kind of doing, say, talking to your client list of people that are doing one to 7 million and they've exhausted their SBA, but then now they have a new source to make another acquisition from this new fund. They do. They, you know, go up market. Definitely. And we do have clients that went from.

I just think of one client, went from that million dollar acquisition seven years ago. And I think he just sold a business for, I think it's $40 million. No way. What were they selling? Yeah. It was a content website. That's believe it or not. A content website? Yeah. Yeah. And now he's looking to buy a very sizable business, like 200 million.

So it's been really, it's been part of the greatest thing, part of my job is watching our clients over time really kind of up their game, starting off with that first acquisition and moving forward with subsequent acquisitions and eventually selling those and then really going up market and buying a 20 or 30 or $50 million business. Yeah. Well, that's because you've been around for a long time providing value.

Steven, so let me go back to this part. So the 25,000, when this is paid. So let's say I find a business and I get you the financials and then you take it to your underwriter. When am I paying you guys 25,000? Okay, so for our capital access fund, once we're certain we could short financing for you and once you're under LOI,

and ready to move forward with financing, that's when we collect it. We don't collect it. We could vet businesses for you and make a determination if we're interested in moving forward with any given opportunity, but we don't collect our retainer until you're under LOI. Your offer has been accepted and we're moving forward with the financing. Yeah. So let me give you an example. Let's say two scenarios. One is I send you the financials.

Jon Stoddard (45:16.109)
And it's a great business. It's doing $12 million. It's very profitable. $2 million or $3 million in EBITDA. And I send the business to you, three years of financials, cashflow statement, balance sheet, all that stuff. You're like, my God, this is great. You're going to give me a phone call back and say, hey, the underwriters, we'll do 60 % of it, or we'll do 80 % of it. Some kind of call like that, right? And you're going to-

mean, usually within a couple of days. We might come back with questions like, there equity role or what's the deal structure kind of going to look like? And we're able to give, you know, we're able to structure it in that way. So yeah, usually a couple of Okay. Great. And one thing I need to note, like the $25,000 retainer, that's non-SBA loans. That's all I'm referring. I'm not referring to you. Yeah. We don't collect any money on SBA loans. Yeah.

Well, Stephen, again, thank you for being my guest on the top &A Entrepreneurs today. Thanks again for having me.