1200 SBA Acquisition Loans Later, Here's What I Wish I Knew!

Summary

In this conversation, Jon Stoddard interviews Bruce Marks, an expert in financing business acquisitions, particularly through SBA loans. Bruce shares his journey into the M&A financing world, detailing his experiences and insights into the search fund model, goodwill transactions, and the importance of cash flow in lending. He emphasizes the significance of understanding the borrower’s background and the structure of deals, including seller notes and partnerships. The discussion provides valuable insights for entrepreneurs looking to navigate the complexities of M&A financing. In this conversation, Jon Stoddard discusses the intricacies of business acquisition financing, focusing on equity requirements, investor relationships, financial performance analysis, and the importance of understanding industry trends. He emphasizes the need for searchers to have skin in the game and the role of strong cash flow in securing loans. The discussion also highlights the significance of thorough due diligence and the ability to navigate the complexities of SBA loans and investor expectations.

Takeaways

Bruce Marks has completed over 1200 SBA loans for acquisitions.
The search fund model allows individuals to buy businesses with limited personal investment.
Goodwill transactions refer to the intangible value of a business beyond its physical assets.
Cash flow is the primary concern for lenders, not historical performance.
Seller notes can be structured flexibly based on the cash flow of the business.
Partnerships in acquisitions can complicate cash flow management.
Building relationships with lenders is crucial before finding a deal.
Military veterans often bring valuable skills to the business acquisition space.
Understanding the borrower’s experience is key to successful lending.
The M&A space requires patience and persistence to close deals. You need to have 10% equity when acquiring a business.
Each bank's requirements for loans can vary significantly.
Having skin in the game is crucial for searchers.
Sweat equity alone is not sufficient for securing loans.
Searchers should have at least a year and a half of living expenses saved.
Investors must be capable of supporting the searcher financially.
Understanding the business model is essential for success.
Analyzing financial performance requires looking at specific years and trends.
Industry growth trends are critical for evaluating business potential.
Strong cash flow is vital for managing risks in business acquisitions.

 Watch the Interview:

Transcript:

Jon Stoddard (00:01.422)
Welcome to the top &A entrepreneurs today. have a guest, Bruce Marks. Bruce is out of Florida and he's done completed over 1200 SBA loans for acquisitions. That's incredible. Thanks for being on the show, Bruce. Yeah, thanks for having me, John. Really excited to be here and participate for sure. So you are using LinkedIn out there.

And I'm looking at your profile right now. It I help finance business acquisitions, &A advisor, speaker, over $300 million in search fund lender. So do you just focus on search funders? So it's a big part of my business, but what I do is I finance, you know, I help buyers finance &A transactions. So that could be searchers, it could be buyers, it could be partner buyouts. It's one...

basically vertical, which is lower middle market &A, but ultimately the borrower can be one of those three categories. So Mark, I want to hear the story on how you pick this niche and find everything. What are you looking for? What kind of entrepreneur you looking for? What do they need? What assets? What's financial background? How long does this process take? And what's a good deal? What's a bad deal? Everything. So let's get into that.

Okay, I hope we have more than an hour. You got to be zero in on the top points there. Yeah, no, I'm teasing you. yeah, you know, I made my first SBA loan many, many years ago and was just a generalist for a number of years and ended up having my own business for 13 years,

had a corporate consulting firm and then ultimately sold that. So got an opportunity to come back into the banking business. And since I had been through the startup of a business, growing a business, selling a business, it just made sense for me to dive into that world, right? So I did, and I was working with basically Main Street transactions at first, right? You know, working with...

Jon Stoddard (02:19.074)
business brokers and helping them and their clients get deals to the closing table. And like anything else, it just kind of evolved. In 2015, I was first introduced to the search fund model. A Harvard MBA graduate student approached me and said, Bruce, I'm looking for some financing. It's a bigger deal. I asked him, how much money are you putting in? He said, well, not much. And I said, well, then how do you expect to get SBA financing? And he explained the model to me.

I absolutely fell in love with it. It made really good sense to me. I've always been a really strong cashflow lender. And this just resonated with, wow, these deals are to good people buying good businesses with good, strong cashflow. on, let me stop. Because I've interviewed a search funder in the past and I asked the same questions. So why is somebody going to lend you $15 million to buy a business when you just got out of Harvard?

You have no experience running a company. Zero. Yeah, so it depends, right? So in terms of a lot of the clients that I end up having are either people that worked for five, six, seven years and then went back to school, went to Harvard, went to Wharton, went to Stanford, went to Kellogg Booth, whatever, all the bigger schools, and then dived into the ETA, Entrepreneurship Through Acquisition program.

And then when they came out, so they now have an MBA, but they've got five or six years of experience behind them. Right. So I think the self-funded search model, which is where I play versus the traditional search fund model. And I think that what you're talking about is kids coming out of school that are more working with the traditional search fund model. They get the investors behind them. They've got a management team behind them.

They don't want to be there operating it on a day-to-day basis. So they're a perfect candidate. And I'm not saying that that's how they all go. I'm just saying from my perspective, very seldom is a searcher, if you will, who's been out of Harvard or Wharton for six months approaching me for SBA financing. This is This is- Yeah. Yeah.

Jon Stoddard (04:43.286)
So I'm just, you know, I'm just speaking on my experience, right? And I do a lot in this space, but very seldom do I see searches who are approaching me and saying, you know, I'm 24 years old. I just got out of Harvard and I now want to go buy a $15 million business. Yeah. Okay. So it's somebody that's got a track record.

maybe in a CEO position at somewhere or a higher level, at least they have some type of management running and coming to experience. lot of my clients come out of the private equity world, right? So they went to school, they got their MBA, they then went to work for some of the private equity groups, capital markets, investment bankers, and then they're doing that and getting their feet wet, getting the experience, going in, learning how to.

operate a business with the company, being in the board meetings, understanding the direction of the company, how to build it, how to grow it. And then coming back and saying, I don't want to be in the corporate workforce anymore. I want to buy one of my own, build one on my own, get some investors and make money for myself. And so that's what I typically see. And it's the majority of the business that I have today. Yeah.

So, and that person looks like, what kind of net worth do they have? Like 500, 2 million, 5 million? I guess I'll share a couple of stories with you because everybody likes stories, number one. And number two, they can relate to it. had a really interesting borrower come to me. He had a really strong background. He was in the military. So he came out of the military. So he great military training. He went back to school. He got his MBA. And he came to me and he said, Bruce,

I'm working with some investors and we are looking at the acquisition of a six and a half million dollar transaction. I said, okay. He had $50,000 to put into the deal, 50. Yeah. And he raised up about a million, three 50 on the deal. Did it, was this raised just commitments or it was in a escrow or a fund somewhere? Yeah, we ended up closing the deal. So it was.

Jon Stoddard (07:01.824)
actually raised dollars. Okay. And what they did was they had put in about a million three in equity, the seller held a small loan and we did a $5 million SBA loan. But the searcher in this case or buyer, whatever you want to call them, put in $50,000 into the transaction. And so when we look at it, and the way that I look at it is you're betting on that person who you're lending to.

To me, really doesn't matter whether he's putting in 50,000 or 250,000, because his skill set is not going to change. His aptitude is not going to change. He has all those things, whether he brings in 50,000 or 250,000. to me, it really doesn't matter. I'm not looking at the net worth. I'm not looking at his assets. We're a pure cash flow lender. How much of the business did he end up owning in the cab table?

And so, so what ends up happening is, is they own the majority of the common. And then they'll do some preferred and that looks a little bit different, for the investors. Yeah, the pilot. Yeah, exactly. Yep. Yep. So they end up generally owning anywhere from 75 to 80 % of the common. And the reason is, is because with SBA, you cannot have anybody own more than 20%. And otherwise they would be.

guarantor in the loan. obviously from an investment standpoint, that's what you're looking at. You're not guaranteeing the loan. You're looking at it as an investment vehicle. You're supporting that searcher. You're getting a preff return. Ultimately, they grow that business. They sell it four or five years from now, and they get a piece of another bite of the apple when they sell the business. So that's how- do my little math here. So that 1.5 million those investors brought in was

less than 20%, like 19, 17 % of the business? No, because there's really not a correlation between the equity check and a percent dollar for dollar, right? You don't look at it and say, OK, the cap table is 100%. I'm putting in a million. So, you know, of the total. And so I'm going to get 70 % of the business. just it doesn't work that way. All right. Was that the the company you just talked about yesterday?

Jon Stoddard (09:28.264)
No, no, that was the one I talked about yesterday was a searcher who I who I had met and he was out of the military. Just happened to be. Was he when you say military, was he an operator? Was he a officer or was he just, you know, both, you know, worked his way up, right? Started out, worked his way up, became an officer, had been in the, you know, the military for six or seven years and then decided that

He didn't want to pursue a career in the military, but wanted to go out, went back to school, got his MBA, and now came out. And we've just had a tremendous amount of success supporting our military. Our board of directors is just really, they just love working with folks that come out of the military, that background, that mental fortitude that they bring to the table.

It's really worked out and we've supported it. I've done a number of veteran loans for sure. Beautiful. I love that. I'm a military veteran myself, so I love that. Thank you for your service, got a question on your website or LinkedIn actually says, we seek and fund goodwill transactions. Yes. Yeah. Can you tell me what you are referring to as goodwill transactions? So goodwill is that intangible value. Yeah.

A tangible asset is something I can see, feel, touch, smell. That's a tangible asset. Yeah. It's on the balance sheet. got that. Right. Right. It's on the balance sheet. The brand. Yeah. That's kind of subjective. Why are you saying that? Yeah. So intangible is that the business name, those kinds of things, just the things that you can't touch. So you get into a transaction where the company is a distribution business.

They don't even control the product that they're, it's drop shipped somewhere. Right. And so they, they, have very little inventory on their balance sheet because everything is drop shipped. The company is doing five or six, $7 million in revenue, throwing off a million dollars in EBITDA. Right. And there's really no tangible assets in that transaction. And yet that business sells for $5 million, right. A five multiple on a million dollars in EBITDA.

Jon Stoddard (11:49.166)
We just really love those kinds of transactions. Not a lot of cop acts, not a lot of working capital, ton of cashflow to service the loan, enough to buy enough for the investors as well as the owner operator. Yeah. So let's take that business right there. It's a five X multiple and it's got great cashflow, 1 million EBITDA. So you're going to be able to loan, is it 70 % or 80 % on that or 4 million or what?

I mean, typically we like, well, with SBA requirements, you've got to put in 10 % in equity into the deal. 10 % equity. 10 % equity. We generally like to add a strip of 10 % seller note. I get very hesitant when a seller is not willing to hold a note. I've got war stories on that up the, you know, you know what? I mean, I just get very hesitant if a seller is not willing to hold a note and then we'll look at 80 % financing. So on a $5 million transaction, buyer steps in with

500,000 in equity, seller holds 500,000 as in seller note, and we do a $4 million SBA loan. Yeah. And let me go back to that seller note. What if you were able to, how low can your SBA financing going if you get the seller note higher? Let's say if seller note goes, yeah, I love the business and I'll give you a 50 % seller note. Yeah, well then it's pretty much right. mean, that's...

He's assuming as much as the debt is possible. So, you know, we're happy to do that. You know, of course, I mean, it lowers our risk, obviously, and it's a lower loan for us. But yeah, I mean, that strengthens our our deal. Right. And his seller note is subordinate to the SBA loan. That's right. Seller notes are always subordinate to the SBA. Yes. Right. And it's still not a deal unless.

Let's say he's offering seller note at 3%. And it's pretty attractive, right? Or 3 to 6%. But the debt, the cashflow has to cover the debt payments on the SBA loan and on the seller note. Yeah. So a lot of times, John, what I see is somebody will structure a transaction. They'll come to me with an LOI or they'll come to me not with one executable, but one that they're thinking of submitting, right? They want to make sure it's bankable.

Jon Stoddard (14:09.634)
And I've got a little saying, congratulations, you've structured a deal that doesn't work because. And unfortunately I say, you, man. I'm going to borrow that because I did the last week. Thank you, man. Congratulations. You've structured a deal that doesn't work. I unfortunately have to say it a lot, but that doesn't mean that ultimately that we don't get the deal done because then you have to go back and retrait. There's a lot of.

I'm come back to that because like, how does that happen? by the way, that doesn't work with the bank and I need to renegotiate with you. So yeah, we'll, we'll chat about, know, there's a lot of talk on Twitter, as you know, LinkedIn search funder.com all, you know, the major, major spaces spaces.

Like what are the terms and conditions? You see it all the time. What are the terms and conditions of the seller? No, does it have to be on standby? Does it have to be 10 years? Does it? You don't even need one. The SBA does not require a seller note in a transaction. So want to get that out there first. There's nothing that says you have to. do mean? You don't even need one. What you're saying is because of the seller, I mean, because the SBA transaction, which is guaranteed percentage by the government.

it's there's less risk in there involved. So he doesn't need a. Yeah. So what the SBA says in their SOP 50 10 6 nowhere in there does it say if you're making or you're in in a acquisition transaction that the seller must hold a note. It does not say that. Yeah. Now, so to be clear, let's say you came in and you know 10 percent is equity. So if a borrower comes in and says I'm buying a business for two million dollars,

and I want a million eight loan, that is eligible. It doesn't mean a bank is going to do it. So there's a difference, but it's eligible under SBA guidelines. So that we're clear. Now, use that other business five million, because the numbers we can stay consistent on the numbers. Right. Yeah. So on that $5 million transaction, essentially 4.5 million of that could be debt.

Jon Stoddard (16:26.997)
and 500,000 could be equity. Yeah. Right. So 10, 10 and 90. Now, a lot of times when they, the buyer comes in and says, well, I want a seller note because I want to make sure he stays engaged. I want to make sure he's in there through the transition plan. I want to make sure that he introduces me to the new clients, all the different reasons that the buyer wants a seller note, the seller note and the repayment.

is determined by the cashflow of the business. If you're paying a 5.5 multiple, the seller note is probably gonna have to be really well structured, like a 10-year loan, very low payments, because there's just not enough room for debt service. If you're paying a three multiple on that same business, obviously that seller note can be amortized over four years.

Right? So what I would love the audience to know is whenever they're talking about a seller note, cashflow dictates the terms and the conditions of the seller note. There is no preconceived. You have to have one and this is the terms and conditions it must be on. Cashflow dictates everything, including the seller note. Make sense? Yeah. Yeah. Let's go back to that subject we were talking about in

I can't even remember the part of it, but it was.

Jon Stoddard (18:03.309)
I'm going to have to edit this video. not only that. It looks like remember the subject we were talking about? said we need to go back to that. Yeah. That's great. That's great. I'm trying to understand that.

When I talk to a lot of entrepreneurs and they come to me for help and I say, look, you have to be creating relationships with bankers and capital at the same time you're looking for deal flow. Because as soon as you find a deal and then it looks interesting and you get something where, you know the requirements for the bank and the capital, that is...

create your structure for your LOI. It's not something out of thin air that you say, I've got a deal that doesn't work. Right. Yeah. Right. Yeah. No. And a lot of times borrowers will call me and say, hey, I want to get pre-qualified. I want to know that you're going to support me. Right. And so we'll get their personal information. They'll send me their resume.

give me their background and why they're a good fit. But it really ultimately depends upon the business that they buy, right? You could take a searcher who's got a great background, strong MBA, experience, and he wants to buy a business and he wants to buy a restaurant business. Well, unless you have restaurant experience, you know, it's going to be very difficult to get a lender. Even if you've got

X amount of money, right? So they have like a 97 % value rate. mean, it, and you know, lot of times the way that I approach lending, especially as a goodwill lender, right? We talked about that, that intrinsic value going forward. I don't really look three years back. Like a lot of lenders will do, well, we've got to have prior debt service. I really don't care what it did three years ago. I care what it does a year from now. Cause I didn't have a loan.

Jon Stoddard (20:17.687)
Three years ago, I've got a loan. If I close a loan tomorrow, my only concern is what's that business future. Right. Exactly. Exactly. And then people will say, well, but if you had three million in cashflow, isn't that a predictor of going forward? And I'd like to share the story because it really will resonate how when you are lending and you're lending in this space, how it should look. Let's say tomorrow, John and I decide that we're not doing much. We're not doing a podcast. Business is slow.

and we're going to go to the horse races. And in the third race, there's the triple crown winner. And we go, wow, this is going to be a great bet. He's won the triple crown. But an hour before the race, they announced that the jockey has taken sick and they're going to put Bruce Marks in the saddle. So you turn to me and you go, hey, Bruce, you ever been in a saddle? Nope. You ever ridden a horse? Nope. Think you can get it out of the starting gate? I don't know, John. I wouldn't make that bet.

you're not making that bet, right? So no matter what the predegree is of the horse, it's the jockey that matters because he's the guy you're relying on to make that horse perform. It's the same thing. And I look at that the same way I could lend to a business, John, that did $3 million two years ago in EBITDA. And if I make the wrong bet on the wrong guy, doesn't matter because six months from now that business is going under. So

When I look at pre-qualifying folks, I really dig deep into who I am lending to, their skill set, what they bring to the table, and the jockey ride and the horse. And that's the most, I would love to make sure that the audience understands that, especially in this size transactions, that that's the right way to look at it. Cause that's the bet.

that the bank is making that you're the right guy to lend to. Yeah. It looked at the debt's going to get me repaid. Do you have any affinity for people that are independent or that, our partners, like say with a brother or another partner or have a great board, lined up?

Jon Stoddard (22:33.837)
So a lot of times if I see a partnership, know, now I've got to, okay, how much does each one of you have to take? Right? So if each one of them is taking $150,000, $300,000 in cashflow is coming off right off the top. Right? So if I got a million dollar business, and let's say you and I decide to partnership to buy the business and I say, John, how much you want as a salary? You say 150. And I say, well, if you're taking 150, I want 150. Now we've got $700,000 left to service debt.

Right. So now that's got to service the SBA loan. It may have to service the seller note. It may have to service the sellers, preff and then still have enough room that the noose is still not too tight around the neck. IE if the business has a hiccup or a sneeze, it's not going under. Makes it very difficult. And your debt coverage ratio is 1.25, right? That's what- Yeah. Well-

Yeah. I mean, that's historically for last year. I mean, if you open up the SOP, it really talks about you should have at least a 1.15 debt service coverage, if not with projections going forward. But you really want to make sure that the noose is not too tight around the searcher's neck, that the deal can't cash flow well, and that they can't sleep at night. God forbid something happens. not that I don't do partnerships. just

Did alone, it's now in closing for two young searchers. I closed a great deal for two searchers back in April. And in fact, those were the guys that introduced me to Twitter and that's obviously how we met. yeah, as long as the business is strong, that it can support them, it will supply, it will make sure that it covers their own personal living needs, then we're okay with it.

I would say that probably 40 % of my deals, maybe 30 to 40 % of my deals are partnerships with two people. And then 60 to 70 are probably individual buyers. Yeah. And when do they come to you? it when they have a deal already and you're on the list of banks they want to cover, or do they come to you beforehand and go like, what do I need before I go out and talk to people? It's up to them. That's what I always say. I mean, I do a lot of,

Jon Stoddard (25:00.481)
consult of roles, certified &A advisor, and having been through it myself and just the amount of experience I've had in the years I've been doing it. I say to the clients, listen, you're running the ship, this is all about you. You wanna come talk to me pre LOI and you want me to look at the SIM, you want me look at the tax returns, you want me to help structure the deal, you wanna talk about it, I'm happy to do it. I really am. that's how you build relationships in this business.

As you all know, John, because you've been doing this a long time and very involved in the &A. By the time a searcher sees a deal, goes through it and it falls apart. And then they're on to the next one, as you know. I can share story after story of, you know, I finally closed the loan and it was a year and a half later after looking at five deals with the searcher. Right. I mean, that's very, very common. That's very, very common.

I start with a searcher and a year later, year two, three months later, we're closing the right one. Yeah. Yeah. No, it's not. I mean, if it was easy, everyone would be doing it. It's not easy. Yeah. Yeah. No, it takes a lot of time, but it's just a great space to play in. I love doing what it is I do. I'm very fortunate that at this point in my career, I get to get up in the morning and make that decision. I don't have to come to work anymore.

I want to come to work. When you, when you, somebody comes to you, let's say that looks like, know, that, that was in the military, way back to school, came out, is a searcher is looking for a business and he goes, well, I'd like this $5 million business. But I only have $50,000. What do you advise them to do? I need you to go find some investors.

equity investors and then come back to me or how do you help there? Yeah. So a lot of times that happens a lot. let me, as you would imagine, right? So I'll say to them, I'll just say, listen, this is the way it works. You're to have to come up with 10 % equity, right? So if you're buying this distribution company, it's thrown off a million. You want to buy for five, you're going to have to raise $500,000, right?

Jon Stoddard (27:22.765)
You've got 50. That means you need 450. Does he need to have 50 or can an investor spot in 50? Each bank is different and each bank's requirement is different. Yeah. So that's a real key point because a lot of people will call me and say, well, I heard the SBA requires this. Well, that may be true. may not be true. That may be the bank requiring it, not the SBA. Right.

And the SOP, Standard Operating Procedures Manual, is really like anything else. It's a Bible. But it's left up to interpretation, right? That's what it means to me. Yeah, right. Exactly. as one lender friend to me, one lender friend said to me once, Bruce, we interpret the SOP a little bit differently than you do. That's when I realized

Okay, yeah, they're playing by a different set of rules. Doesn't mean they're wrong. Doesn't mean they're right. They want to take that chance. God, God love them, right? So the way that at least first Bank of the Lake goes to market is, is we want the searcher to have some skin in the game. We want them to have a little bit of money into the deal. Does every bank out there require that? I don't think so. I'm not sure.

But I have heard that there are some banks out there that may not require that. We do. So if we're doing a five million dollar deal and the equity raises five hundred thousand, we want fifty thousand from the searcher on that deal. You know, there's a terminology called straw borrower. We've all heard it in the mortgage industry. Right. And, know, when you're dealing with the SBA, it's a government. Right. And we get audited just like any other industry.

And so in order to keep our guarantee intact, which is obviously we're here to make loans, but we're doing these loans because there's a risk and we want to make sure we get the SBA guarantee. We are definitely on top of mind to make sure that our guarantee sticks, God forbid in the event of default. One of the ways of doing that is to say, hey, you know, the searchers got a little skin in the game. It wasn't a straw bar or we're okay with it.

Jon Stoddard (29:47.789)
because I will get deals where they'll say, my sweat equity, my two years into the looking for this, my working with the outside community, me seeing 250 Sims in the past, whatever, that's all sweat equity. And that's what I'm putting into the deal for us, for our. I'll be honest with you. I sharing some like, spent probably over a hundred thousand dollars five years ago searching for a business. Yeah. Yeah.

because I was doing it kind of full time. mean, I did have some other work, but it required a lot of money. Yeah, it does. It does. And the self-funded, you know, and a lot of times what that comes into play when they are looking, because as they start to get down the path, father and father, more money that it's taken them to be a self-funded, the more urgency it becomes to get the deal to the closing table. Yeah. Because their funds are running out and they've got to find some.

So, you know, if you're a new searcher out there and you're looking, you know, you've got to have at least a year and a half worth of your living expenses set aside. Because to your point, you spent a lot of money doing it. Right. And if you don't have it, that's when you're forced to make a decision because you're going, holy cow, I've got to find something here because I'm getting close to the end. Yeah. Yeah. So tell me about the.

the investor and the sales preference on, you know, what they, what that means to the loan and what that means to you. From, from the way that the investors are looking at the game? Yeah. So we get- Because if, if you, if a searcher came to you and said, Hey, you know, I don't have $500,000. So they got to go back and start searching for investors. Yep. And the pitch is going to sound like what?

and usually what they get to comply with SBA loans for the other 80 % or 70%. Yeah. So a majority of them put together a investment thesis or an investment deck. They'll share that with me and they'll have stages of completion. Like, okay, I've entered into an LOI and now I want to make sure that I can get bank financing. So they'll come to me and say, okay,

Jon Stoddard (32:13.215)
this is going to be the structure. We're buying this business for 5 million. I've got 50. I'm going to raise up 450 from investors. The seller is going to hold a $500,000 note. We would like a $4 million SBA loan. Does that work? So we'll look at the numbers. We'll go through the tax returns. We'll structure the deal. And then I'll say, yes. So we will give them a term sheet at that point that says, we would like to proceed forward under these terms and conditions.

then generally what they'll do is they will use that to start to go to market and say, we have a bank that we're working with. This is Bruce at First Bank of the Lake. You can look him up, at his reputation. We're working with him to get the SBA loan. Now we have to go out and get soft commitments to raise up this additional 450,000. And as you know, there's a ton of professional investors that do this.

There's groups out there that do this. Yeah, by the way, there's a huge list on a search funder that'll do that. Huge, huge list. And then there's some other firms out there that do it. There's a couple of firms in California. There's a couple of firms in Texas. There's a couple of firms in Boston that will lend to searchers, right? And they, they know the model. They understand the model. They know the investors behind it and they can do it. And it's interesting because I've never had a deal.

where I've worked with a searcher and they have not been able to raise the money. They've never come back to me and say, Bruce, we can't move forward because we were unsuccessful raising the funds. You've never had anybody say we couldn't come up with the $450,000. Wow. Yeah. Cause it's just, you know, the bet is in the individual, right? And they usually that individual that you're making a bet on is like, I mean, I could see him. He's going to get it done.

Yeah, he's going to get it done. so from our standpoint as a bank, not only does he have to sell us, but he's got to sell the other five, six, seven quote unquote investors that he's the right one, right? Cause they're investing real dollars into this as is, as is we. So that gives us more comfort that yes, he is a good bet. He is a good jockey and six other people agree with me that he is.

Jon Stoddard (34:40.265)
That gives us a lot of comfort, to be truthful with you. Then, obviously, their board. I just recently approved a, well, we recently approved a pretty large transaction in California and it was a $6.5 million deal. And the buyer is going out to raise money. And I know the investors behind the deal, they were the ones who actually told the searcher, hey, you should speak with Bruce.

He'll really like this deal and he can get it done. But I'm so confident with the people that are behind him, their industry focus, what they bring to the table to help him. It just makes it really easy for me to get the deal approved when I'm making the presentation to our executive loan committee, because we know the people, we know the investors, we have a track record with them. They've been right. They bring a lot to the table. That's super helpful.

You know, so it's, it is important who the searcher brings on his team. is important who is investors. And I've, I've shared this with several searches on, if you're only looking to raise 500,000 and your, and your thesis is, is I want to get 10 guys that got 50, right? So that's $500,000. You got to be able to know that those guys, God forbid, if you need a capital call can do it. Right. They're going to be the Eddie for you to support it.

Not every time does a business just, you know, we get the projections, they just show this upward trend, right? You never see, well, I got a learning curve. The business might go down. I may need some additional work. Right. You know, you only see this month after month after month, you know, increases like I own my own business for 13 years. You own your own business. Has that happened in all your years in business? Just straight up? I wish it did, but no. Yeah, right. Right. And I laugh and I share with them that I go.

Let's talk about reality. It's like lumpy. It'll go like, yeah, exactly. exactly. Exactly. So it's important, right? It's important that, God forbid, you need to go back to your investors, that they've got the pockets to put in more money. Because to think that that's not going to happen is naive. Right? So, you know, to your point, we do look at the investors.

Jon Stoddard (37:05.111)
We do look who's making that equity contribution. We do look at what they bring to the table in terms of their skillset, how they're going to help the searcher. Yeah, it's all super helpful when we're making a decision. Yeah. When you look at the business that they're acquiring, what are the red flags? Let's say if it was losing money out of a three-year average. I mean, I'll give you an example. I'm looking at a business that did

I'll tell you the exact numbers on it. Give me a second. Like, I love it. can I, am I going to possibly get this deal? John? I'd like to look at it and go like, man, if I could get a hundred percent seller finding it, cause he's just so he hates paying taxes. He hates paying taxes.

I did the average on this like, and you know, it did, 244 net income I have in 2019, 2020 did negative 65,000 negative 65 and 20. Yeah. And 21

is 71,000. And 22 is like, is rocking. They are at 305,000 in August 8th, as of August 8th. So that's like an average, I did three years. I took four months from 2019. I added them to,

and did a three year, 12 month average. they're doing 124,000, excuse me, total was 373,000 divided by three is 124,000 over three years.

Jon Stoddard (39:08.621)
Yeah, so I don't do averages. I don't look at that. I would go back and look at, I understand obviously 20 because of COVID, right? That's what they're gonna tell. But 21, we had COVID as well, right? It wasn't fully there, but it wasn't fully gone away. I would get a little bit granular and wanna understand what happened between 20 and 21. And then obviously what's happened in 21.

to 22, like how did they get to 305? Is that sustainable? Yeah, I asked him about that and they said all that contracts and the government getting it's like they have to spend it. But it's an interesting industry because we're, it's, can't really talk about it. I'll talk about later what it does, but the business should continue to grow because we're becoming more conscious of needing this product. Yeah.

And I think, you know, when I look at it and they have a unique vote because there's else in town does it. Yeah. So so that's you know, when I look at it, I look at each year, I look at the balance sheet, I look at the income statement, but I really want to get granular with the business and the business model itself so I can understand it. Right. So I get that 20 years was going to be down. You know, we see a lot of those type of scenarios.

But to me, it's the go forward. So if the case can be, hey, you know, in 21, they only made 71 and they made 244 in 19. What happened from 19 to 21? I get 20, but why did it drop from 244 to 71? And then all of sudden now it's rocking and rolling.

What are the factors that will continue? What's happening in that industry? What does the seller know that you don't know? Let's do our homework and make sure. And so I like to get really granular about the business, the business model, how they make money, why they make money, while they'll continue to make money. Why is it sustainable? Yeah, that's always a red flag with me because you don't, you

Jon Stoddard (41:28.331)
You don't get to talk to what the customers are doing and you know where they're going and are they going to keep buying? So I'm in a deal right now and I can't tell you the type of deal, but I'll just tell you the numbers in 2020 the company did and how this is relative to what you were talking about. So we're in credit right now on a deal. It's a

$7 million purchase price.

In 2020, the company did $225,000 in revenue. Ouch. So on a $7 million business, like, yeah. In 2021, the company did $4.7 million in revenue with $1.4 million in EBITDA. Yeah. So there was no EBITDA in 2020, obviously, because they only did $225,000. They did $2.5

4.7 in 21 with a million foreign EBITDA. How are we getting this deal done? We've got just one year's debt service coverage in 20. The business really didn't even exist. Here's the factors why. It's a synergistic acquisition. So it's a gentleman who's got an existing business. That business is throwing off.

a fair amount of cashflow. He has been for the last several years. He's absolutely the right borrower. And this is a competitor that he is buying. So he knows the business he's buying. It's synergistic. He's getting it on the rise. He's structured a deal where we're looking at

Jon Stoddard (43:28.365)
90 % financing. He's putting in 5 % equity. The seller is holding a 5 % note on full standby, full subordination, of course, and we're doing a 90 % deal for him. And when you look at it, you say, he's absolutely the right buyer. It's synergistic. The company is doing well. It's growing. The space he is buying in and what he's doing

is growing like wildfire. There's a lot of looking forward reasons to do the deal. And when he called me, he said, I've shown this to a number of banks. They've all said no right away. But I've heard you're a little bit different because of your philosophy. Did they say no because that one bad year? Nope, not even a bad year, just no year. Basically, you know what I mean?

There was a very compelling reason why the company went up. The company brought in a couple of people that really were able to scale it and take it to the next level. market is those people. Finding people that could take it from 220,000 in revenue to 1.5 million in EBITDA. Where are those people? right. But this borrower is just

very worthy of getting this kind of financing. So it's a $7 million deal with deal cost. We've got like 350,000 in by the buyer, 350 by the seller. And we're doing not only a $5 million alone, but a million and a half conventional peri-pursu loan, which is our bank, behind the $5 million SBA loan. So we're giving them a junior strip of a million and a half behind.

$5 million SBA loan to get the deal done. And that's the kind of transactions that we do and what we look for rather than going, okay, well, it did 3 million three years ago. Right. you know, we put our money where our mouths are. that's how much when you say look forward, how much

Jon Stoddard (45:51.277)
like due diligence did you do on the industry and say, hey, it's not a dying industry like say Berkshire Hathaway with textiles. It is a cybersecurity industry growing at 20 % per year. Right. So obviously there's IBIS world and there's a bunch of industry analytics out there that talk about what's happening in that industry, the growth of that industry, what's expected over the next three to five years.

And then you look at the market share that he might have compared to the whole market, because it's not being created, it's there. But why buyers or why, because this is a business to business type of product, why those small businesses will utilize these services and why does it make sense? So like for us, we're a bank.

We're not a huge bank. So we have outsourcing IT services. have outside, we have some HR, but we have some outside HR help, right? So there's a ton of small businesses that don't have the manpower and that are gonna use services of outside companies to help them facilitate their growth until they get ultimately big enough, right? I mean, that's the bet. But when you look at the industry that he's in, in the vertical that he's in,

This is a very good existing, strong, growing sector that's not going away. It's not, it's absolutely not going away. So the fact that he can catch it on the rise, and I did a deal similar for a company in Texas and we got their deal approved and it was very similar. In fact, we got the deal approved.

We didn't have debt service for 19. We didn't have debt service for 20. And we got the deal approved on 21 Q of E numbers for the 10 months ending October, 2021. So I didn't even have a year's tax returns to say that I had cashflow. I did it on cashflow on a Q of E based upon 10 months. We for the- Do you need the tax returns on the business?

Jon Stoddard (48:12.269)
before you see the... Yeah, so what happened was is we made the loan subject to the company finishing out the 21 year filing the tax returns and showing that number or a little bit above what the Q of E said. They were able to do that and we closed the loan in February of 2022, but we got the deal approved on 10 months numbers on a Q of E of October, 2021.

You know, when I speak to the searchers and I stay very close with my clients, they're killing it. They're just, you know, I went down to Texas, I met with them and they said, we thought the market was here. No, the market's like this. It's not even like this, Bruce. It's like this. He said, we're killing it. We're going to be, we're on track to do a million six and even do this. Wow. He said, and the, vol he said, we, we, had to.

I've moved the lease location already because they've outgrown it. They've had additional trucks. They've added additional crews. just, you they were the right guys and we knew it. And we were comfortable with a go forward look to say this deal makes sense. They raised up enough money from equity investors. They put in good amount of money. Each one of them, were two guys, partners, so to speak. They each put in a good amount, but super solid backgrounds.

super bright guys, no question that they were gonna be able to do it and they're doing it. They're not doing it. That's cool. So lot of great stories, lot of, you know, when you've been in this business as long as I have, that's what you have, a lot of stories, right? Yeah, yeah, yeah. You do a lot of deals and you got a lot of stories and it's fun to see the success. I can tell you that since, you know, in the last eight years that I've been strictly focused on

this market size and the kind of clients that I'm working with, one searcher reached out to me, he said, hey, Bruce, we know that nothing is perfect. What happens when a client doesn't perform? And what happens with the SBA guarantee? Everyone wants to know that. I go, I'm thrilled that I cannot answer that question. So you never had it default on a SBA? No. So far, think that, yeah, I mean,

Jon Stoddard (50:32.501)
I look back at my prior institution, this institution, we've been making the right bets on the right guys. Our go-to-market strategies is we want to good people, find good businesses with good, strong cash flow. And the stronger the cash flow and the looser that noose is around the neck, the more that that business can have some hiccups or sneezes or colds.

and still not affect the cash flow. When I see the deal getting really tight, that's when I say, yeah, I don't know if this is the one for me. Yeah. That's a seven year, SBA is seven year loan, right? Or is five or seven? Yeah. Ten year long. Ten year long. okay. So yeah, that's the benefit of it, right? I mean, that is a benefit because if the guy wants seller financing, that has to be a shorter term for them because they don't want to stick around, especially if they're 65, seven.

Yeah. And generally, but again, that's where, that's where the negotiation comes into play, right? And the strategy behind structuring that and making sure, because it's a good deal when the buyer, the seller, the lender, the broker get up and walk away from the table, shake hands and go, this was a good deal. Right. It can't be one sided. It can't be a great deal for the searcher. It can't be a great deal for the seller. Right. It's got to be a combination of all of those going.

this is a good transaction and this is one that will stick. Right. So let's do this as an exercise. I'll send you this deal here. What do you need? The income statements, balance sheet, cash flow statements?

Yeah, whatever, whatever you got. And I'll be happy to give you my opinion. This would be a great exercise. And we're already up on the hour. So I want to thank you for very much being on my show. yeah, how do you say that again? Congratulations. Congratulations, you structured a deal that doesn't work. There you go. Now, now, now what you have to do is three times the week.

Jon Stoddard (52:44.461)
I said, I have drawn a buy this $20 million construction company. Great. Did you try SBA? No, I'm outside the country. Do I know any investors? No, I don't. This has been great, John. I greatly appreciate you having me on the show and letting me be a part of it and looking forward to having that conversation and seeing what I can do to help you. Thanks very much.

Okay, great, thanks.