I know this is old, but a question I often grapple with - how do you avoid "overpay[ing] for a business" while still being "focused on getting a deal done, not winning a theoretical value argument?"
I often feel the loudest twitter voices are those telling searchers to slow down and "DON'T OVERPAY" - but if I can service debt at reasonable risk, what does that even mean?
That's a really, really tough question. I think it's a personal decision around what "reasonable risk" means -- like if you are at 1.2x DSCR to start, you have very little room for error. Had you bought something that tight in 2022, you'd be screwed with rates going up, let alone any kind of J-curve in the business.
On the flip side, if you can underwrite to a 1.5x DSCR, put together a good-sized LOC, and start with lots of working capital, you have more room for error.
When I think about theoretical value argument, I think it's a bit useless to fight with a seller over statements like "this business is non-recurring revenue, so has to be priced at a 2x multiple discount to recurring revenue businesses, which generally trade for 5x. So I'm not paying over 3x." That line of argument is generally fruitless.
But if it's instead saying something like "hey, at the price you want, there's no room for anything going wrong. This is a tough transition and revenue has XYZ risks to it, so I need a bit more room for error, which I can get by having lower price (and lower debt) -- either that, or you the seller can pick up more seller debt on standby to offset some risk." That line of reasoning is more of a dealmaking mindset.
I may have misunderstood your question -- I was answering how does a searcher get a deal underwritten. I think you're asking how do you get approved before finding a deal?
The answer is you don't -- first you find a deal that should work for a bank (based on being a good business, reasonable debt level, etc.). You can preview with a bank to get a head nod. Then once you're under LOI, you submit it for formal approval. Getting financing approved is a closing contingency always.
That was my understanding as well—I misinterpreted your initial statement re: getting "preapproved" for a 7(a) loan, so apologies for that. Thought you were suggesting there was a way to get pre-vetted by one of the SBA PLP lenders before finding a deal. In any case, keep the good literature coming!
I know this is old, but a question I often grapple with - how do you avoid "overpay[ing] for a business" while still being "focused on getting a deal done, not winning a theoretical value argument?"
I often feel the loudest twitter voices are those telling searchers to slow down and "DON'T OVERPAY" - but if I can service debt at reasonable risk, what does that even mean?
That's a really, really tough question. I think it's a personal decision around what "reasonable risk" means -- like if you are at 1.2x DSCR to start, you have very little room for error. Had you bought something that tight in 2022, you'd be screwed with rates going up, let alone any kind of J-curve in the business.
On the flip side, if you can underwrite to a 1.5x DSCR, put together a good-sized LOC, and start with lots of working capital, you have more room for error.
When I think about theoretical value argument, I think it's a bit useless to fight with a seller over statements like "this business is non-recurring revenue, so has to be priced at a 2x multiple discount to recurring revenue businesses, which generally trade for 5x. So I'm not paying over 3x." That line of argument is generally fruitless.
But if it's instead saying something like "hey, at the price you want, there's no room for anything going wrong. This is a tough transition and revenue has XYZ risks to it, so I need a bit more room for error, which I can get by having lower price (and lower debt) -- either that, or you the seller can pick up more seller debt on standby to offset some risk." That line of reasoning is more of a dealmaking mindset.
Just out of curiosity, how do you go about getting approved for a $3.7mm SBA loan prior to finding a deal? Thanks for the post btw—awesome content.
Hey! If you check out my archive, there's a post about Navigating the SBA 7(a) Maze that lays that out.
Forgive me if I'm mistaken, but I didn't see anything in that article about the 7(a) pre-approval process—am I missing something? Thanks!
I may have misunderstood your question -- I was answering how does a searcher get a deal underwritten. I think you're asking how do you get approved before finding a deal?
The answer is you don't -- first you find a deal that should work for a bank (based on being a good business, reasonable debt level, etc.). You can preview with a bank to get a head nod. Then once you're under LOI, you submit it for formal approval. Getting financing approved is a closing contingency always.
That was my understanding as well—I misinterpreted your initial statement re: getting "preapproved" for a 7(a) loan, so apologies for that. Thought you were suggesting there was a way to get pre-vetted by one of the SBA PLP lenders before finding a deal. In any case, keep the good literature coming!