Host: Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs, and on this podcast I talk to the people who do it. Today I'm speaking with Lisa Forrest, a lender who specializes in SBA financing for small business acquisition. So kind of the most relevant type of lender for an acquisition entrepreneur. And really the ability to use a lot of leverage to buy a cash flowing business is part of what makes acquisition entrepreneurship possible. I knew the basics of an SBA loan and how it works, but I had on Lisa to really walk through it all for me. We discuss a ton of topics. How to evaluate a lender to work with for your acquisition, how a lender will evaluate you and your deal, what are some of the key criteria to consider in a loan, common pitfalls that Lisa sees, acquisition entrepreneurs make digital businesses, and how SBA can or can't work with SaaS&E Commerce. What happens if the business you've acquired has a cash crunch and more. If you're new to this, you're going to learn a ton from Lisa here. I'd also recommend pairing this episode with my Steve Ressler interview of a couple weeks ago where we talk about working with investors to do an acquisition. Between these two episodes, you will ramp up your financial knowledge quickly if you're just starting out. Okay, here she is, Lisa Forrest of Live Oak Bank. Lisa Forrest, thank you for joining me today on Acquiring Minds and Will Smith,

Guest: thank you for having me.

Host: You are a lender at Live Oak bank and Live Oak bank has a practice dedicated to small business acquisition, helping acquisition entrepreneurs finance that purchase that business they're looking to acquire with sba, the SBA loan. So we're going to get into how a bunch of the questions that somebody who's new to this would probably have. How to choose the lender, what criteria to think about, you know, the do's and don'ts of working with a lender and the rest of it. You have years of experience in this. Personally, you guys at Live Oak bank are basically talking to acquisition entrepreneurs all week long. So lots of expertise to draw from. My first question is simply about how to think about this loan. Because for most people, if they've ever worked with a banker at all, it's just to get a mortgage. And at least my experience is that the mortgage lender you work with isn't so important. You're really price driven. Who will approve me and who will give me the best rate? And that's all I really care about. I suspect the lender you choose. When you're going to buy a business for a million dollars or 2 million or 3 million dollars, it's a little bit different. So talk to me, just set me in the right direction on the contrast between getting a mortgage, which might actually be for the same price, I might get a mortgage for a million or two, $3 million versus buying a business for a similar price or more.

[3:07] Guest: Yeah, you bet. It's a great question. And there are some similarities. We're going to need tax returns, we're going to need W2s, we're going to need statements, we're going to need to know information all about you when you're looking to buy a business. So there's the you part of the transaction for sure, but there's also the business part of the transaction which is really, I'm going to say, sort of 75% of the deal is really about the business you're going to buy. So we also need tax returns on the business. We need all the financial information on the business because we're coming at it from a cash flow perspective. And I'm assuming these are cash flow driven asset like kinds of acquisitions. Now if you're buying self storage or a gas station or a hotel, where you're buying an asset that is really more real estate driven, that's going to be a whole different kind of conversation. So my comments today are going to be more about those cash flow asset light kinds of transactions. So you have the you part of it. What's your experience? What are your complementary skill sets? What's your resume look like? What's in it for you? Why does this, at this point in time seem interesting to you to buy this company? What do you want to do with it after you buy it? And we're really driven off of that debt service coverage, the ability of the cash flow to cover the loan that we're talking about from the company. So you're buying the company's cash flow and that's what we're analyzing. So there's the you, but there's the business piece to it too.

Host: And that you piece that, let's say 25% of kind of what my loan application looks like. Is that something that I can just do once? Because I'm probably going to look at a number of deals, right? So can I just prepare that once or do I need to tweak that for every deal that I look at?

Guest: Well, so let me just give you kind of my spin on it from the standpoint of How I work on deals with my co director, Heather Anderson. We head up the sponsor for finance search fund lending division of Live Oak. So Heather and I have worked together for 10 years. She and I have both been in the market for 30 plus years. So let me give you my take on how we approach business acquisition.

Host: Okay.

Guest: And we it's a numbers game for all of you out there that are searching for businesses or soon to be searching for businesses. It's a numbers game. You've got to get through as many deals to vet as many deals until you find the one. And so we could be working with our searchers, our business acquirers, our clients. We could be working with our clients for one to two years at a time. It takes planning and that searching part of actually finding a company that you're interested in, that's going to take some time. So we get to know you over time. So yes, you're going to fill out your personal financial statement for us. You're going to give us your resume and your bio. But that's kind of a one time thing really. Unless there's huge swings in in your personal financial situation. It's not like applying for a residential mortgage where every time you want to get pre qualed for a home loan, you've got to fill out the application. That's not how this works. We get to know you from the get go and it's usually sort of one personal financial statement and one resume and then we're off to help you analyze business cash flow as you're finding deals of interest. Does that make sense?

[6:26] Host: That's great. That's great.

Guest: And so for every kind of 25% of the deal is you. But it's. I don't even know why I said that because every single deal the you comes back into it from the standpoint of are you looking at a manufacturer, are you looking at a retail company, are you looking at a distributor? And how might your experiences dovetail with each one of those opportunities as they're coming into your view?

Host: Is it common that a searcher brings you a deal and you decide that it's not a right fit? Not because the cash flow, like the business doesn't look like it meets all those kind of very cold like financial criteria. But there's just an you kind of intuitively feel incompatibility between the searcher and that business. Does that happen very much or are most searchers just drawn to businesses that they probably add value in and be good at?

Guest: So I would say I don't Have a number on it. I don't even know. Like, is it 80, 20, 90, 10? I'm not sure how to answer that. But there are definitely times where you've got a deal and you just have a sense that that's not the right fit for that particular searcher for that deal. Generally what happens is, I will say is we don't actually have to say it. What happens is because of the way we walk our clients through the process, generally they're sort of coming to that conclusion on their own because it's not just about the debt service coverage or the tax return net income. To your point, that's part of it. But there's so much qualitative analysis that goes on. We have an M and a questionnaire that we have our clients go through. It's basically 30 years of Heather's and my experience on doing acquisition deals. And there's a lot of questions in there. Say for instance, maybe there's a company that requires a certain kind of license and you don't have industry experience and most of our searchers don't have industry experience. So we're used to that, we're expecting it. But there might be a subset of some industries where maybe you're just that much more uncomfortable because you have to get a license that you know you can't hold. So now you've got to rely on a key employee or you've got to rely on the seller while you're getting that license. So I don't know, maybe that's a fit, maybe it really isn't for that particular searcher, given that kind of nuance. And sometimes I've had searchers say, you know, the business was great, but when I did the site visit, I met the seller and when I realized I was going to be in an office in a back room running the company all day, versus what I'm good at is being sales, being out in the market selling. And I realized that that business was going to need me to be sitting in that office all day. I realized, oh my goodness, there's no way I can buy that business otherwise. It was a great one and I referred it to somebody else. So, you know, there are those times and I think our clients generally are really self aware of those kinds of nuances and it happens. But the goal is for us not to like be the bad guy and point it out. But like you kind of have a gut feel, you kind of have a nuance, but hopefully throughout the process that searcher is coming to that conclusion themselves.

[9:39] Host: Sure. Great.

Guest: Well.

Host: And so now, in terms of the lender that I choose to work with. So Live Oak bank is a big name in the space, but you aren't the only game in town. There is competition. There are other. Other banks and lenders who work with SBA acquirers. How do I think about, as somebody looking to buy a business, how do I think about the decision of what lender to work with?

Guest: Great question. And so noted. This is not supposed to be a commercial for Live Oak bank, so cut me off if I'm getting Live Oak. But we actually have content that Heather and I put out where we actually said, how do you find the lender? How do you find the right fit for you? Because this is absolutely not about us chasing pipeline and trying to close every deal that there is. That's not how a good lender approaches their target market and how a good lender approaches the search ecosystem. In fact, it's just the opposite. There are plenty of deals out there. There's lots of great lenders out there, and it just really depends on the fit for you, that deal and your lender. So let me give you a couple examples. For instance, a Live Oak thing is that on our business acquisitions, we want cash flow to cover total debt at 1.5 times. So we want enough margin where you can absorb a little bit of downside if something bad happens or give yourself enough margin to actually grow the company. Have Heather and I over the years have decided and come to conclusions that a 1.5 cash flow coverage margin is where we think it's safe and can put you in a situation to really thrive once you buy that company. So 1.5% is our target. Lots of SBA lenders would allow you to do a 1.1 or a 1.2 debt service coverage. So that's just one differentiator. Not saying that that other way is wrong or incorrect, not saying where they end all to be all on one of our CRED policy points. But it's a differentiator, and clients coming with us just want less leverage. They want to bring in more equity and. Or they're negotiating sort of a better price point. That's just one differentiator, and there's lots of differentiators.

Host: And, Lisa, why would I, as the borrower, want to work with the bank that has a higher debt service coverage ratio when that. That ties my hands a little bit? I understand it from your perspective. You're choosing higher quality deals, therefore. But, like, even if I want to be super conservative, don't I want to at least have the flexibility that I'm not going to be violating my loan if I dip a little one month or three months below the debt coverage ratio.

[12:22] Guest: So let's be clear about this. On SBA loans, there aren't covenants like you would have in a conventional loan. So this is our, our approval standard is 1.5.

Host: So it, so going forward, I'm not violating the loan. It's just to sign the loan. We need to see that the business could cash flow that today.

Guest: Correct. With a nuance there that I'll get into. And I don't know if this is too much in the weeds for you Will, but no, please nuance there. And it depends on your viewpoint as a business acquirer. What is your comfort level? How, how much room do you want to have? If you're very comfortable with that deal at a lesser debt service coverage margin, great. That's how you've decided it works for you. And there's plenty of lenders that would fit that viewpoint or fit that strategy with you. So I'm not saying it's the right answer. It's the way we've conducted ourselves and we've had a very successful portfolio because of the additional margin. So I'll get into a little bit of a weed there. Also, on that 1.5 debt service coverage, which is our minimum on a go forward basis, there is one little covenant around that. If you've got a seller note on your deal, the seller is going to be in a subordinate position to your senior lender. That's on every SBA loan. There is a nuance around that seller subordination that says if the debt service does dip going forward, the seller subordination documentation could give, you know, kind of puts the bank in control to say, well, maybe you're not paying your stellar note today because your debt service margin has suffered. So we think it gives our, our buyers a little bit more of a backstop cushion because, you know, once our money's out the door and you're paying us as agreed there, there's no ability for us really to step in and do much. But you've got a little bit of control around paying or not paying that seller note if something happens to your business once you get in there, and I'll tell you, during 2020, our clients were thrilled that they had a little bit more control over their cash flow structure regarding their seller note.

Host: That's great. And what about fees? And how does, how does that work with lending? I mean, some lenders, you know, I would pay as the borrower would pay up front. There's some sort of like flat fee just to, you know, maybe start some pre qualification process. I don't know a lot about that. Can you give me the one on one on that?

Guest: Yeah. So again, the question's a little bit probably more mortgage related. I'll just kind of give you the SBA viewpoint and then maybe a little differentiation just to compare and contrast between lenders. So with SBA loans, there is an SBA guarantee fee. The U.S. small Business Administration charges a fee. It's a percent of the loan amount and it's on a sliding scale. Every lender charges the same. Everyone, every borrower pays the same. Depending on this sliding scale, I normally just have you for your modeling purposes, model between 2 and a half to 2 and 3 quarters points on the loan amount. And that's set for everyone. No negotiation. There it is what it is. And that can be rolled into the loan. So it could be part of the financing of the loan. As far as loan costs, for the most part, SBA lenders are not charging origination fees or anything like that like you might have on a mortgage loan or commercial deal because you know that SBA fee is, you know, it's, you know, kind of gets your attention. Right? So we're not also charging origination fees on top of that. However, lenders do charge for their out of pocket costs and that's going to vary from lender to lender. Probably about 10k, 10,000 for your out of pocket. And those are third party costs for business valuation, running UCC searches and you know, documentation and attorney costs. That runs you about 10,000. But that debt does vary from lender to lender. So those of you out there, that's a question to ask your lender and

[16:23] Host: that is also rolled into the loan.

Guest: Typically, normally you finance that within the loan amount as well.

Host: But really. So if we're talking $10,000 on a million dollar loan or more, that's a relatively small sum. And so you probably shouldn't be very price conscious on that.

Guest: That's our opinion and that's our viewpoint. And again, that 10,000, whether you're doing a million dollar loan or a $5 million loan, it's really all about the same kind of out of pocket costs. So you kind of, the smaller the loan might be a bigger kind of burden because it's the same kind of flat fee kind of stuff for the most part. But cost loan cost for an SBA loan really aren't a big differentiator shouldn't be.

Host: So. And what are some now the negatives, like if I'm looking, if I'm considering buying, getting a loan for this business, what are, what are some of the pitfalls? What are some of the mistakes that I make or that you could see made? Hmm.

Guest: Falling in love with the deal too fast. I'm just going to say that I've got like four things came to my mind. So falling in love with a deal too quickly and hey, that's easy for me to say. You're out there in the market, you're out there in the trenches with this search grind where you're just trying to find companies and you're, you're seeing so many deals out there that aren't good. Just keeping that discipline level high so that the business that you finally decide on is a really, really good business that is going carry you through transition and then allow you to grow and keep with it. So just having deal discipline because it's weary out there, you know, you could look at 25 deals and not find anything. And so it's just keeping up your deal. Deal analysis. Discipline is one of them. Working capital. With some loan structures, you're trying to keep your down payment to a minimum. So you cut things out of the transaction that shouldn't be cut out. Working capital. You need to have adequate working capital built into the structure. Either our term loan is going to build working capital in and, and, or you do. Usually it's an and we're also going to give you a line of credit. But the bigger your transaction, the more down payment you have to have because it's a percent of the total project. But don't cut working capital out thinking that, that, that you're going to, you know, bring in less equity and that's going to be better because you're saving yourselves up front kind of out of pocket.

[18:48] Host: So some people will cut corners on working capital just to bring the loan size down or project size down, equity down.

Guest: Don't skimp on working capital. That's not what you want to do. Especially in today's environment where supply chains are just hurt badly right now. Supply chain management, supply chain delay. Our existing clients are actually coming to us right now asking us to increase lines of credit because of the supply chain mess and then also labor shortages and labor constraints. So I would say those are two real tactical things right now. Labor and supply chain. When you're talking with sellers and analyzing deals, you've got to be all over that conversation and on the line of

Host: Credit piece and working capital. So one of my guests last week was describing how his loan was structured, where there was a loan to acquire the business and then did the SBA Express took the working capital into a second vehicle, the SBA Express. This is kind of an in the weeds question, but give us 30 seconds on that, if you would.

Guest: Yeah, absolutely. That, that's how you should do it. We always want to include, we always want to include a line of credit in a transaction. I would think most banks would as well. Where you've got the main acquisition term loan, that's your 10 year amortization, where you're buying the company and we might fit a little term working capital in there to kind of get you through transition. And we're going to include all your, you know, kind of loan costs and SBA into that transaction. But then also from an operational standpoint, you need a revolving line of credit and it's the SBA Express loan. Maybe it's 100, 152, 250 working line of credit, operational line of credit, SBA Express. That's a real, real common kind of double structure where you're doing a term plus an SBA Express.

Host: And so, but if you were talking about the person who might be tempted to cut corners on working capital to lower the project size. But if the way it's being structured is that my working capital is coming out of the SBA Express, which is a line of credit, and I did it that way, how would skimping on line of credit loosen up my project size?

[21:00] Guest: Yeah, you've got to pay an SBA guarantee fee on the line of credit as well. And there are some buyers that are just so focused on the fees at the risk of not structuring it correctly. So, you know, that's no pass. Go with me. I've even, you know, and I've had clients come back to me three months after closing loan. Lisa, I am so glad you kind of argued with me about that line of credit. You were right. And I should have probably asked for a bigger line of credit. So, but, and not saying that kind of moving them through that conversation is not a good conversation to have. And it's very normal. People are just trying to keep their costs down as much as possible, but you just don't want to cut corners.

Host: You talk about how you really will work with your borrowers, the buyers of the business, the acquisition entrepreneur, for a long time, in some cases a year or two, as they, as they go out and find that business, the right deal, do you then help. You obviously help with structuring the deal. You've already given an example of kind of showing the borrower that they need more working capital. What about like deal negotiation and strategy? Because obviously how one structures the deal is a big part of the negotiation and the financing is a big part of that. So is that something where you actually weigh in and kind of coach a negotiation?

Guest: Well, going to try to be really careful there because our role, we have a certain lane that we stay in a successful acquisition. A searcher is going to have a deal team. They're going to have their banker, they're going to have their attorney, they're going to have their accountant and any number of other advisors. So there's a deal team. Each of us is coming to the transaction with a little bit different perspective. All perspectives are interesting and needed and necessary. I'm going to have sort of debt service coverage and how much loan, in our opinion, can this business afford? That's going to be my slice of perspective. So we're not negotiating, Lois, for you. We're not telling you how much the company is worth. We're not going through and putting your purchase and sale agreement together. That's coming from you, between you and your attorney or CPA and those kinds of things that those parts of the deal team would be doing. However, not to say that we're not going to have an opinion. Can we read review parts of the LOI that kind of come into the debt side of it? For sure. But as the searcher, as the buyer, that needs to be coming from you. But can we help give you some viewpoint on certain parts that our debt sort of intersects. Intersects with? Yes. But yeah, we're not going to write your lease for you or anything like that.

Host: The questions that I should ask a prospective lender that I might be considering, are they basically similar to what we've talked about, like what the debt service coverage ratio requirement is, or are there other kind of like top two, top three things that when I'm having that first conversation with a lender, just to see if we should take it to the next step that I should be looking for?

[24:08] Guest: Yeah. And is this. Well, I'm just going to frame it this way. So if you've got a deal in working with Live oak, anyway, how we work it, if you've got a deal pre LOI that you'd like to get our opinion on, we have a cash flow model that we give to you template. We'd like that to be completed and we have an executive summary template about the deal so that you can give us your buy side viewpoint of that deal. So we have two templates that we share with our searchers. If you want to talk to us pre loi, that's something that you would come have completed so that we can have a really meaningful, effective, efficient conversation with you. And there's lots of things that come into play. Debt service coverage for sure. How much down payment, how do you view seller notes, working capital, qualitative transition plans. How are you going to actually transition the business? What's the seller doing? What are the key employees doing? I mean, it's a very comprehensive and a very, very detailed conversation. So I think for searchers it depends on what kind of lender interaction they want, how involved do they want their lender in the analysis and the long term relationship. So you get on the phone and generally I find within the first 15 minutes searchers can probably identify who their top three lenders are going to be just because of the nature of how that interaction is going to go. We have a lot of tools that we provide our searchers. So business buyers generally work with us when they really want a comprehensive relationship.

Host: Just, just to say that it sounds like your live oak. I mean, part of your positioning, part of your kind of value prop to borrowers is that you really are high touch, really involved, really engaged. And that's just the way you approach this. And I suspect a lot of borrowers like that. Maybe there are borrowers out there who don't, I don't know. But that is a particular style that not every bank has. Is that a fair.

Guest: Yeah, that's fair. And we're going to ask questions about, like we're a lender that asks questions about customer concentrations. How much of your revenue is tied to project work? How much of your revenue is tied to new construction? We ask a lot of questions and depending on the answers, we may, you know, we may have a more conservative take than some, some other SBA lenders out there. So plenty of deals out there, plenty of buyers, plenty of banks. It's this vetting process that's really important and you should get started on it sooner rather than later.

Host: Speaking of conservative or not. So digital businesses, of course, are an area of huge growth and interest these days and there's a lot of transacting there. And there's sites that have cropped up like Microacquire, that are devoted just to the buying and selling of digital businesses. And. But the multiples and the acquisition prices for these businesses are notoriously really High because there's so much demand for them. So just talk to me about what you're seeing out there. Do you guys work with digital businesses and. Yeah, and then I'll have some follow up. So maybe just like a 30,000 foot view of digital.

[27:26] Guest: Well, why don't I lump E Commerce and SaaS together? Because I think it's going to be somewhat of a similar answer. So we lend off of EBITDA and cash flow, we don't lend off of array. So I know specifically for SaaS where it's a high growth and it's about those recurring revenues, which I can completely understand. That's how you're going to value that company. Totally get it. But when it comes to how much debt we're going to lend, we're basing it on what the actual cash flow is. So right now we're just not doing a lot of SaaS, especially under SBA because these are generally meant to be highly leveraged transactions. And there's just the ARR model can't support a lot of debt. So SAS specifically probably isn't a really good senior debt model where we're going to give you specifically monthly principal and interest that has to be repaid. And if the value is based on the ARR, that doesn't square with the fact that we need cash flow, actual historical cash flow, to pay us back. So SaaS is just really tough, especially in the SBA world where most the target is for folks that are putting down maybe 10, 15, 20%, because that's how the SBA program works. So we see SAs mostly going the conventional route where that's a really equity driven program. And maybe it's not senior debt, maybe it's equity and mezzanine debt that does more interest only and has a lot more flexible debt structure when you're in that high growth scenario with SaaS. So it's just generally not a really good senior debt program generally. But we've done a few, we've done some.

Host: And this really, it doesn't have to do with the nature of the fact that the business is digital or anything like that. It really all comes down to cash flow. So if I got my hands on a deal, a SaaS deal, where there was healthy cash flow and it could support an SBA loan according to your typical criteria, you're totally open to it. It's just those deals are unicorns, right?

Guest: Absolutely. And for good reason. And we're not passing a judgment. Oh, that company isn't worth that. No, it probably is. It's just that's a different financing vehicle and there's lots of MES debt out there that can probably be better fit for that. And then we'd come in in a couple years and maybe take out that more expensive MES debt down the road. So, yeah, SaaS is great. It's just probably not a really good fit, especially in the SBA world because of that cash flow driven analysis methodology that we come at it from on the SBA side and then E commerce, same kind of thing. The reason we don't do a lot of E commerce is we can have a tendency to see the company's been around for two years, company's been around for three years. That founder now is spinning out and going to do something else because the founder is a serial entrepreneur and we have two years worth of data or even one year of cash flow. And again, we're going off historic debt debt service as well on the E commerce. So sometimes that doesn't fit well into kind of a traditional SBA viewpoint. And there are some actual E commerce lenders out there that really specialize in E commerce.

[30:32] Host: So, you know, for anyone using sba.

Guest: Yeah, using sba. But again, you still have, you still have debt service you got to contend with too.

Host: Yeah.

Guest: So for us, it's generally more that we see a lot of deals that maybe haven't been around as long for, you know, sustainability, performance, all that kind of stuff.

Host: And so what is that? How do you think about the age of a business and how that plays in? Because even if I were to bring you a landscaping business deal, if that landscaping business is only two years old, I assume you'd still not smile upon such a young business. So is there a rule of thumb here in terms of business age?

Guest: Well, you know, this is where lender fit is going to come into play as well. There are certainly lots of SBA lenders that might focus more on startups. I'm business acquisition, I'm historic cash flow. That's my lane. I finance sustainable, repeatable cash flow. That's what I do. Lots of SBA lenders might be okay with a younger company and they're going to look at it more from a startup lens. That's just not my lens.

Host: But from your lens, from the live oak lens. Do you have a kind of a threshold age that, like, if a business is younger than three years is probably just not even going to pass the sniff test, or five years or 10 years?

Guest: I'll just frame it this way. Say there's a company that Was started three years ago, established January three years ago. It had a loss in the first year, broke even in the second year, and now we have minimal cash flow in the third year. That's going to be tough for our lane. Not that it's not a viable candidate and not that there aren't other great other SBA lenders that they would think, oh, that's right in our skill set of what we do. Just not my skill set. So then that kind of goes back to your initial question. How do you find the right lender?

Host: We touched earlier on having a seller note and one of the things that you might help with at the beginning or that might be structured into the deal is the subordination of the seller note. So if there is a pinch in the business, maybe the seller note accepts a deferral of payment. Talk to me about, let's get negative for a second. So talk to me about if I, if I, if I'm now the new owner of the business and there is a crunch of some kind, what are ways, like what, what happens? Tell me how that, how to think about that, those downsides.

[33:00] Guest: And this is just going to be a lender response. Just in general, if you're noticing, as a business owner, if you're noticing any sort of slide or you're getting that feeling in your gut where you think things are just not going to go well, you've got to be on the phone with your lender immediately. And that's also part and parcel of picking a lender is how do you think the post close is going to go? Is this a lender? Is your lender going to be engaging with me and interacting with me post close? If there's any kind of slider slippage, you've got to be on the phone with us and your lender. And I'll give an example right now with the supply chain crunches that are going on right now. Yeah, it's huge. Our clients have been very proactive with us, getting on the phone with us and our servicing colleague to say, my supplies are delayed by, you know, 120 days. This is what's happening. What are there things you can do to be helping me? And we've been doing some things like increasing lines of credit and, you know, it's going to be a deal by deal basis. And so my short answer there is you've got to talk to your lender. If there's any kind of inkling or gut feel that things aren't going well, if you're not sleeping at Night, you know, it's a conversation you probably okay with your lender.

Host: Okay. And then the way it's dealt with is just going to be case by case, lender by lender.

Guest: Okay, what is it? Did you lose, did you just lose your top customer? And you're fine because you're going to be backfilling that customer, but it's going to take your time, Take some time. That's one scenario that happens. You lose your top customer. Right now we have supply chains. You can't get employees to come to the office because they're now taking jobs elsewhere. So you don't have enough people to do the work. You still have your contracts, but that's delayed. What is the issue? What is your outlook? Is it solvable? How long is it going to take for it to get solvable? What are your projections? Those are the kinds of things that we would be talking about.

Host: And now, in light of the supply chain issues and the great resignation or just the tightness in the labor market that you just referred to, are you finding that many of your borrowers are crunched? Is this a hard time for acquisition entrepreneurs, people who are already in this seat?

Guest: Well, I will say that, yes, there's a crunch going on. And luckily, knock on wood, we've structured the deals well going into it, where the businesses are still fine, everyone's doing great, the business hasn't gone away. Our CEOs are having to pivot and figure out, well, how are they going to manage their particular supply chain crunch? Some of them are short term, some of them are longer term. But I feel really good that we've structured our deals while going into it so that these aren't businesses that are now going to be going under or going away, nothing like that. For the CEOs out there, you've got your transition plan and then you have what actually happens. And sometimes those are definitely not the same thing. Even without labor crunches or supply chain crunches like we're encountering now, you've got a transition plan going into it. That's why that we put that article together recently on how to think about transition. And then as the CEO, I think things always are a little bit different than maybe what you were expecting. And so, I mean, just talking to your lender proactively is always the right answer.

[36:34] Host: What was the document that you just referred to that you just put out? You want to plug in?

Guest: Yeah, we just put a piece of content out, called from searcher to CEO. I guess that's a shameless plug. I'M sorry, I didn't realize I was doing that.

Host: No, I'm inviting you to plug it.

Guest: Yeah. From searcher to CEO, we pulled a lot of experts from the search fund ecosystem. A lot of investors search, current searchers, searchers that are now CEOs, CPAs, attorneys, all from the ecosystem. Just talking about how you think about acquiring a company from the idea of transitioning it. And then once you're a CEO, what are your comments about now? What is it like kind of in your first hundred days of being that CEO and just trying to give you some good nuggets to think about, some

Host: of the language that some of my guests have used about those first hundred days, it's always particularly violent. A bloody knife fight or getting punched in the face every day, or, you know, the Mike Tyson quote. You know, everybody's got a plan until they get punched in the face. Like, it's just, it seems like this document touches on a really relevant point, a really relevant point in this entire process because that transition can be, can be rocky, I hear.

Guest: Yeah. And those are their words. Those are all of our clients and ecosystem words that we just kind of put them together and try to give you a good roadmap on how to think about things. And so then you add supply chain and just extreme, extremely tight labor market onto that now. So this whole idea of thinking about the transition and anticipating things that could happen, it's just really important, even more than ever to make sure your structure is going to be able to withstand the transition.

Host: Just a couple more questions, Lisa. Have you seen. So you've been at Livehook, I think four years, Correct. But you were already doing search financing before that?

Guest: Oh, yeah.

Host: Right. Yeah. So you've been doing it for a while, right?

Guest: Yeah. So lending in sort of this sba, lower middle market space, just lending in general. I'm starting my 35th year, so search in the lexicon has been around, you know, search has been around for 20 years, but I think it's really exploded, especially from the self funded side of the, of the methodology, which is a little bit newer on the scene where you're a searcher, you're self funded and you're going to do an SBA loan that's really exploded in the last sort of five years, especially in the last two years. And that's what I focus on, you

[39:07] Host: know, and I'm one of those people. I'm, I'm adding to the conversation. I'm very new to it myself, you can probably tell by my questions, but I Just wonder, I don't know what it was that drew me into it now. I think it was very personal. I don't think it was kind of part of this trend. But I arrive and I find that there is this kind of trend going on. I wonder what it is that has made this something that's all of a sudden kind of so hot, especially given that it's not, it's actually not new. It's been in the background there, just kind of percolating and then it's been boiling over in the last two or three years. And I wonder what that's about. If any comments since you've been watching for a while, you've been active for a while.

Guest: Yeah, I do think that there has been this phenomenon called the Silver Tsunami, this idea that privately held business owners are eventually going to have to sell their companies because their retirement nest egg is all built up in the value of their company. So there's been this theory that small business owners sort of in their 60s, 70s, 80s, are going to have to exit. And that's like, I know it's been quoted at trillions of dollars of value and that's been quoted really for the last, say, 20 years. 15, 20 years for sure. And then 2008 happened with the, with that kind of a meltdown in 2008, which I think kept sellers chained back to their companies, rebuilding them. And then the global pandemic also had a, you know, I don't even know it's going to take another couple years to actually decipher and decide what happened in the global pandemic with regard to sellers selling, because we're still in it. So we don't know how this has all been decided. But I think what's happened for lots of different reasons, sellers are finally to the selling table. So the sellers are finally here. So I think part of the fact is that you have to have sellers in order to fuel an acquisition market. So I think the sellers are finally here. There is a lot of debt out there. There's a lot of equity, there's a lot of debt. So that's also fueling the ability to buy a company. And then from the standpoint of sort of the search fund model being taught at our business schools and that really precipitating the model and the methodology and the information about search fund being literally out there at your fingertips to find YouTube's videos, what have you. So I think there's a lot of, lot of factors that are really fueling this idea of business acquisition, business selling Business buying. And it's a great time to be a buyer. Absolutely. Just make sure that you fully vetted the deals.

Host: You know, it's funny because you hear that it's a great time to be a buyer and you hear about the Silver Tsunami and all of this wealth transfer and business transfer. And then on the other hand, you also hear, like you yourself said at the top of the call, like, it's actually really hard to find a good business. It's not like there are all these amazing businesses at your fingertips. Just choose one. You got to really, really work to find, to find not only a quality business, but one that fits, you know, fits what you can bring to the table. So it's, it's interesting because you, because we all hear that the opportunity is great. And I think that, you know, that translates into people's ears as it's easy, but it still ain't easy. I mean, nothing, making money is never easy. But I mean, even finding a deal, that first step is still not easy, right?

[42:32] Guest: Absolutely. And a lot of our clients, they're doing it 100%. They've sort of quit their day job or they've just come out of, you know, business school and they are dedicating 100% of their time to being a business buyer, to being a searcher. So this is something they're doing 100% of the day, all day long. And they're. And it's their job and they have a methodology around it. And even with that, it's taking six months, nine months, a year, maybe even longer to actually find the business that's the right fit. So, yeah, it's a grind.

Host: Yeah. And Lisa, do you find that in many of your deals that in fact the seller is retiring? That. That is really the standard story?

Guest: Yeah, absolutely. Absolutely. There's other stories as well. Unfortunately, what happens is there's illness, death in the family, the founder gets sick. So we hear that one as well, where they have to sell it because of that, which is always like the worst part of the story when you're trying to facilitate something in that situation. Divorce, especially for like 50, 60 year old sellers, divorce is also kind of up there, but then just plain old retirement. And the next generation of entrepreneur isn't the family member, the next generation of entrepreneur that we're financing is that third party business buyer. So that's another part to that nuance of why is this so crazy right now? It's because the next generation of entrepreneur is a third party.

Host: Yeah. Yeah. Lisa, another chance to plug. You do an office hours every week too, Actually, Wednesdays to Thursdays. I participated in them last week. They're awesome. Tell the people what that's all about.

Guest: Sure. So part of us trying to help you scale your search is to just give you a couple of tools. One, on Wednesdays, we do an office hours. Every Wednesday, Pacific Standard Time. Myself and my co director, Heather and I do everything. Sba. It's the basics. It's kind of like business buying, business acquisition, SBA 101. But we go through a lot of great detail. We show you an average deal and it's a live zoom that you attend. And we have anywhere from sort of 20, maybe 20 to 30 people that join every week. And then on Thursdays, we talk about cash flow modeling and executive summary. So we actually show you our cash flow model. We actually give it to you. It's yours to do your what if and vet your deals on. And then we show you a template and an example of how to put a business summary together. Business buyer, executive summary together. So if you're thinking and noodling over a pre loi deal, how do you kind of put your thoughts together? And then with the cash flow model and the executive summary, we're happy to help kind of chat with you about anything you're thinking about.

[45:29] Host: Pre loi and all of those, the models, the templates, these are the very documents that I could use if I found my deal, I could fill them out or follow them and bring them to you as the documentation that you would seek as a first step. So these are, these are functioning. These aren't just kind of samples. These are functioning templates that I can really use.

Guest: And you may use them for months before you even bring us a deal. So they're yours, especially the cash flow models for you to do what? If you can plug in the cash flow information that you have, you can play around with structure. It's an Excel spreadsheet that we give you. And then when you you're vetting deals and deals are kind of starting to kind of rise to the top a little bit. And those are the ones that you want to talk about. Then you deliver us these all filled out and we can have a really pretty efficient conversation with you about your thoughts.

Host: Great. Lisa, how can people either register for these office hours or contact you? What's the best kind of link to pulled into your world here?

Guest: Just email me. Just send me an email, then I'll respond with links. They're in my signature line. And then you register. Super easy.

Host: And what is it? What's your email?

Guest: Lisa Forrest, That's F O R R E S T at Liveoak Bank.

Host: Got it. Reach out to Lisa, everybody. Lisa, this was really great. Thank you very much for taking the time.

Guest: Thank you, Will, so much for inviting me. I really appreciate it. Hopefully it was helpful.

Host: Very much so. Talk to you soon.

Guest: Bye. Bye.