Host: A few weeks ago, Acquiring Minds hosted a live panel with three top players in SBA lending to the search ecosystem. Today's episode is a replay of that panel, which was really a report on the state of the market as of summer 2024. Lisa Forrest, Matt Dolsky and Brad Heddich shared what they're seeing, good and bad in the search market, including asking prices on businesses for sale. Are they coming down? How interest rates have changed the market, the shape of search deals that are getting done Hint with more equity trends in seller notes, how the SBA rule changes of 2023 have impacted the market one year later, which industries are strong, which are struggling competition among searchers, how are their searcher clients performing as operators, and much more. Hearing from a cross section of lenders is a peek behind the curtain of SBA search deals, and these three have their fingers on the pulse. Now, if you want to watch this interview instead of listen, you won't find it on YouTube as usual. Instead, you could find it under the webinar section of the Acquiring Minds website, acquiringminds Co and listen next week when we'll air a replay of the search investor panel. Between that panel and this one, you will learn a ton from those who direct capital in our space, be it debt today or equity next week. Okay, please enjoy this discussion with Lisa Forrest of Live Oak, Matt Dolske of Byline and Brad Heddich of Commercial Lending X Announcements for some of you, buying a business right now is less your priority than simply operating and leading one you want to get in the seat? Well, don't forget to be checking Smith List for amazing opportunities to do just that. Smithlist.com is a job board for operators and leaders of small businesses, and many of the roles posted there are from within the searcher community and perfectly suited to entrepreneurial operators. Which is probably you if you're listening to this podcast. A couple examples this week, two businesses that were featured in Acquiring Minds interviews are looking for entrepreneurial operators. Costa Dio, who bought a tree business two and a half years ago and is someone many of you will recognize, is looking for an entrepreneurial operator to help him run his three crews and grow to five crews and beyond. Also, Jules Brenner, who is rolling up metal fabricators, is looking to fill two positions, a GM and a plant manager. Now, even if those particular roles aren't a fit for you, make sure to sign up for the alerts at Smith List so that you're notified as we post new job opportunities for entrepreneurial operators. Smithlist.com Smith List.com. 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. August Felker is a two time successful searcher, first with a traditional search fund. The second time around he did a self funded search. Today August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under Loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberly is a specialty insurance brokerage for searchers by a former searcher. Check out oberle-risk.com O B E R L E- risk.com link in the show Notes welcome everyone to this panel with three leading lending professionals at the front lines of search, of entrepreneurship through acquisition and of the of the famous SBA 7A loan. My name is Will Smith. I'm the host of the podcast Acquiring Minds and we're going to learn from these three over the next hour what they're seeing out in the business acquisition market here in summer 2024 and learn what we can to apply in your own deals and businesses that you hope to buy. Some introductions as if any are needed. Lisa Forrest, would you go first? Tell us please who you are and the service that you and Live Oak provide to searchers.

[5:17] Guest 2: Absolutely. Thanks so much for having us. My name is Lisa Forrest. I head up our search fund group at Live Oak bank and we are very active in the self funded search lane for SBA lending. We are the nation's number one SBA lender and we are excited and thrilled to be immersed in the ETA space and are just so excited for the momentum. What's happening in ETA entrepreneurship through acquisition and the whole kind of silver tsunami that's been talked about for so many years. It is real, it's here and it's continuing. Happy to be here with my co panelists.

Host: Thank you Lisa Matt Dolski, can you tell us about yourself?

Guest 3: Matt Dolsky, Byline Bank I head up our search vertical and it's kind of funny I've told this story before but I was introduced to search accidentally about six or seven years ago now when I just stumbled into a search deal not even knowing what it was. And now fast forward six and a half years and it's all I Do. So I'm very excited to be here, excited to talk all things search. And again, thanks for having me.

[6:26] Host: You got it. Thank you, Matt, Brad, your turn, please.

Guest 4: Well, thank you for the invitation. Our firm, Commercial Lending X, we are primarily a commercial loan brokerage shop, although I do like to mention we have a bank consulting division as well. So we're doing loan review and credit work for a number of commercial banks and credit unions, including several SBA banks. So we do see the other side of it from the consulting perspective as well. But my focus is on helping borrowers find that right lending solution and maneuver through the process and understand what it takes to get a deal done. So excited to be here and answer questions.

Host: And Brad, just for those uninitiated, explain how your role as a loan broker is different than Matt and Lisa's as lenders.

Guest 4: So obviously Matt and Lisa represent their individual banks. So they have the credit box of Live Oak or Byline bank at their disposal. They do. They are experts in their field and high up in their bank. So they do have a lot of ability to get deals done internally. Whereas we as a broker, we place deals through over 500 funding partners. In total, over 80 SBA lending partners. Those are all lenders we have direct relationships with. So we have a wide credit box. From the standpoint that different lenders do different things in the SBA world, maybe it's an industry one lender won't do or they won't reach on a certain credit. So we just have more options to look at.

Host: So a searcher might be shopping their deal from bank to bank to bank. Probably all searchers go through that. Or they might work with a Brad who is kind of doing that on their behalf and maybe in a more targeted way. Because you're familiar with the, the credit boxes, the buy boxes of the various banks, right?

Guest 4: Correct. Yep.

Host: Okay, thank you all. And thank you all for, for being here. You're a. Your reputations precede you, your leaders in the search space. So we're all excited to hear what you're seeing out there. And on our pre call, the webinar pre call, which we had earlier this week, we talked about some of those things that the three of you are seeing out there. So I have some notes here that I'll use to kind of guide the conversation, but we'll just see where it goes. But one thing I want to call out, one trend that we can start with is basically that I heard you all say that more you're seeing more equity go into search business Acquisition deals. Lisa, can you speak to that?

[9:00] Guest 2: Sure, I can start with that. So same time last year or even two years ago with where interest rates have been and I think we're, we're seeing kind of what life is going to be like now for a while with where interest rates are. And for those of us who've been doing this for a really long time, this is actually kind of stabilized. This is not. While it's shocking when you're in 2020 and now we're in 2024 and we're, we're. Prime has gone, but this is really more stabilized. So I think that the, the space, the ecosystem, the business acquisition world in lower middle market, this is kind of stabilized. So I would have thought if, if I had, if I had to bet you, I would have bet that by this time now that valuations would have come down because you know, your buying power goes down by about 22% where prime is now. And I would have thought that the market would have adjusted with multiples coming down and sellers kind of participating more in that stabilization. I don't know if we've necessarily seen that yet. And I think, I'm really curious how Matt and Brad want to add on to this. But. So I think what we've been seeing is some multiples have been coming down, but with some a lot in the sell side, multiples have been staying the same, elevated and other parts of the cap stack, other parts of the structure have got to move. And especially for the larger deals where you've got bigger EBITDA driving bigger multiples. Anyway, we've been seeing more equity. I know SBA is really touted for 10% down and we're going to talk about some of these SOP changes, maybe even less down from our buyer. So there's a lot of discussion around how low can I go equity wise. Well, I think we're actually seeing in at least probably 50% of, of my deals anyway, 50 or more. We've actually been seeing more equity required in order to bridge that, that valuation gap. Because everything's based on debt service coverage, historically based. So you need more equity to be able to afford the deal.

Guest 3: Yeah. And just to add on that, I think to touch on the larger deal part of it, I think, I think that's a real key part of it because it's not all the same when a 4 or 5 or if you're talking Perry pursue, which is a more than 5 million dollar loan amount for anyone out there who's not familiar with that term. But that's where we would layer in, in almost all cases, unsecured conventional financing above and beyond the $5 million SBA cap. So when you start talking about those larger requests, just from a credit standpoint, we're going to want to see a little bit more equity in a lot of those transactions. And I think that is another trend that I'm seeing. I think Lisa, you'd agree, and Brad, probably you as well, of trending towards larger deals just generally in the space which then that higher equity injection goes along with that.

[12:08] Guest 4: Yeah. And I will go ahead and confirm with you. Definitely seeing it more on larger deals. In fact, we're seeing a lot more 9, 10, $12 million deals that historically wouldn't have even had an SBA piece, now drop it down into the SBA world. But in order to make those deals work, that the equity is a lot of cases has to be higher to meet what the, the seller's looking for.

Guest 2: Agreed. Agreed all the way around on that.

Host: And so to be clear for, for this, for the audience, what more equity in the deal means is they'll have to bring more cash, and that is either going to be more of their own cash or friends and family cash, or they're going to need to raise money or raise more money from investors. So it's more money to the table. Is, is, is the takeaway for the searcher out there, correct?

Guest 3: Yeah, absolutely. Yep.

Host: Yeah.

Guest 4: And not on all deals. I don't want people to hit the panic button. I mean, your smaller transaction, you're more mom and Popeyes. I think you're still are seeing some of those deals get done with 10 or less equity. But if you're getting competitive on those larger deals, it's, it's definitely a lot of them are. Have to have more equity to make them work.

Guest 2: Yeah, yeah, that's a, that's a great point, Brad. And I think the distinction here is just the trend is toward more equity. I think for so many years, like decades, the SBA program was General, you know, 10% down, 10 to 15% seller note that was sort of the way that these business acquisition projects have worked for so many years. And we, we just are migrating away from that by, by virtue of the need for more equity to make some of that debt service, historic debt service work. But to your point, Brad. Absolutely. Definitely a fair amount of these deals are still getting done with, you know, that sort of original formula. It's just that sort of added nuance now with where market conditions are today.

Host: A PEO run by a Searcher for searchers. If you're running a company with less than 100 employees in providing health insurance, you could secure better benefit plans at a 15 to 30% discount through through a professional employer organization or PEO. Aspen HR, run by search fund veteran Mark Sinatra, understands the needs of search operators and could be a great solution for you to receive HR compliance and diligence support. A powerful HR tech platform and Fortune 500 caliber benefits, all for a fraction of the cost. Check out aspenhr.com or contact Mark directly at mark aspenhr.com and we're getting a question from the audience. Is there, if you were pressed, is there a number that equity percentage number that equity falls now? Is it, you know, 15% more commonly when before it was 10, or is it just a couple of points? It's 12% versus 10% sort of thing. Can you give people a sense, a more precise sense?

[15:15] Guest 3: For me it's all over the map and, and most of the time it's borrower driven. They're coming to me with a structure that has more equity. I mean I, I mean I've seen it anywhere from, from 10 to 25, even maybe 30% in some cases. And that's not us saying you have to come with that. That's folks just structuring the deal in that way. And then, and then I'm seeing it. But, but it, it's borrower driven in a lot of cases for you too,

Host: Brad and Lisa, or is it you going back to them and saying, hey, for this to pencil, you need to bring more equity?

Guest 4: I would say most of the time it is being driven by the client. And again, a lot of it's on those larger transactions where maybe they're doing a $9 million deal, but to get the debt service coverage ratio to work at the multiple they have to pay to be competitive with the PE firm. They have to have a larger chunk of equity just to make the deal work. So they're planning that. I think some of these are borrowers that historically may not have used sba, but they're viewing it as maybe a better alternative to conventional debt or private debt.

Guest 2: Yeah. And I would say it is very, very deal driven. This is not anything the bank or the lender is saying, well now we want 15% across the going to be very deal specific and deal driven for that historic debt service coverage. And there are cases and again to Brad's point, I don't want to freak out the market here, but there are cases on larger transactions where you might have bring in 20, 25% equity. I mean, these are the ranges now where in order for the deal to pencil and it makes sense for the seller, you know, there's that balancing act sometimes we're, we're seeing really large equity coming in, but again, that's already going to be sort of understood by the, the buy side coming in.

Guest 3: Okay, Will, can I just touch on something that you brought up about it being, you know, bank driven? Are we going back and saying, well, you got to bring in more equity? And one of the things that I think is nice about the ETA space and, and is the level of sophistication among the borrowers in structuring their deal. And that's one thing that I would encourage anyone listening to do before you bring it to somebody like Lisa or myself or to Brad is to pencil it out yourself. Because if the debt service coverage is not going to work based on a 10% equity injection, you should probably figure that out up front. And I think by and large most people are doing that and that's why they're bringing it to us, because they're just like we're focused on. The searcher is focused on debt service coverage as well and making sure that it all works. And that's why I think you're seeing that be borrower and maybe investor driven. And I think that's a really good thing.

[18:14] Host: Well, on this point, that kind of kicked, kicked part of this line of conversation off that prices basically haven't come down even though the, our buying power by buyers has 22%. You said, Lisa, I hadn't heard a figure. So that was really an interesting number to hear. Getting a question from the audience, the obvious question. Anybody have a theory on why sellers are intractable and stubborn and, and, and not being flexible with US buyers? And if you don't know, like, who knows, do we think that maybe it's still bound to happen and it just, just the effects haven't, haven't sellers haven't clued in yet or we shouldn't hold our breath.

Guest 2: I'll take a bite on that. Like I said, I would have lost a bet. If you had bet me, I would have bet, you know, you know, however many hundreds of dollars or more that the market would have adjusted already as it had in previous cycles. There's a lot of buyers that there's a lot of you out there. There's a lot of buyers driving demand, driving interest, driving momentum. There's a lot of banks out there, lot of banks wanting to finance the better business acquisitions. There's a lot of investors, there's a lot of brokers, so there is a lot of people monetizing the business acquisition process. Right. There's a lot of podcasts. They're wonderful. But there's a lot of momentum around this idea of buying businesses. And I think that that is, you know, maybe not allowing the market to adjust maybe the way it had in the past. So that, that's my bite of that answer.

Guest 3: I'll give a short response. I think the sellers do that because they can and when they can't, they no longer will.

Guest 2: There you go.

Guest 3: Yeah, Brad.

Guest 2: And Brad, you see such the spectrum from all of your, you know, lenders you work with.

Guest 4: The only other thing I'd add to what you said was the fact that I am seeing a lot of private equity dip down lower than they used to because that, the, because we do some larger transactions as well. And that kind of true middle market, upper middle markets kind of dried up a little bit. So when you start having these PE firms dip down, you just create more competition. So I think that's part of what's driving those values. And they can afford to pay more because they can bring that larger equity check to the table. And it's, it's hard for an independent sponsor or even certainly an independent searcher or self funded searcher to compete with that type of equity contribution.

Host: Yeah. So great. Very simple supply demand dynamics here. Sellers just have more people who want to buy their business. Therefore they don't need to be flexible on price. Even, even when buying power has, has come down some. That's been offset by all these new people wanting to buy these businesses. So the answer to the final question of let's not hold our breath is, is yes, let's, let's not hold our breath. So we've started with two bad news takeaways on the market. What about this, this dynamic of more lenders being in the market. This might be a little inside baseball for the audience, but I think it, it's still worth addressing because, because, well, I'll, I'll give my takeaway after I, after I have you guys spell out what this trend is. Matt, what, what, what am I talking about here?

[21:51] Guest 3: More.

Host: You guys are now having to compete more?

Guest 3: Yeah, absolutely. I think, I think that's a testament to the space in performance that there's certainly more financers out there than there was two or three years ago. And that's a good thing. That's a good thing for the searcher. I think we all, as you mentioned in your Opening comments We all serve different niches. We all have things. I have things. Lisa has things that her bank likes and, and doesn't like, and the same thing with us. And so I think it's just about finding the right fit. I, I think sometimes there's a thought that it's, you know, you know, you can go to any bank and it's kind of a, you know, you're going to get a one size fits all, and it's really not like that. And even down to specific industries, how people look at buyer experience, structure. So I think it's good overall for the space. And, and then somebody like Brad obviously is working with lots of different lenders, so he can probably speak to this, you know, really specifically about kind of what the landscape is like, but definitely more competition, which I think helps searchers get better terms and the right fit for what they're looking for.

Guest 4: Yeah, and I'll throw my bank consulting hat on for a moment. There's a lot of banks that have gotten into SBA lending because it's very profitable and it's a great way to grow the bank. But we've gone an extended period of time without major credit defaults around small businesses, and we probably would have started to hit that around 2020. But then you had Covid and you had this whole flush of cash come into the system that propped up a lot of businesses that probably wouldn't have just survived in general. As that cash peels away and some of these banks who more recently got into SBA lending see some losses, you'll probably see the number of lenders out there shrink again. It does not stay consistent over time. Lenders get into it, they find it profitable, then if they have problems with it, management moves away from it, or they substantially tighten their credit criteria on it. We're, I'm already starting to see that from a lot of institutions that were much more aggressive a year or two ago, they have tightened up what they're looking to do. I wouldn't say I've seen anybody fully pull out yet, but I've seen some institutions get much tighter on what they're doing well.

[24:22] Host: And so I think the takeaway, my takeaway for the audience here is that kind of obvious, but there's a reason that the three of you are on stage. You are specialists in this niche. I could have found dozens and hundreds of people out there who, who put themselves out as SBA lenders. So. And you could find, you know, any at your local, many at your local bank or locally, you can find many, but they are. They don't have the depth of expertise in this niche. They, like you just said, Brad, they probably don't have the staying power. So, like anything, when you buy or out there shopping for vendors to help you do your deal or whatever you need, you're going to want people who are specialists in what you're doing. So that's why these three are on stage, because they live and breathe this stuff and have been in it for years. I also don't want to, you know, speak so negatively of, like, as if some SBA lender who isn't on this stage or just works locally or something is bad at what they do. I'm not suggesting that either. They could be great. And plenty of guests on the podcast have used folks like that that are not big names in our community. But just, just be aware of the, of the specialization, the time in ETA and search, and the staying power of your lender, and not only the lender, but the larger bank for whom they work. So, Matt, go ahead.

Guest 3: Yeah, I was just going to say the important thing, I think, as a takeaway for the audience is that, you know, one story that I'm sure we all see and have seen is where you are with what I'll call a, you know, a pretender lender, where you, you, a searcher comes in and they, they have their loi and they're looking for financing, and they end up with a lender that has never done a search deal before. And because there's certain characteristics to search deals where there's a lot of lenders out there that are not comfortable with it, there's a lot of good ones that are. But I think by doing a little bit of poking around, you can figure out if it's, you know, are they somebody that. You can go to the SBA's website, there's a list of the top SBA lenders in the country that. That's a good place to start. I think if you bring up search and they have no idea what you're talking about, whoever you're talking with at the bank, that's probably a pretty good indication. But these are, you know, most search transactions are large airballs, meaning, you know, collateral shortfall. You have experience, pfs. It can be different than traditional SBA lending to some banks. And so, you know, the last thing any of us want to see is somebody who goes and runs through their whole due diligence exclusivity that they have only to get a no after 40 or 50 days and now they risk losing the deal because they were with somebody that wasn't really, didn't really understand the search model. So just something to, you know, just wanted to add on to that for, for the folks out there listening.

[27:37] Host: That's a great point, Matt, and actually elaborate a little bit more. Tell people exactly when you said airball and collateral shortfall, that's a little bit of lender speak. So put that in layman's terms. That's okay. No, this is great. And then also the lack of experience that many searchers have in the industry is a pretty common characteristic in search in a pretty, but one that if you as a lender you haven't seen, you're like, why am I going to let this guy who doesn't know what a condenser is buy an H Vac company? But in search you got to. So please start with the first one. What do you mean by airball?

Guest 3: Yeah, so just lack of collateral. This is, this is the cash flow lending world. The, the, the searchers out there are, are pricing these businesses off of cash flow and we're cash flow lenders. So for instance, you brought up H Vac. I mean, most H Vac companies have, you know, 12 or 15 or however many vehicles. And that's about, you know, the, you know, maybe a little bit of inventory. But just airball, meaning, you know, we're doing a, let's say a 4 or 5 million dollar loan and you have maybe a hundred thousand dollars of collateral. For many lenders, that just doesn't compute even in the SBA space. So that's the answer to the first question. I don't know if anyone, you know, Brad or Lisa, if you want to jump in on, you know, industry experience. I think in the search world, it's very rare that you have somebody who has direct experience. Lots of great people out there that have good experience. It's just not in whatever they're buying. And, and there's lenders that are in the search space are comfortable with that. And we certainly, different deals, different industries, we can talk more about that. Some things we think you need to have certain skill sets for. But, but just generally there's some banks out there that, that just does not compute for. So just wanted to touch on that. Lisa, Brad, I don't know if you guys have anything you want to add to that.

Guest 4: The only other thing that I would add on to, and again, I want to be cautious because there are so many great lenders out there, but the, the one challenge you have is that there's a, you know, there's lenders like Lisa and Matt who are very involved in the organizations. They have some say in control, they know what they can get done and can consistently get it done. There's also a lot of other lenders out there that are pure sales guys that move around from institution to institution. They'll put a term sheet on anything with two legs. If they think there's a shot they can get it done in their organization. And so you could just gotta be careful because as Matt already indicated, that term sheet may not be worth anything, but you could go through a multi week process before you find out. So I think that's another thing. You just need to watch out for

[30:37] Host: any, any tells, red flags that people you know can look at their LinkedIn, they bounced from bank to bank maybe or just press them with a couple of smart questions and they stumble on the questions. Just kind of obvious stuff or is

Guest 4: there something else, you know, from what we do? I mean it's, it's definitely understanding their experience. How long that they've been at different institutions, how long have they been doing SBA lending? In particular, how long has their institution been doing it? One really good thing to ask is what's the size of their SBA team, right? How many underwriters, closers, salespeople, credit team, credit managers, do they have a lot of these smaller banks? If they've just got one, two or three people, one, they're gonna have a hard time managing capacity to begin with. But secondly, it just goes to tell you they don't have a super experienced team.

Guest 2: I think you also want to ask what's the kind of average deal size that you work on? And then I think you just want to also form a relationship with the person that you are talking to. And we understand that especially in, in today's kind of niche and for our searchers, you're, you're forming relationships with, with several lenders. It's not just one. You're talking to many of us, which we understand and we appreciate because as Matt alluded to in the beginning, there could be nine out of 10 deals that work well for me, but that it's that tenth one that isn't a fit for me that you've decided to get an LOI in. So you have to have your relationships. But I think it's just how the lender is conducting themselves. Are they asking good questions? Do they have competent analysis? Do they understand how to analyze cash flow? Are they asking all of the hard questions early on about your particular transaction. And that's a good thing. If you've got a lender asking you a lot of deep questions, that's good that you want that. It's, it's supposed to be collaborative. So also your interaction with that lender is, is going to be really, really telling.

Guest 4: That's a great point. You don't want the lender just to agree to everything that you bring to them. Oh, yeah, I can do that. Oh, yeah. No questions. Yeah, that. Lisa, awesome point.

Host: Yeah, I, and I, I, I agree and would say that in some ways, yeah, you're not trying to, you're not trying to get around your lender or outsmart your lender so that they'll give it, give it to you that you, like Lisa said, this is collaborative. And a smart lender is, is basically a diligence filter. They're going to, they're, if they're pressing you on something, it's because they're seeing something weak in your business, and you should welcome that as opposed to try to kind of, you know, cut around it or what have you.

[33:19] Guest 2: So we don't want this to be painful for you. We don't want it to be painful. But, you know, you're going to have to work, you're going to have to do your homework. You want your lender to collaboratively have you do homework, and then the lender has to do their own homework. So you want that kind of, you know, all working in the same direction kind of feel. But it shouldn't be painful. We don't, we don't want, we don't want you to, you know, never want to do this whole process again. But, you know, this should be a little bit of work.

Host: Let's move on to, I think, an observation, Brad, that you had yesterday about, or maybe it was you, Lisa, maybe everybody. Anyway, seller notes have gotten larger, I think probably in line with deals getting a little bit bigger equity, needing to get bigger interest rates, causing, you know, the, the penciling of deals to be a little bit more challenging. So, so also on the, on the seller side and them offering notes, you're seeing a trend there. Brad, care to share what you're seeing there?

Guest 4: Yeah. So I think this goes back to what we were discussing earlier about that, you know, that expectation gap between, you know, what the business, what you can ultimately finance, and what the seller wants. And one way we're seeing that gap get covered is not just with seller notes, but also some seller notes with some forgiveness, with maybe some creativity in how they're structured. That Creativity could be that payments don't need to get made in the future or get deferred if certain performance metrics aren't hit. You know, just, just a lot more creativity in how this stuff's getting done. And we've seen some flexibility from the SBA in some of these structures that have helped clients get, you know, pay a little bit more for a business, but put some protections in for themselves and still set the business up for the senior lender where it will cash flow effectively going forward.

Host: Lisa, did you want to add anything?

Guest 2: Yeah, we've definitely been seeing a lot more forgivable seller notes in this last year. I mean, for a long time it was always touted that, yes, you can do a forgivable note. You can do, you know, your clawback metrics. We talked about that for a really, really long time, for years as a structuring mechanism. But it really, really started to become kind of critical to many of the transactions in this last year, maybe year two. Two years. So it's become a really flexible structuring mechanism for us.

Guest 3: And I would just add that it's. Brad, you said the word protection. And I think forgivable seller notes are a really good way for a searcher who's thinking about a deal to protect themselves on some things that could happen post close and the, and they can be tied to many, many things and we see them, you know, you know, gross profit or a certain customer or revenue. I mean, whatever, whatever you want to tie it to. There could be certain characteristics about a business where just putting that forgivable piece in really helps protect you on, on the back end.

[36:29] Host: Well, it sounds like where sellers are being inflexible on the prices they're commanding for their businesses, they're being a little bit more flexible on structure of deal and, and willingness to do some kind kind of notes happily, I guess, and

Guest 2: especially on the forgivable piece. What's also been helpful because I think that one of the factors or issues we've been seeing is where the price might be based more so on the last full year. And it's the idea of sustainability. Maybe there's, I mean, we won't do a hockey stick. We're not going to do a hockey stick if it's, if 22 is below break even, well below break even. And you've got really nice debt service in 2023, that's probably a no go for us anyway. But say you've got more blending around the edges where you've got acceptable debt service in 2022 and, but you still got really, really good run up in 23. The forgivable note is kind of that trust but verify, you know. Well, and if the business valuation supports the price, including that forgivable note, that's another element to key in on as well. But it's kind of a trust but verify. Yes. Celery will the, the buyer will pay you this in the, at the end of the day. But you know, that last year EBITDA definitely has to be sustained. So it's a trust but verify mechanism for the buyer.

Guest 4: Yeah. And I think you see a lot of the sellers more willing to do this because one, maybe they've had trouble selling the business. They've had a few deals fall apart. So if they want to get the price, this is a shot at them still getting that same price. But I do think it comes in where you've got that big growth year in 23 or maybe they've added that big customer that they know is going to pay off in the future. So they kind of want to earn something for that, but they know it's not realistic based on historical cash flow that they're going to be able to get that payment day one.

Guest 3: Yeah, not to veer here, but in talking about Lisa, you mentioned the hockey stick. Hockey stick thing. I see that quite frequently where somebody brings me financials and a deal to look at. And, and they're very focused on either, you know, trailing twelve month or last twelve months. And, and not at all about the historical tax returns. And SBA requires that we underwrite, underwrite based off of tax returns. And so the, that, that, you know, if you're basing that purchase price off of trailing twelve month and, and then, you know, the tax return of 23 or tax return 22 has no cash flow is under one to one. But last twelve months is, you know, two times. That's almost, I don't want to say impossible, but that's very difficult for us to finance and I see it more frequently than I would like to.

[39:25] Host: Well and I think it, that's counterintuitive for people. So it's good we're spending time on this because, you know, many people coming to ETA will have come from some reading about or interest in entrepreneurship where it's all about growth all the time. And so to see some sort of hockey stick effect is in fact celebrated. Of course, in Silicon Valley you want, you know, everybody's got the chart with the hockey stick.

Guest 2: Right.

Host: And in, in this world, or get at least getting a deal Underwritten according to SBA regulations, hockey sticks are, are not welcome or at least valuations based on that end of the hockey stick ain't going to happen. And so, so it's just, it's a little bit counterintuitive that super high, super fast growth can actually be not something that you all smile upon. And indeed like you said, Lisa, and I guess you, you, you too Matt, will not underwrite anything more to add to that. Add to that because it's, it's, it's an important under people for people to understand.

Guest 4: I just, the other thing I'd mentioned there is that it's just not SBA either. If you were to do a deal in conventional bank financing, they're going to have the same concern. There may be some non bank lenders that would get comfortable doing a deal with a hockey stick. But you know, it's going to be a harder sell even there. They're going to really want to be convinced that revenue and profitability is going to continue going forward.

Guest 3: It goes back a little bit Will, to the. When we talked about the airball or collateral shortfall and you think about the kind of lending that we're doing, cash flow, lending in the cash flow being key. It's, it's tough when you don't even have one full tax return year of cash flow to really rely upon that, you know, last 12 months. So I think just to you know, add that to it, I think and even it's a policy, it would be a policy exception really, you know, getting into the weeds here on SBA stuff. But if you don't have at least 115 debt service coverage based on the last tax return, you're talking about a projection based loan which it's very difficult for a bank to get comfortable with a loan, a business acquisition that's perfect projection based. It just is that it doesn't really compute to us.

Host: Great point. And tying it back to the airball. Cash flow lending, this, in this, this world you're lending against the, the strength, the historical pattern of those cash flows since these businesses have so little actual hard assets and collateral to, to keep the bank secure. So what the bank is keeping the bank, the bank's lending against is this, is this history of, of cash flow performance. So gotta be, that's gotta be, gotta be there. I want to turn our attention now a little bit to what you're seeing from your borrowers who are on already on the other side of their transactions. People have already bought businesses. The and I'll tee it up this way. I think it was you, Brad, yesterday, that there's a little bit of softness that you're seeing in, in, you know, in the, in 2023 numbers trailing 12 months. So you. Halfway through this year going, going back to halfway through 2023 is showing a little bit weaker than calendar year 2023. In other words, we're seeing some softening. Can somebody jump at that? Do I. Did I have get that right?

[42:57] Guest 4: Yeah. So, and I'm going to talk a little bit more broadly here. We don't only do SBA lending and then we also from clients we're looking at on the consulting side. But I would say in general, a large percentage of businesses, you know, probably 40, 50% are showing some decline in the first six months of 2024 compared to 2023. Not to be fully unexpected, 2023 was still kind of a post Covid rebound year. But we, we are seeing both either some decrease in revenue or some decrease in cash flow or both. And I will tell you from some of the consulting work we've done, some of our lenders are saying they are seeing a pickup in defaults, not only in sba, but also in some conventional lending as well at the start of this year that just wasn't persistent last year. So I do think that there's a little softening out there. As far as clients we finance, though, most of the clients we finance seem to be doing fine. They got into the businesses at the right level and there hasn't really, we haven't. We're not hearing issues from our existing clients, but we are. You know, I've had a number of deals where clients are under loi and we've gotten updated numbers since the first quarter and they've been down and clients are having to renegotiate deals because the numbers just aren't working.

Host: Matt, are you seeing anything like this?

Guest 3: Yeah, not so much in 2024. Interim numbers. I, you know, to the question about operators that we finance. Yeah, I, I had a conversation with our chief credit officer yesterday in advance of this so I could get some new and fresh information to share. And where we see the biggest mistakes made and where, where borrowers struggle is generally pretty quickly after the, after the, the closing and into the, the transition phase. Oftentimes if we end up with, with a problem loan, it started to go that way almost immediately. And I think the lesson in that is, and the reason why it happens is you have sellers that, you know, specifically this was, this is what we discussed yesterday, sellers that didn't do what they said they were going to do in the consulting period. Sellers that were maybe saw something around the corner with their business that we weren't able to identify that Q of E wasn't able to identify legal wasn't able to identify any of the the people in and around the deal. So I, I think the lesson there is you need to be really comfortable with your seller. It's, I think it was, it's a Warren Buffett quote that you can't make a good deal with a bad person. And so I just think if you are starting to have friction with a seller as you work through the process up front really take note of that and consider what that post close relationship with will look like because it usually doesn't get better after you give them a bunch of money at closing if you're already having problems pre closing. So that's where we've seen some Mrs. And and I think there's some lessons in that for, for people that are out there looking at businesses and talking to sellers.

[46:25] Host: Lisa, anything to add?

Guest 2: Yeah, yeah, you bet. And I think we saw in this lower middle market at least from my perspective it sounds like ma similar experiences. We saw a lot more retrading last year kind of the back half of 23 we saw a lot of retrading where coming out of higher 22s or first part of 23s. The back half of 23 wasn't really sustainable. So I don't know if the market has just sort of gotten smarter or more efficient with where numbers are and so many of our self funded searchers are getting quality of earnings reports. So I think maybe some sellers are more expecting Q of ease now which wasn't you know, 10 years of five 10 years ago that wasn't really a thing. But I think more buyers are getting quality of earnings so I think the sell side is expecting their numbers to be vetted and so I haven't so far I have haven't seen a lot of retraining this much as compared to last year. As far as the portfolio goes at at Live Oak the lenders, the the salespeople on the front end we are part of a quarterly default meeting and we're also part of a quarterly watch list meeting. So at Live Oak we the front end is well aware of what's happening in the portfolio and I think the thing that isn't captured and maybe thought about and and to Matt's point on this idea of transition I think there are a lot of more buyers in this lower middle market space because you don't have backstop. You know, these are highly leveraged transactions for a reason and you might have a seller note, but other than that, there's not a lot of extra backstop. It's not a conventional deal where there's a lot of excess equity being, you know, committed or available. So when things start sliding, there's not a lot of room to move or go from there. And I think that the statistic that's not captured is how many buyers sort of muddle through or they're doing, they're doing fine, they're doing okay, but they're not hitting these growth rates that were originally anticipated or originally hoped for. And so I think our portfolio in 2024 is doing better. 2023 and 2022, we, we started to see some cracks giving though, given those interest rates that movements that had to be digested. So even if companies were growing and even if their Eida was growing, it was all going toward paying additional loan payments. So I think that there was a lot of getting used to that was happening in 22 and even in 23. So I, I think I'm, I'm knocking on so much wood here, I can't even tell you, I don't even want to say this to jinx us, but our watch list is feeling a lot more stable. We have a lot of, at least we're a bank that has a lot of communication with our operators post close. So we know if there's a, and in a collaborative way, not, not in a gotcha way, but we do know if there's little cracks here and there because we have a lot of communication post closed. So maybe I have a more hyper aware viewpoint of, of what our customers are going through, but I'm seeing that our watch list has definitely, you know, it doesn't seem as fraught this year. The last couple years it was a lot of communication going back and forth to their operators.

[49:55] Host: And do you feel, Lisa, that that's basically an indication of the higher rates being digested now, being kind of fully absorbed?

Guest 2: I hope so. I really hope so. And I think the newer deals coming on now, they started in an environment where we know this is the interest, you know, so, so the interest rate has already been baked into your historic cash flow and debt service. It's already been part of the, the closing and you're putting it on the books in this state already versus, you know, you think you've got, you know, a 5% interest rate and now it's,

Host: you know, 10 and on this point, Lisa, about the muddling through versus maybe larger private equity shops where there's more, more equity in, in a, in a transaction. Is that to say that it's the, it's the how little equity there are in search deals that causes them to not have the gasoline to fuel growth? Is it, is it just search?

Guest 2: It's, that's, that's the name of the game. That's what SBA loans are for. That's how they, that's how the program works. It is, they are hot by definition, highly leveraged transactions. That's how SBA loans go. And you know, this is my third plus decade of doing this. So this is not new. This is just how SBA loans work. I just want people to have an appreciation that I do think this lower middle market, small business loans, lending environment, these, these businesses are harder to operate, I think, than people are anticipating. Yeah. And I've been doing this for 30 plus years, 37 years. So I mean, I've been doing this a really long time. The vast majority of my clients do well. So I don't want this to sound doom and gloom. This is always how it's worked. I just think that there needs to be maybe a better appreciation for how hard these are to operate. But that's really hard to do until you're in it, doing it. It's really hard to, I mean, adequately help discuss that before you actually close on one of these kinds of opportunities.

[51:57] Host: Well, it's like so many of my guests have said, you know, I knew it was going to be hard. I listened to the podcast, I talked to other operators, like intellectually I knew it was going to be hard, but you only really know, feel, experience it when you in fact experience it.

Guest 2: But hey, I've created my life's work around doing this, so obviously I wouldn't be doing it if, if things didn't turn out well for people. I'm just, I don't know, maybe like a mother hen now. I don't know.

Guest 4: This goes back to an earlier point we made about you want to be sure you're working with the right partners. Because I be probably a lot of reason why Lisa, Matt and myself, and I'm not trying to say this with any arrogance, but we have clients that have been successful because we've discouraged a lot of clients from doing certain deals as well or help them structure the deals the right way so that they don't end up in a position where they have a bad deal. You know, some, sometimes you find clients who Just really want to try to make a certain acquisition work and you got to kind of nudge them and help convince them that this, this may not be the right acquisition for you. And at the end of the day, you're not. Most people getting into this are not looking for a job. Right. They're looking for a career. You don't want to buy yourself a job that, that you're going to be miserable with. Post close.

Guest 3: Yeah. All great comments. Just to add on it, I think working capital is an important concept here. When Lisa talks about, you know, the, the borrowers that it's not like this, you know, right out of the gate, sometimes it's levels off or there's a little bit of a dip. And that's just the reality of how the operations of business go. And one of the key things to be thinking about is what does my post close liquidity look like? How much working capital am I getting? Do I have a line of credit? Do I need a line of credit? Because if everything goes straight up, well that's, that's great. And then you have other problems that you have to deal with. But if it doesn't, it's that liquidity that you want to have that is, is going to help you through those times. So be really cognizant of that as you're talking to your lenders, to your other partners. Think a lot about seller provided working capital, bank provided working capital, and what you might have from a working capital or post closed liquidity standpoint. I've seen a few deals where searchers have over equitized the deal to put working capital on their balance sheet day one. And I think that's a great way to think that you're giving up some ownership but that you want even that much more excess cash so that if things happen that you can't foresee, you have that backstop.

[54:41] Host: Okay, let's get to industries because that's always a hot one. Lisa, you guys have industry focused verticals. So your Live Oak is often asked this question, what can you tell us about what's hot and what's not?

Guest 2: Yeah, we have 40 different verticals at Live Oak where we have those divisions do Nothing but H Vac or plumbing all day long. That's their 247 to do that, to stay on top of and, and do those industries, I would say the really interesting industries for us, which aren't going to be a surprise to anyone. The reason we have industry vertical set asides is because they're scalable industries with a good total Addressable market and they perform well. We wouldn't have a vertical with people around those industries unless they were doing well and had scope and scale to them. So H Vac and plumbing, very popular and so far it's performing well. Msp, managed service provider, broadband, isp, that, that sort of, that whole category is very, very active. We're seeing multiples with MSP north of 5 even in this lower middle market north of 5, maybe even 6. H vac and plumbing are also kind of trending above 4, 4 and a half because it is so popular. And our nuance around H Vac and plumbing and home services, roofing, you know, you name it, they're all really popular. We're looking for ties to repair and maintenance, not new construction. Matt might take a different view than us on that, but just to compare and contrast. So we want service, maintenance and those are what are driving multiples higher for the home service kinds of industries. Property management is also a new one for us. It's very popular and that one is growing quickly. Of course, Senior care, home health, all of that's wildly popular and it has been for, for many, many years just because of our aging population and trying to age gracefully and age gracefully in, in place if you can. Franchise has been a really growing area and I think for searchers in particular, that's always been kind of poo pooed that oh franchise is kind of easy. I don't want to do that. But for multiple unit operators, franchise can be very lucrative, especially around restoration, pest control. Brad mentioned on our pre call animal care. We have a whole animal care segment as well. And then Brad, you also mentioned manufacturing yesterday and we do a lot of that as well. And then sort of like janitorial, all of those kind of blue collar areas, very popular. Again, multiples are trending up in those because they are popular, doing well and scalable.

[57:30] Host: What about landscaping and fencing? Lisa?

Guest 3: Sure.

Guest 2: So landscaping for us has just not performed well. I know Matt's going to offer some comments there to residential landscaping. Just one lender's opinion just hasn't performed well for us. Low barriers to entry, a lot of difficulty around labor, labor constraints, especially if you have any seasonality to that industry has been really tough on our residential operators. We are looking at commercial landscaping that has a little bit more of a contract reoccurring aspect to it and we want more professionalized. So we're looking for 50 people, 50 employee organizations or higher for commercial landscaping and then fencing. We have seen some, you know, interesting things pop up where you've got maybe a business that's tied to maybe it's not new construction, but it's tied to like home resales. We took a hit on a couple of our fencing in 22 and 23 with increase in interest rates. And then when the home resale softened, that was an industry that apparently kind of got, got caught there. And then I'll also say staffing is an area that we've seen a lot of softening in, even for medical staffing.

Host: Thank you. That was comprehensive. Great.

Guest 3: Yeah, great insights, Lisa. I think, you know, I would just add a couple of things. You mentioned landscaping and you know, I'm located in the Milwaukee, Wisconsin area and just generally across the Midwest. I think landscaping that has snow plowing. Typically our landscapers here do snow plowing in the winter. Beth. And really challenged and has resulted in some challenging credits because we've for going on three or four years now have had so much less snow than what we would typically get. And that, and that's really affecting them in their off seasons. I would just add on the, for on, on the topic of industry, that's another thing where there's going to be a lot of differentiation amongst the lenders. So have those conversations. There's certainly industries that Lisa likes that we don't like and vice versa and other lenders the same thing. So, you know, I know for us, if you're looking at a deal that is a, is a contracting business or has a, you know, a general contractor type of feel where, you know, there's certain things that you can look for like does this business have progress billings, Are you working on large projects that extend for several months where you're having progress bills and payments that we view as a business that you need a specific skill set for. And so, you know, either having experience or a background, you know, maybe in, in engineering, where you're going to need

[1:00:12] Guest 4: to

Guest 3: sell us a little bit, if you will, on, on why you're the right fit to run that company because we just view that as, as different than, you know, running certain other kinds of service businesses. So that's just something to be aware of, you know, to talk to your providers about that upfront and what they might like and don't like.

Guest 4: I would say from our perspective, we're industry agnostic. With the lending partners we have, we could look at just about anything so long as it's of course legal, you know, but it, the most important thing I think is experience or relatable experience from the buyer. I tell people if you're if you spent your whole life scooping ice cream and filling ice cream cones, then it doesn't probably matter what type of business you're looking to buy. You're going to have a hard time having relatable experience if you've managed an ice cream shop and you're going to go manage another business, probably relatable to a lot of different businesses. So it really depends on where that experience lies and, and then what you can do to convince a lender how that that experience will parlay to what you're trying to do now in your career.

Host: Great point, Brad. Thank you everyone. I want to get my panelists here talking about the, the rule change that happened last year. If, if you were following the SBA and source acquisition world last year it was, there was quite a buzz around. It took a little bit of time to digest. We were talking about other digestion. This was more digestion that was happening and now six 12 months later, we're seeing some effects indigestion. Lisa, would you tell, would you kind of give people context for those who don't know what I'm talking about, Define what this rule change was, why it's relevant and then we'll talk from, hear from all three of you about what its impacts are now, the impacts we're now seeing from it.

Guest 2: Yeah, we had quite, quite a few changes came in. I think the two that are most interesting for your audience and given our time constraint, I think it's the equity injection and then the partial, partial change of ownership. I think those are the two that got the most interest around them and, and impacted the, I think the lending opportunities the most. So why don't, do you want me to take the equity injection Matt, and then I'll turn over the partial change to, to you.

Guest 3: Sure that works?

Guest 2: Yeah. Go ahead please obviously fill in from what I'm going to say as well. So equity injection minimum 10% is still required equity cash injection by the SBA. But the SBA did open up what can how you can make up that 10% down. The idea of a seller note on full standby, either no principal and interest or interest only being paid on a two year seller note. Those can make up part of or all of your equity injection. If your seller note is on a two year standby for two years, in theory, buyers are maybe allowed to come in with 0 down where that seller note can count for your 100% of your 10% down. If the seller notes on a two year standby can't have a balloon, it then has to amortize after the two years. I don't know if lenders are actually going that aggressive. I just know for, for one at Live Oak we're not. We might allow some amount of that two year standby to count for your equity injection, maybe 5% percent of that. But then we're not doing 95 financing. We're probably then wanting a secondary seller note on top of that. And so much depends on why it is that you are trying to come in with that little cash injection on a program that is already a very highly leveraged transaction as it is. But that is the SBA rule definitely. Brad can weigh in here. Lender to lender is going to have opinions on how low can you go and really make sure you are working with a lender that can explain to you how they're coming up with debt service coverage. I've heard that there are some lenders that are not actually including that seller note payment in their debt service coverage. We are doing that and we think that it is the more kind of prudent way to think about it. And then there's a nuance for that. If it's interest only for two years, 25% of the 10% has to come from the buyer. 75% of that 10% can be in that seller note if it's on interest only for two years. That's a lot of weeds turning it over to you, Matt and Brad.

[1:04:54] Guest 3: Good job explaining that it is a lot of weeds when you start getting into the equity rules. The other big change was allowing for partial changes of ownership where the sellers retain equity post closing. It's good that we're talking about this right after we talk about experience and how that can play into your ability to get a deal finance because

Host: we

Guest 3: view it as a, as a, a big workaround and plus to experience to have the seller retain equity post closing. Typically we see, you know, in the 5 to 10% range is, is typically where I say seen those land without liars on both sides of that. But that's something that you were not able to do. SVA you always had when in business acquisition it had to be 100% change of ownership. I'm seeing it on probably half the transactions that, that I'm working on have sellers retaining equity. I think it's a really great tool. It can help bridge valuation gap. I mean there's just so much that, that it helps with as well as working around the experience part. And in a lot of cases in businesses where you have licensing, it can Help alleviate the needing to understand what the licensing transition is because the seller's going to be staying on and retaining that. So definitely something to think about as you're considering transactions and ways to structure them. And also again, helping bridge if there's any experience gap. Just think about how having the seller stay on might help with that.

[1:06:36] Guest 2: Agreed there Map. We really like that partial buy in

Guest 4: on the opportunity to go to 0% down. Quite frankly, I've see some lenders here and there marketing it. I'm not truthfully seeing deals get done there. I'm typically seeing most lenders requiring a minimum between 2 and a half and 5% down. Even if you have that seller note on full standby for 2 years. The only time I've really seen the 0% work has been if like maybe it's an employee or a key employee of the business buying the owners out, then we've seen some lenders willing to go down to 0% in that case because a lot of the transaction risk is off the table for those deals. One thing you do need to be aware of with the seller note piece of it is if you are doing a partial business acquisition, you can't use a seller note as part of your equity in that transaction. So you can use existing balance sheet equity to help offset that total equity requirement, but you can't use that seller note if you have the seller staying on in the deal. So that's another little nuance you need to be aware of and need to work with. And we see a lot of people structure it that way, but then at the end of the day they got to kind of unwind it or restructure how they're going to do that. Also, if you're doing an equity a deal where the seller's retaining equity partial business acquisition, be aware that has to be a stock or membership interest purchase. So it's not a rolled equity transaction. The seller is retaining that percentage of stock or membership interest. So you can't do an asset purchase on those transactions. So it's another little nuance you have to understand when you're, when you're doing those opportunities. But yeah, we're seeing a lot of deals get done with seller notes on standby for two years or more. And we're seeing a lot get done with less than 10% equity. And certainly a large percentage of deals where sellers are now retaining some ownership, especially if there's a lack of experience or, or there's a need to be sure licensing is going to stay in place.

Host: Lisa, you I Heard you say that. You, you, you're seeing it, you like it. Did you have more to add on, on the actual impact it's had?

[1:09:05] Guest 2: Yeah, just the partial buy in I think it's definitely had a really positive impact on helping in this lower middle market where we are really active in supporting those partial change of ownerships. Not so much the zero down payment or the less down payment. We're more in the camp on really utilizing the partial change of ownership though.

Host: And to be clear again, the, the big points there were having the owner's expertise along for the ride, licensing, often transferring with the business, solving that problem there. And there was something else just it

Guest 2: really helps with the transition and it helps with, you know, especially if the seller and if the seller is key now if the seller is key, regardless of their ownership percentage, they're still going to have to personally guarantee. So you want to keep the seller below 20% so they don't have to personally guarantee. And there really does have to be a business can transfer without that seller but they can be helpful to you in transition. And for a partial change of ownership the seller can stay on indefinitely. Now you're going to have to take their salary and build that into your historic debt service coverage calculations. But for those cases where you really do see a fit with the seller, they can stay on for a lot longer than a year and that is definitely a big change and in some cases that's going to be really helpful.

Host: Skin in the game by the seller to the, to see a successful transaction in transition.

Guest 2: Great.

Host: Well, it's interesting because I, when it first the rule change first came out, there was I, I saw some kind of saying that this was a nothing burger or at least that it wouldn't, it wouldn't impact the market that much. But what we're hearing is a year later, in fact, it's shown up a lot. Matt, you just said half your, half your deals have retained equity in them. So that's, that's quite a bit great. Everybody. Very, very helpful. Just let's, let's close out with just a couple of the how to questions I said we wouldn't spend time on but these are so these are questions that you guys answer day in and day out. But they're so important to the process and so many people have them or have doubts about them first timing of engaging you all, what does that look like? When should searchers be reaching out to you one on one, not just going to office hours to learn, but actually starting a relationship.

Guest 2: Lisa, I'll Say for me, basically we have you start on our office hours. That's really helpful. And then we have templates for you to pre loi. You can share your buy side overview pre loi. If you'd like to get a viewpoint on a transaction before you put that LOI together. We have templates for you to talk with us pre loi. So that's probably the, the easiest and the best place to consult with us early on. I mean it's more efficient for us if you have an LOI and come to us then. But you know, we want to make sure that it's, it's you're getting good financibility tips.

[1:12:02] Guest 3: Yeah. And I'd say it's definitely a good idea before you submit an loi just because have us look at it. We'll tell you if there's something in there that may not be SBA eligible or maybe a structure that we, you know, there's a problem with it that we know we couldn't get this done. You definitely want to figure that out before you submit an loi. So I would just say as early as, as you're comfortable.

Guest 4: Yeah. And I will say that we operate maybe just a little bit different because we're kind of more of a consulting company, not just a bank. But our recommendation to clients is to come to us pre loi. We're always happy to sign an NDA, review a SIM review financials. We provide some financial feedback can help make suggestions on structuring a deal. Our goal is to try to be sure when our clients get to that LOI stage that whatever LOI they, they put out there, it's something that can get financed in the market that they're, they're not going to set themselves up for failure.

Host: Great. Thank you you all. And final question. Let's, let's hit on the PG personal guarantee. This of course is always something that so many people struggle with wrapping their arms or getting their heads around. I'll give you a specific example. Let's say someone has is more established, maybe kind of mid career. They've four types of assets. They've got equity in their house, they've got cash and securities, they've got IR 401k IRA accounts and they've got a 529 for their kid or kids. Any of those protected from, from the pg? How can somebody who's got who's, who's further along in their career and has real assets as opposed to the 25 year old who while personal bankruptcy would be not Good. They're also just don't have as much at risk, don't have a family. I mean, it's just an interesting point that, that somebody who's got a lot of net worth relatively and somebody who has no net worth basically have to deal with the same personal guarantee. One has a lot, a lot more at stake there. Respond to that if you each, each would. Please. Brad, you want to go first?

Guest 4: Sure. You know, I have this discussion with clients often. It's, it's not fair. You can have two guarantors on a deal that both have to sign 100% unlimited guarantee. One's got a $2 million net worth and the other one has $100,000 net worth. It, it's unfortunately just the way the program works. You know, there's things that people can do to obviously protect certain assets. If they've got spousal assets, the spouse isn't involved in a transaction if they don't have lendable equity in their home, if their equity has been eaten up by a first mortgage or a home equity loan. You know, so equity in a home, in order for a lender to be required to take IT by the SBA, has to be 25% or more the value. So, you know, certainly there's some creative ways people can help kind of protect themselves. But at the end of the day, you don't want to over protect yourself either because if you don't have enough of a net worth, you're going to have a hard time getting qualified for an SBA loan or maybe the amount of an SBA loan that you're looking for. There's certainly not a hard rule with most lenders of how much post closing liquidity you need or how much of a net worth you need to qualify for a certain deal. I think a lot of it is deal dependent, but certainly if you've got a hundred thousand dollar net worth, it's very highly unlikely if you're doing a deal on your own, you're gonna get a $5 million deal done. So you want to be sure you, you show a reasonable net worth as well. And you got to be accurate on what you report. This is a federal program. You don't want to not disclose assets on a personal financial statement.

[1:15:50] Host: Thank you, Brad.

Guest 2: Lisa, I don't, don't mean this reply to sound curt or flippant at all. I know the aspect of a personal guarantee is really serious and it's really important. I actually had my own SBA loan. I own a small business also and had an SBA loan and I actually had to sign a personal guarantee and I had a lien on my house. So I understand personally what it's like to go through the thought process, especially if you're going to be the operator and you have a spouse where you have to kind of walk them through what it is. You're this crazy thing you're considering. But the job of the lender, it's not my job to convince you that you should be comfortable with a pg. It is really something that you're going to have to decide if the benefits of the SBA program are worth the requirements of that personal guarantee.

Host: Matt.

Guest 3: So I'll disclaimer will by saying I'm not an attorney and don't pretend to give legal advice about what assets people can protect. But in that, in that scenario, my understanding is that the 401k and the at best accounts are not A bank cannot go after that. But again, here my disclaimer not an attorney, though I do play one on TV for from time to time in regards to the, the I, I take just another track on this one. When it comes to that example that you gave, I would say that there that's not an even situation to say, well, one person has, you know, all these assets and they have to, you know, they're getting the same deal as the person who has no assets. It oftentimes doesn't work out that way. I mean you're able to get

Host: usually

Guest 3: those larger deals, especially Perry Basu, we have guidelines about how much net worth somebody has to have. You can oftentimes secure better terms if you have more net worth than somebody that doesn't have any. So I don't think it's an exactly apples to apples comparison to just say, well, this person's going to get the same deal or ability to borrow as much debt as somebody who has more horsepower on their pfs. So that I would just add that to it.

Host: Great clarification, great point. And so and that manifests itself in terms of maybe better terms, for example, just different, different deal. Great, great point.

[1:18:03] Guest 4: And Will, one other quick thing. I get the question all the time from people, hey, can I do conventional bank financing? Because I can avoid the personal guarantee. And the truth of the matter is, if you're doing a conventional bank deal of the size that we're talking about right now, it's 95% greater than likelihood, you're going to still have to sign a personal guarantee. You're not going to get out of it, but you're going to have much worse terms than you would via an SBA 7A loan. So I think a lot of people have to understand they're asking the bank to take a tremendous amount of risk. They're signing the personal guarantee. Part of it is that they're financially backing the deal, but part of it is the trust factor that the lender knows that there's somebody serious that is going to back that transaction. And there's a lot of data out there that indicates that loans that are unguaranteed versus loans that are guaranteed. The, the collection rate and repayment rate is substantially higher because borrowers just don't walk away. They see difficult situations through because they have something to lose. I know that's not what people want to hear, but that is the reality in the data and, and why a lot of lenders like that guarantee, even on the conventional side.

Host: Well, and it, that's like the discomfort that people feel around it is precisely the point actually. So that if, if things start not going well in the business, you have so much at risk, you're going to move heaven and earth to, to make it work. That's, that's not a flaw that it is designed to be that way. So the likelihood that you're going to be able to circumvent that very core characteristic of this loan product is very slim. So. Well, thank you. Thank you all for that. That I know it's, it's a theme that comes up again and again. A lot of people have a hard time wrapping their heads around it. Understandably, it's not to be taken lightly. We're going to call up there. We're well over to the three of you, Lisa and Brad and Matt. Thank you guys for giving me some extra time in a very rich conversation. This was wonderful. I look forward to having you back for an update on what the market looks like six or so months from now. Bye, everyone.

Guest 4: Thank you.

Host: Thank you.

Guest 4: Thanks.

Guest 2: Will.