Podcast Summary: Acquiring Minds

Episode: How to Choose Your Lender When Buying a Business

Host: Will Smith
Guest: Lisa Forrest, SBA Lender, Live Oak Bank
Date: October 14, 2021
Duration: ~47 minutes

Overview of Episode Theme

Will Smith interviews Lisa Forrest, an experienced lender at Live Oak Bank specializing in SBA (Small Business Administration) loans for small business acquisition. The episode focuses on how acquisition entrepreneurs should choose their lender, key differences between business acquisition lending and more familiar lending (like mortgages), what criteria matter, common mistakes, nuances in SBA financing (especially for SaaS and e-commerce), and how lenders and borrowers can work together both before and after acquisition.

Key Discussion Points & Insights

1. Business Acquisition Loans vs. Mortgages

• Difference in Focus: While a mortgage is primarily about the borrower's personal finances and rate-shopping, business acquisition loans are much more about evaluating both the buyer and the business itself (03:07).
• Main Lender Evaluation:
  • For business acquisition, roughly 75% of the deal evaluation is about the business (cash flow, financials, fit), and 25% is about the buyer's experience, skills, and motivation (03:07).
  • Personal items (resume, financials) are prepared once, not per deal, unless something changes (05:17).

2. The Importance of Fit and Discipline in Search

• Lenders evaluate how well a buyer's background matches the business's needs. Sometimes a deal isn’t a fit due to qualitative factors (industry licenses, working style, etc.) (07:22).
• “Falling in love with a deal too fast” is a common pitfall. Maintaining discipline and patience is crucial (17:18).

3. Selecting a Lender and Key Criteria

• No One-Size-Fits-All: Many lenders are out there; fit depends on your needs, the deal, and the lender’s policies (10:01).
• Key Differences:
  • Debt Service Coverage Ratio (DSCR) requirements can vary. Live Oak prefers a 1.5x DSCR for more safety, while some lenders may go as low as 1.1 or 1.2x (10:01).
  • This 1.5x is the approval standard, not an ongoing covenant (12:22), but helps protect buyers if business cash flow dips and seller notes need deferral.
• Fees:
  • SBA guarantee fees are standard, set by the government, and can usually be rolled into the loan (14:54).
  • Out-of-pocket costs (“about $10,000”—business valuation, lawyer fees, etc.) can also be financed (16:23).
  • Advice: Don’t focus excessively on these relatively small costs (16:41).

4. Structuring the Right Deal: Working Capital & Lines of Credit

• Never skimp on working capital to save upfront; shortchanging this can cripple operations post-acquisition (18:48).
• Best practice: combine a standard SBA 10-year amortized loan with an SBA Express operating line of credit for working capital, even if it means an extra guarantee fee (19:56).
• Lisa: "I've had clients come back to me three months after closing...Lisa, I am so glad you kind of argued with me about that line of credit. You were right." (20:59)

5. Role of the Lender in the Deal Process

• The lender is part of your 'deal team', alongside your attorney and accountant (22:22).
• Lenders advise on debt service and loan eligibility but don’t negotiate your purchase price or contracts.
• Good lenders provide pre-LOI (Letter of Intent) support, reviewing cash flow and deal summaries before you make offers (24:08).

6. Vetting Lenders: What to Ask

• Top questions:
  • DSCR requirements
  • Down payment minimums
  • Use of seller notes and their subordination
  • Views on working capital, transition plans, and qualitative aspects (24:08)
• Some lenders are high-touch and provide lots of resources and support (Live Oak’s positioning), while others are more transactional (25:46).

7. Digital Businesses, SaaS, and E-Commerce

• SBA loans are mostly unsuitable for SaaS/e-commerce deals with high recurring revenue but low historical cash flow. SBA lending is cash-flow-driven, not ARR-driven (27:26).
• “We lend off EBITDA and cash flow, we don’t lend off of ARR...For SaaS, the ARR model can’t support a lot of debt...it’s just generally not a really good senior debt program.” – Lisa Forrest (27:26–29:25)
• If a SaaS/e-commerce business does have robust, proven cash flow, SBA loans are possible but rare.

8. Business Age and Lending

• Historic, repeatable cash flow is critical. Lenders like Lisa avoid younger businesses (under 3 years) unless they have solid, proven financials (31:53).

9. What If There’s a Cash Crunch Post-Acquisition?

• Communication is key: reach out to your lender immediately if trouble looms.
• Solutions may include increasing lines of credit, deferring seller note payments, or restructuring (33:00).
• Each situation is unique; lenders will assess the problem, outlook, and projections (34:22).

10. Current Challenges: Supply Chain and Labor

• Supply chain issues and labor shortages are prominent concerns for new owners post-acquisition (18:54, 35:00).
• Sound structuring (adequate working capital/reserves) protects against these surprises: "Luckily, knock on wood, we’ve structured the deals well going into it..." (35:17).

11. Market Trends: The ‘Silver Tsunami’ and the Rise of Third-Party Buyers

• The prediction: a wave of retiring owners (“Silver Tsunami”) is finally cresting, creating more deal flow (39:44).
• "The next generation of entrepreneur isn't the family member...it's a third party business buyer." (43:15)
• Despite more sellers, finding a quality business that fits still takes time and dedication (42:32).

12. Live Oak Bank: Office Hours, Resources, and Approach

• Weekly Office Hours: Live Oak offers open Zoom sessions every Wednesday (SBA 101, case studies) and Thursday (cash flow modeling, deal summaries) (44:18).
• Templates and cash flow models are available for prospective buyers (45:29).
• To join or learn more: contact Lisa directly at lisa.forrest@liveoakbank.com (46:41).

Notable Quotes & Memorable Moments

• On Personal Fit:
  “There’s so much qualitative analysis that goes on...Sometimes, I’ve had searchers say, ‘The business was great, but when I did the site visit ... I realized there’s no way I can buy that business.’” – Lisa Forrest (07:22)
• On Working Capital:
  “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.” – Lisa Forrest (18:54)
• On SaaS and E-Commerce Lending:
  “We lend off EBITDA and cash flow. We don’t lend off of ARR. For SaaS...the ARR model can’t support a lot of debt.” – Lisa Forrest (27:26)
• On Supply Chain Issues:
  “Our clients have been very proactive with us...this is what’s happening. Are there things you can do to help me? ...We’ve been doing things like increasing lines of credit.” – Lisa Forrest (33:00)
• On the Market Now:
  “It’s a great time to be a buyer. Absolutely. Just make sure that you fully vetted the deals.” – Lisa Forrest (41:50)
• On the Search Process:
  “It’s a grind. Even with 100% dedication, it’s taking six months, nine months, a year, maybe even longer to actually find the business that’s the right fit.” – Lisa Forrest (42:32)

Useful Timestamps

• 03:07 – Key differences: mortgages vs. business acquisition loans
• 07:22 – Qualitative fit: when it’s not just about the numbers
• 10:01 – How to assess and pick among SBA lenders
• 14:54 – SBA fees explained; cost structure
• 17:18 – Biggest borrower pitfalls
• 18:54 – Current environment: working capital, supply chain, labor
• 19:56 – Optimal structure: SBA acquisition loan + SBA Express line of credit
• 22:22 – Lender’s role vs. other deal advisors
• 24:08 – What to ask potential lenders
• 27:26 – Digital/SaaS/e-commerce lending limitations
• 31:53 – Minimum business age & historic cash flow requirement
• 33:00 – Handling trouble: what happens post-acquisition
• 35:17 – Lender perspective on today’s crunched acquisition environment
• 39:44 – The “Silver Tsunami” and generational business transfer
• 42:32 – The grind of searching for a good business
• 44:18 – Details on Live Oak Bank’s weekly office hours and resources
• 46:41 – How to contact Lisa Forrest for tools or guidance

Episode Takeaways

• Successful business acquisition borrowing is as much about “fit” and qualitative analysis as it is about numbers.
• Lender choice matters—a good lender is a long-term partner, not just a loan source.
• Understanding working capital, the realities of business cash flow, and the nuances of different business models (SaaS, E-commerce vs. traditional) is critical.
• The market is active due to retiring owners, but finding a great deal still requires perseverance and discipline.
• Resources (templates, models, guidance) are available for newbies—don’t be afraid to reach out and ask questions.

Contact for More:
Lisa Forrest — lisa.forrest@liveoakbank.com
Weekly Office Hours (Wednesdays & Thursdays): email Lisa for registration.

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