← Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
#207 SBA Loan Strategies for Acquiring a Business | Expert Advice
00:58:01
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- [00:00]
Allen Peterson
I help first time operators buy real businesses with maximum leverage. I closed over $70 million in acquisition financing last year. Home services specifically, they're just really hot right now. For 10 down, sometimes 5% down, you can buy a business that's cash flowing from day one. The members of your deal team should care about your long term success. Just because a deal can get done doesn't mean it should get done.
- [00:34]
Jack
Welcome back to Jacquisitions. Today I am extremely excited to announce on the pod we have Allen Peterson. Allen is an SBA guru. I'm so excited to have him to talk to today. There's a lot going on in sba. There's a lot from an acquisition side where you know your lender is going to be one of the most important connections that you make and work with throughout this process. Alan, how are you doing?
- [00:59]
Allen Peterson
Thanks for having me on. I really appreciate it. I'm doing pretty well all things considered. As at the time of this recording we're backing into the hard stop date of the old SOP and into the new one. So, you know, thankfully all the loans I had that would be adversely affected by the updates to the program are in. We've got our PLP numbers, which is jargon for the SBA authorization number, the number the of the approval number that needs to be assigned to the loan by June 1st in order to be qualified under the old rule book, so to speak. So besides the SBA moving the goal post on me especially in some ways that have complicated acquisitions of the skilled trades and home services businesses which is my specialty, it's been good. I mean, hey, my kids are swimming without floaties. There's a lot of good stuff going on as well. Right.
- [01:54]
Jack
So there you go.
- [01:55]
Unknown
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- [02:46]
Jack
I mean, I think you we'll talk a little bit about the changes in the sba because I think that's extremely important coming up for people listening. But before that, I mean, you also mentioned that your specialty is in the home service field in SBA loans. Tell us about that. Who are you? How did you get into this specific niche?
- [03:04]
Allen Peterson
And I mean, ultimately I help first time operators buy real businesses with maximum leverage. You know, I do that through the SBA 7 loan program. We lend nationally, we're industry agnostic, but we find that the home services specifically, they're just really hot right now, you know, and that's not saying that that's why I'm in the space, right? So for example, I closed over $70 million in acquisition financing last year. A lot of those people didn't realize that they had the access to capital that they did. Right? And that means that maybe I need to do a better job getting the word out and letting people know that, you know, for 10 down, sometimes 5% down, you can buy, you know, a business that's cash flowing from day one. You know, for me, the home services world is relatively bezos proof, or at least we hope it to be. You know, I live in Tampa, Florida, Jack, and I'll tell you exactly what I do. If I have air conditioning issues, I pay nothing else to it, right? When I start sweating in my, I open my wallet and I. And I pay, right? And you know, that's kind of the thing I like about it too because you know, when I look at businesses, I try to be very objective, right? And these industries, to me, I'm extremely bullish on all the data supports that this is the space that is going to continue to grow. This is not just, you know, consumer confidence based discretionary spending. This isn't luxury, this isn't boutique jewelry. You know what I mean? This is stuff that people really, really need. And more importantly, you know, the people I get to work with in this space are really, really cool, right? So it's a variety of folks that come into this world and are interested in the space. Maybe, maybe it's because of, pardon me, but I don't want to say snake oil, but maybe it's due to Instagram reels, You know, maybe it's about, hey, you got no money, no experience, you could buy a million dollar ebit to business, just get a seller note. It's that easy. And for 1500 bucks monthly, I'll tell you how I did it myself. Then I'll rent a Ferrari and drive away. Right. That's not just not reality. So I think there's a lot of interest in the space. But then when we get down to it, the people that are most successful are already doing their research. They're already listening to podcasts like yours, like Own an operator. They're already a little bit ahead of the learning curve and in my experience, because they're looking into industry specific questions and that's why I've had success there. It's a little bit based on the interest, but I've done plenty of these deals. I'm happy I have three in closing right now and two approved. I mean, those are five H Vac deals year to date that are in and I closed one earlier out of upstate New York. So that's all H Vac. I'm doing a lot of plumbing too. Roofing can have some unique challenges based on their model, if it's dependent upon insurance payments, that can create some cash flow concerns. Right? Based on the ability to manage working capital ebbs and flows. And that's all the stuff that we get in the weeds on. And when I work with people, we get into the weeds of those topics together. We make sure that you're buying a business good. Because just because a deal can get done doesn't mean it should get done. You know what I'm saying? And that's sort of the way we approach it. And we find that our clients, the people we work with, really appreciate that, you know, we want to be on their side, on their team and be objective really, you know, at the end.
- [06:52]
Jack
Of the day, which is huge because I mean, this is a relationship that you build, like I said at the beginning, that you build over. You have to work with this lender for 10 years if you close on an SBA or you pay it off a little early. But still, but on some, even if with real estate, I mean, you're looking at 25 year relationship with size, somebody that you're crawling in bed with. And from an owner standpoint, you really can't get out of it other than refinancing to conventional or something way down the road. But it's a difficult divorce process. And so I always say make sure you are getting in bed with a really good lender who's setting you up for success and who's working with you. Like you said, to go through a lot of these challenges and understand the Business. I always tell people, don't, don't lean on the lender in terms of like, their job is not due diligence for you. Their job is not sussing out if you should buy this business or not. But definitely having someone who's on your.
- [07:43]
Allen Peterson
Side is for sure. And it's, it's the most important piece of the puzzle is that, you know, we get along well and we're supporting, you know, the same mission at the end of the day.
- [07:53]
Jack
Yeah, exactly. And so with that, I, I mean, ironically, I was talking to a very, a very large scale broker who does only h businesses nationwide. Yeah, he's down in Florida too. Yeah, I'm sure you know who I'm talking about. Yeah, he was saying, he was saying that he was working with you on two deals right now. And I was like, oh, I love it. Yeah, he's coming on the podcast tomorrow. So it's such a small world and small industry once you get to that really high level. But what I was going to ask is what is there any commonalities that you're seeing with buyers in terms of, just for my curiosity. Right. He was mentioning that a lot of buyers are coming out of New York, New Jersey, trying to buy businesses down in North Carolina and Florida. Do you see any of that kind of, that same trend or you seeing operators like myself expanding and buying businesses or operations guys buying businesses or marketing guys buying these businesses? Is there any geographically?
- [08:47]
Allen Peterson
There certainly is. And as someone who moved to Florida From Pennsylvania in 2020, my, my, my house is built of glass. As far as any judgment towards people relocating to, to Florida, it's not a.
- [09:03]
Jack
Judgment, it's just like curiosity.
- [09:05]
Allen Peterson
But, you know, all my neighbors are from Connecticut anyway. But, you know, it's, it's something that I do see a lot of people targeting geography, the most common being Florida, Texas and Georgia. And you know, for those, for that reason, those deals tend to be more competitive or at least there is the illusion of competition that, you know, without, you know, nefarious intent. We'll, we'll just say sometimes is presented all the time like, oh, this is a Florida H Vac deal. I got three cash offers behind you. Well, if that's the case, take the cash. Okay. Because that's, it's just, it's simply something that makes that geography more challenging. You know, with that, we've also done expansion deals for people all over the country that are looking to buy commercial real estate or acquire a competitor with zero down. So, you know, that's a compelling roll up strategy for some folks, you can have up to $5 million. Yeah. I mean, think about it. Like, if you can do $5 million per NAICS code, industry code, you could do H Vac until you can't anymore. Right. And then. And then expand into plumbing, depending on the mechanics and your deal sourcing. Right. We ran into.
- [10:20]
Jack
Yeah, yeah, Plumbing. Same. Right, Plumbing. Same in AICS code. But if you want to spend into electrical, same point.
- [10:26]
Allen Peterson
Right.
- [10:27]
Jack
Like, that's actually our strategy. So I get excited because it's like, we are going to try. We still try. We bought four in the last two years, but we're trying to expand up to that 5 million mark and then go, hey, we know we have to put money down again on a new NAICS code. But that being said, like 10% as a business that has, you know, 5 million in debt, so that means we're doing much, much, much better. Shouldn't be a huge issue at, you know, for, for that reason. But still up to $10 million or $15 million in, like, really nice loans in for acquisitions and growth. It would be a huge growth strategy.
- [11:06]
Allen Peterson
Absolutely. And there's also whispers and we'll see what happens with it, that the SBA limit is to go up. Right now, it's all about manufacturing. That's the big piece of the narrative. But I think that there's an optimistic viewpoint that we will see the 7A program go beyond $5 million. And I don't think it'll take a super long time, as that's the narrative, that people in D.C. are agreeing that the loan limit's been in place for a long time. It's just time for it to go up. Will it go up to 10 million? I don't know. 7 million might be a more appropriate target. But still, I mean, that's a benefit we'll see as $5 million is still plenty of exposure to be able to do with such little down. Right. It's all about the leverage.
- [11:55]
Jack
Exactly. And I mean, super interesting and that you mentioned manufacturing and all that. And so moving forward, I mean, I know there's lots of changes happening in the industry. Kind of mentioned it like it's at the forefront of your thought going into June, as we record, I maybe we bring this up now. I had it slated for later in this conversation, but I think it's a good, good transitionary time. So there are a lot of changes happening in the sba. There historically has always been a lot of changes. I remember a couple, like a year ago, they were saying, now you can, you know, you can refinance and amortize the entire loan into the, the new amortization if you buy real estate. And then they said, oh no, no, now you have to, you have to do it as a percent of the entire portfolio. So there's just always changes and, and it's always flexing with these new changes coming out. What are some of the biggest items that you see that new potential buyers.
- [12:55]
Allen Peterson
Should be aware of? So what we have seen in the changes, the main, the main changes, in my view, we're almost to. I don't know, I mean it feels as if the ETA community at large was, had to take a step back in some ways based on the changes. However, we're seeing good deals getting done still. Sellers accepting Lois with the new structures. The new structures specifically are that if a seller retains equity in any capacity, Even less than 20%, we can no longer do a multi step acquisition. So think of it this way. A multi step acquisition would be I'm buying a business, but I want to do it via asset sale. So I form Newco with seller as 10%. We'll say very common or five, whatever it might be, they own 10% of NewCo. We complete the acquisition via asset sale and then it goes on. We can no longer do that. So any partial change of ownership where a seller is to retain any amount must be done the stock sale. Additionally, it'll trigger the need for them to guarantee for a period of 24 months. It was communicated at Nagel. That's the national association of Government Guaranteed Lending. It's the large advocacy group and essentially lobby in D.C. for the interests of the SBA lenders. It was communicated there that while the guarantee for the seller must be there for 24 months, it does not have the same collateral requirement. So that is a little bit better than what we first thought it would be. But it's still going to be challenging, let's be honest. I mean, we have a retirement age seller. Yeah, I don't, I don't know if they're going to guarantee 24 months of debt unless it's to maybe a key employee. It's to someone really known to them. It's someone that they trust. It's someone they're looking to put on, you know, and we can get deeper into this later, Jack, but I always try to stress upon that point the psychological element of the seller liking the buyer legitimately is worth more than just the final cash at close. I've seen it myself, you know. That being said, it's A still hard point to negotiate the other piece besides the seller having to retain equity, having a guarantee, which by the way was our go to licensing strategy. You know, please.
- [15:32]
Jack
That's what I was. Yeah, yeah, yeah. Can we, can we start, can we touch base on that? Yeah. So, I mean, I think that's, that's one of the biggest, biggest questions I get. Luckily, Tennessee doesn't require an H VAC license and so this never really was an issue. There's, there's some weird, it's a double edged sword right on one end. I don't need a license under 25k and in specific cities and counties to install an H VAC system that allows for high levels of low level competition. Chucks and trucks, single guys, guys that just want to go out on their own and huck units around. It's a very unique perspective, but it also allowed me to get into the business without having to have this issue specifically. Keep an owner on, worry about licensure, blah, blah, blah. Since then I've gotten all the licenses myself just because it's easier for me to carry them. But the question we get all the time is like, Jack, how do I do it? I live in Georgia, we don't have that ability. How do I buy without the license? And so there's historically been a few ways, the world way that you mentioned where you keep the seller on, the seller keeps the licensure, they get a little cut and then good to go. But then another way that we've seen, right, is they hire somebody. They hire somebody who can get the licensure for them. Is that, is that no longer available as an opportunity route for people?
- [16:50]
Allen Peterson
No, that's actually the preferred route now, I would say, you know, as far as a strategy standpoint, obviously equity costs more than debt in the long run. I acknowledge that. But that being said, with execution and approval in mind, I would take it a step further and identify someone who can qualify the business that currently has no equity in the target and give them a slight percentage, the same amount that you'd be comfortable leaving the seller. Why wouldn't you offer that to a third party? Now that's going to take some vetting, you know, give it, you know, why not? But it's something like that.
- [17:27]
Jack
I mean, I'm glad though, like that that's in my mind the best way to do it, that's what I recommend all the time is I say, hey, go find somebody in this market who is, you know, maybe older, retired, still has a license, but still kind of wants to work a little bit, wants to be on, on board as a consultant, work with you guys on some bigger projects, things like that. There's more value than just the license itself. And you pay them a small amount or a little bit of equity here and you have a partner, a very small end partner, but somebody who makes sure that you're not, you know, shooting yourself in the foot. And I think that there's huge opportunity. I mean I see it all the time on the forums of people offer, offering licensure or asking for it. And I know that that is a huge, a huge market to be able to, to do that. So I'm glad that that's still available. The other you said stock sale, which is, you know, on a construction based company is something.
- [18:22]
Allen Peterson
Not a lawyer, but I know I wouldn't do it either.
- [18:25]
Jack
That being, that being said, you know, there are certain circumstances where it makes sense. There are lots of circumstances where it doesn't make sense. But I'm glad that they still left some doors open to be able for non licensed tradespeople or non licensed buyers to work with licensed tradespeople and continue to buy businesses. I don't think it shuts the door completely.
- [18:50]
Allen Peterson
And also keep in mind, Jack, so if you identify someone through forums, through whatever outreach that you want to put into action, as long as that individual. Right. They're not currently an owner. So there's no guarantee requirement. They can have up to 19%. And I'm not suggesting that, you know, you run with 19%, but I'm just reminding you that that triggers no guarantee. We're not pulling their credit, we're not getting three years of tax. We're not doing all that. We're going to reference them in the business plan. We're going to reference them as part of the overall strategy. Their history, I'll still grab a resume on them, you know, but their personal liquidity doesn't matter, their FICO score doesn't matter. It's just their ability to, you know, qualify the business. But also they should bring some real experience that can be relied upon for advice during transition. And you know, it's interesting, I'm working with a client now. They did a plumbing business that was, it was mostly commercial and they had some residential in there as well. They're in the DFW market and I'm actually doing their second deal now where they're acquiring some real estate. As they're growing. It's working. Those are the calls I love getting, you know, and what's really cool is they first got their qualifier using Facebook groups for plumbing operators and then LinkedIn. And they found people, they talked to them on a zoom call. They were like, hey, we're young, we're hungry. We've been studying the industry. We just don't have a way to qualify. Would you come on and also give us some advisory? And. And this individual they targeted had a successful exit previously, which to me made a great sense to give them some equity. I mean, A, they're qualifying the business. B, they're sharing their playbook of why they're hanging around on Facebook forums now instead of working these days. Right. So that still works. So for anybody listening out there, just know that those are the important moving parts and you don't need to worry so much about their individual credit worthiness. It's all about their operating experience and ability to qualify the business. The rest of it, well, that's on you.
- [21:02]
Jack
Yeah, no, I love that. So I'm glad. I'm really glad that this is the way the conversation went because that was my worry with the new changes, is that they were going to somehow snub that out and make. Make them do a personal guarantee or something. But it's only the sellers. But yeah, that's amazing because I, I think that was the way to go. Anyway, I personally am not a big fan of working with sellers, just as my personal beliefs, there's some great sellers out there. I'm not knocking all sellers. I'm just saying that historically for me, I am a do not work with the seller camp. And so this allows you to really not be tied to the old. The seller or the old owner. And it allows you to actually pick and hire more of a hiring process, process and partnership process. So good, Good stuff. And, and so that's one of the big changes. What. Are there any massive, other massive changes that we should keep an eye out for that really will disrupt how we buy businesses?
- [22:00]
Allen Peterson
As we covered that really important piece, as the late great pitchman of Oxiclean fame, Billy Mays would say, but wait, there's more. And here's the more the seller.
- [22:16]
Jack
Yeah.
- [22:16]
Allen Peterson
Can only count towards the equity injection if it is on full standby for the life of the loan. It additionally cannot account for more than 50% of the total injection required. So very often what we used to be able to do was do a seller note on standby for two years, followed by most often three years P and I payments with no balloon. It was more favorable for the seller. It was easier to negotiate. But what I'm Seeing already, and I'm saying this sincerely, is that sellers are already kind of, you know, they're not as in tune like with the rule changes as maybe some of us that are really in the trenches of this or even acquisition entrepreneurs that have brought been close to loi or kind of getting through the motions and doing kind of their initial homework and they're getting serious. You know, there's a learning curve and that advantage is in the side of the buyer in my view. What I've seen people do is they say listen, I'm going to pay, you know, I'm going to request a 5% seller note on full standby for the life of the loan. I'm going to share that secondary market data suggests that, that it would be abnormal for me to hold this loan to maturity. That being said, you potentially would have to be on standby for 10 years. What I would like to do is increase my offer by 5%. And you know that sounds gamey. I'm not saying to do that. Right. That's not my place. I'm a W2 employee of a financial institution and this is a recorded call. Joking, right? But as a deal guide, a strategist, I've seen that work for people that are actively in my pipeline. And that allows you to come in with 5% down as long as 10% of the total project is. So keep that in mind. The total project isn't just the acquisition, it's buying the business. It's any working capital to be provided by the bank. We always include lines of credit. It's something I always do. Adequate capitalization is a non negotiable for me if I can make a deal work. But I cannot be certain you're getting enough working capital to support yourself during transition while the cash cycle catches up. And if that stresses the DSER too low, where we're all comfortable, we gotta negotiate that there might be some cash left behind, you know. But anyway, I'm kind of getting off track and tendency to do that Jack. So be my guardrail.
- [24:49]
Jack
I mean, I think, I think no, you're all good. That's amazing. So I mean I'm in the same boat. The nice one, nice thing for everyone listening about home service businesses if that's where you're at versus the manufacturing or some E commerce store or something like that, is there's very little working capital, right. I think when I bought my business I think I had $37,000 in working capital. So not like crazy amounts. Whereas if you had to order, you know, something for your manufacturing plant, you needed to put in an order for material at 2 or 3 million dollars. Right. So we don't have those kind of long drawn out capital constraint or capital needs. And then we have a fast cash cycle. So we sell the, sell the item, get paid at least in residential, commercial, you know, you could be 30, 60, but still it doesn't, it doesn't expand out that cash cycle too much, but fully agree on the working capital. Right? That is one of the most important things is making sure that you are well capitalized going in because you will need it. I think we needed it for the first entire year before we got our feet really under us and started generating to a point where that didn't matter anymore.
- [26:00]
Allen Peterson
And that's what it's all about is giving that support. Jack, just to piggyback that with a little more clarity of the way I personally look at it is, listen, if we predict that you've got a 60 day cycle and we're going to assume it's a cash free day, debt free transaction, which is very common. So anybody newer to the space or is just kind of dipping their toes in the water, that would imply that the seller at closing will satisfy all outstanding debt obligations. There'll be nothing left. However, all the cash is essentially cleared out of the cash register regardless of industry. We see that very common. That allows you to negotiate for ar, you know, work in progress as it becomes ar. And then inventory. Inventory is usually easy because you know, if the seller's going to retire and head off to Mexico, I don't know what they're going to do with a pallet of reams. You know what I mean? It doesn't make any sense. So you can negotiate those. But what we want to do is if we determine through third party financial due diligence, don't skip financial due diligence, QE proof of cash, whatever is appropriate. Do something, get a third party, an unbiased third party to put their eyes on it. The bank's going to do our job, but I always advise to continue to do that when we have our working capital target. I like to extend that a bit more. Okay. Just to be safe. And then also with a line of credit is nice because it's a break in case of emergency fire alarm. Okay? If you need it, you've got it. And if you don't use it, quite obviously you don't pay for it. And in the spirit of like working capital, I do want to call out something to Jack. As I just touched on financial Due diligence. A lot of people don't realize that out of pocket direct deal related expenses will count towards the project. There'll be project items, which means that your out of pocket payments will count towards your equity injection. So the money you're spending on financial due diligence. Yeah, a lot of people don't know that. Yeah, we do. We.
- [28:01]
Jack
I didn't know that.
- [28:02]
Allen Peterson
I do it. I don't know if.
- [28:03]
Jack
Yeah, I don't know.
- [28:03]
Allen Peterson
You know, my friends at Wells are doing that. But. But we are. Right. So it's, that's an exciting thing where we've got quality of earnings. Oh man, I gotta outlay that cash. Yeah. But a. That risk is way smaller than a pg. We, we all should agree on that. And then legal, you, you know, M and A attorney work that's done pre close, we can do that. We can put them on the settlement statement. Pay your attorney at close professional business plans and projections. You know, if that's something that you want to do due to bandwidth or you want it exactly how the bank wants to see it, all of those things are going to count towards your down payment. Now that came out of left field, that whole topic, Jack. But I get excited about what are the things people don't realize about the program. And that is a big one. People are always surprised to hear that.
- [28:56]
Jack
Yeah, I mean I am. I definitely paid out of pocket from a different account for all that. Those items. So that's really interesting that, that. Which honestly, now that I'm in the business, that actually makes more sense because as you work with attorneys to do different projects, like hey, we wanted to switch our. We wanted to raise capital. A lot of them will defer and then roll in. That, that's, that's a commonality in kind of the, the banking sector. It's just, I don't know if it's something that, you know, is going from a W2 into a owner. It's something that we are privy to that knowledge very often. And, and it's. That's really cool. I mean I didn't, I didn't realize that at all. But now I can start. Start saying that at least, at least Alan does it.
- [29:40]
Allen Peterson
Yeah, yeah, absolutely. And we look at it as we're de risking the deal. Right. I mean, why wouldn't we try to support the effort of you further de risking the opportunity. It's a true benefit to the bank as well, admittedly.
- [29:56]
Jack
Right. Yeah. You get due diligence, you get better m and a legal support like all of those Things is better for the deal in the long term, for survival. Wonderful. And then to circle back real quick for everyone listening. So the original point of this, this topic was we were talking about that they, they moved the, the requirement for seller financing towards your equity injection. So the seller's amount that they can put towards that 10% so that you don't have to pay that whole 10% needs to be out of 10 year. What is it? Deferment. So they can't, the seller can't accept payment if it before 10 years.
- [30:38]
Allen Peterson
But slight, slight correction, it'll be. It's not for 10 years. It's not for 10 years. It's for the life of the loan. And I call that out because when you're negotiating that if there's anybody you know at home or in a car stuck in traffic or you know those. That's usually where I am when I'm listening to podcasts. Right. Or, or you're watching on YouTube or wherever fine podcasts are offered. Just know that the language is important here. Tip. Always call it for the life of the loan and then try to instill confidence in your ability to pay that down significantly quicker or to establish the health of the business in a shorter period to refinance and do commercial to conventional commercial to a regular business banking situation. When you have three years of business tax returns with your name as, as the owner, you're looked at considerably different than when you're a W2 that's looking to buy a business. I mean, it's just why acquisitions are typically done sba. Right. So I just want to call that out on that Jack. But yes, the seller note needs to be on standby for the life of the loan. That's the language in there. And that sometimes can be a hard pill to swallow, especially when we talk about, you know, the retirement age individuals. You know, I, I was going to say Silver Tsunami. I don't know if Eric has that trademarked if I'm going to get sued. But you know, it's, it's something where.
- [32:10]
Jack
Right, yeah.
- [32:11]
Allen Peterson
You know, that's, that can. That's a negotiation point that certainly is more complicated now than it was four weeks ago.
- [32:19]
Jack
Yeah, I mean the way I sold it to my. So we had a bit of that. We did the 10 year. Because I don't. That rule was fairly new. It's kind of ping ponged back. Right. So it used to be this way, then it went a different way over the last three years and then now it's coming back. Is that correct? Or was I just. Is this another miss on my end?
- [32:36]
Allen Peterson
Oh, no, not at all, Jack. This is a return to normalcy based on increased default rates and perception that the rules that they rolled back were more of a benefit to a seller than they were ultimately to a borrower or, or in this case, buyer. Right, which is the spirit of the SBA job retention and creation. Not necessarily sophisticated lower market to main street micro PE model benefiting from a government guaranteed program. I mean, it's a return and it was fun while we had it. I'm not, Listen, I'm not. I just rocked the plan. I got so excited. But no, it's not. It's nothing new. It is a return and honestly it's been something where if I can say transparently, it's broomed away a lot of buyers that were reaching out that weren't necessarily serious or weren't necessarily in a position. They hadn't thought about it for a while and they saw a reel from a guru type and they wanted to know, whatever. And now that it's like 10% down, they're like, oh my God, you gotta be kidding me. It's only 90% leverage, you know. So it is what it is. But yeah, to your point Jack, it's a return to weight. Always has been.
- [33:57]
Jack
Just answer the phone is one of those phrases that's always easier said than done. I know it was hard for me in my business because the phone always rings while you're out in the field trying to get something done or it's 8pm and you're trying to get your kids to bed. Well, I have the solution for you. I'm extremely excited to today to announce quick staffers your go to solution for building a high performing cost effective customer service team. We are placing CSRs who have been pre trained on proven home service SOPs and scripts. The same ones that Wilson and I use in our business. For a limited time we're offering $500 off your initial placement cost for the first 10 signups. See link in the description below or head over to quickstaffers.com for more information. Well, you know that that was the circumstances and where the way I bought my business and you know, I think I used some kind of line similar to that is like hey, I'm focused on hypergrowth. We are projecting that we will be, we will close out our loan in about four to six years and then that that last 5% that they keep on for the term of the loan or can't get, can't touch for the term of the loan or life of the loan ended up becoming much quicker. So our seller got paid off significantly quicker for his than as you mentioned, market data ends up pushing it faster. So interesting.
- [35:13]
Allen Peterson
It's also a way to put them to put the ball in their back in their court. Like listen, with your year to date unaudited P and L that you shared on your rocket ship growth trajectory, we'll clearly be able to pay you back sooner. And if you have doubt about that, should I have doubt about 20, 20, 25 year to date tripling historic performance again?
- [35:38]
Jack
Well, you said the seller, you said that all I had to do was add marketing and this thing would take off. So that's what we're doing.
- [35:45]
Allen Peterson
We're doing a little bit of SEO, a little bit of ppc, another three letters that are related to Internet marketing. Boom. We're rich, baby. We're on the beach.
- [35:54]
Jack
We're on the beach.
- [35:55]
Allen Peterson
Easy.
- [35:55]
Jack
It's easy. Yeah. That's sarcasm for anyone not watching my me and my mustache twitch as I say it.
- [36:07]
Allen Peterson
So.
- [36:08]
Jack
Yeah. Right. I just want to make sure everyone's really clear on what I said with that, Alan. I mean, so I wanted to take a second and my belief is that there's, there's a job on, you know, on buyers specifically, which is a lot of who our listeners are is there's a job and an onus by them in this process where they start looking for a business to brand themselves, to be able to showcase themselves to a broker and to a seller that they are a good buyer for this business and that to the broker that I'm a good buyer and a real buyer and I'm not going to kick tires for you. What does that look like? How, how should an individual position themselves with as they have those first conversations with you to showcase that this is someone who is really willing to go the way. They're not one of the 2% of people that are. They are one of the 2% of people THAT are going to make it to close.
- [37:01]
Allen Peterson
You know, we start with a buyer pre qualification letter. You know, a bank letter of support is something that I can produce within 24 hours. And all that I need is a personal financial statement which, you know, we have a template we prefer to use. It's SBA Form 413. But we can look at it in any template and you know, if you're not familiar with the document for any reason, a personal financial statement, think of it as a balance sheet for your household. So it'll list your Assets, also your liabilities, so we can get a clear picture of what your liquidity is. You know, that really helps me tell you, hey, based on what you've had, are you going to use investors or are you not going to use investors? How much are we talking about this or that? That means that I can pre qualify you up to an amount that you can really get home on the other piece that we need is a management summary or resume and that's it.
- [38:01]
Jack
Yeah. So with that the pfs, the personal financial statement, pencil whip or not pencil whip. So and what I mean by that is, right, do, do, does our listeners, should they, when they, when they give this form to you, if they're general ballpark or do you prefer that they are exact? Because those can be pretty onus, right? They have, do you have any assets? Do you know what are all your liabilities? Oh, your rental properties and what are their values? What do you pay per month for this? What do you pay per month for that? So it really does, it's a decent sized form, right? Two to three pages of some in depth financials.
- [38:37]
Allen Peterson
Leave it to leave it to the gov, right?
- [38:41]
Jack
Yeah. Right. And so do you prefer that like is it okay if that somebody gives you a form and they're like, hey, my house is worth about 500,000 and I have about 243,000 in debt on it, or do you prefer that they're like hey, no, I have 2, 243, 617 and 12.
- [38:59]
Allen Peterson
No, the former all day long. So you know, just know that all I'm looking for here is a realistic ballpark, you know, and when we're looking at cash, I look at cash and cash equivalents. Not every bank does that. So when I'm looking at your total liquidity, I'm looking at checking, savings, brokerage and retirement if applicable. Yes, there's penalties for accessing those funds. However, yes, you can access them in an emergency. So we're going to look for that still. That can be a ballpark because what I'm looking for ultimately, if you communicate that your desire is to put the full 10% down, I want to make sure that you have what's called post close liquidity, which is something that is not as talked about as often as a lot of the other moving parts of the SBA loan process. But essentially what we want to do is make sure that after you've made the equity injection, you still have adequate reserves in case of a personal emergency, in case of a turbulent transition period, in case you totally mess up the transition and you kick the door in on a break room in a Patagonia vest and an NBA under your arm and you tell the 15 year people that have built the business you bought that there's a new sheriff in town or all of these things can happen and we try to prevent them. Personal liquidity does matter. I, I usually target about 5% but we can do less if there's other strengths in the deal.
- [40:32]
Jack
Interesting. Yeah. And then with that do you all, and this is more of a curiosity because during my process I got in a big argument over this with our bank. Do you require that the they match their pre W2 income to their projected income for the DSCR? DSCR? Yeah.
- [40:53]
Allen Peterson
No, no, no, we, no, we are going to. So we're going to. You. We're. What we're looking to do is we're going to use the PFS as our initial guide. I'm going to use the discovery call that I always try to have early in the process to talk about things like outside income to remain to talk about things like perhaps a spouse has, has income that can support the personal financial needs of the guarantor. We're going to talk about different ways to maximize that pre qualified amount. And that's not to say you have to swing for the fences. It's just to open up as many doors as we can. Your pre qualification is it's your hunting license. That's what it is. It's sell side brokers, intermediaries, sellers themselves. No, you're serious. You're real, you're engaged. Oh and by the way, you can actually get a deal done. You know what I mean? So that's the purpose of it. So we're going to model your replacement salary for whatever you list on the PFS at first as your ballpark monthly debt obligations. If we don't have outside income from a spouse and if you might have another business, you might have a side hustle, your W2 might remain in a reduced capacity post close. All of those things are acceptable. We want to make sure that when we pull the personal credit report that those numbers line up though. Right? So if you tell me that your mortgage is two grand a month and it turns out to be three, it's not the end of the world. But it's another 12,000 that we're going to build in because I want your set obligations to be covered at the minimum and anything above that for my purposes. Year one, year two, take that from distributions. If you need cash or figure something else out, you Know what I mean? But yeah, we're going to forecast, we're going to add back as much of this seller's comp as we can.
- [42:39]
Jack
For anyone listening, I don't think you guys understand how amazing that statement is. So we, during my process of buying the business, we had a very large period where I had quite a few calls and arguments about bringing my salary from the high six figures or high, well, high hundred thousands. So I was like I was making 170, 100, 180,000 in my W2 and they weren't going to, they weren't going to let me. Even though we were living well below our means. We're moving from California, Napa, California, which is a high cost area, to Tennessee, which is a generally a lower cost area. And they wouldn't accept the fact that I was going to move down to 110,000 salary, which I even went lower than that after because I just didn't tell them. But point being was 110 and I said my wife still works, we have plenty of salary. Like there's, there's a lot here. But you would think that that was the end of the world. But that the, the additional 80,000 though, or the additional 90,000, whatever it was requirement to a, you know, the business only did 700,000 top line, like 90,000 additional on top of whatever the, the old owner was, which was around that 100,000 mark. You, you couldn't like the DSCR is like you just can't do it because it's an extra hundred thousand. That's 1/7th of the entire loan in additional salary that I had to put in on the books. Finally it came off. But the fact that, you know, somebody could have a conversation with you and you actually understand the reality is amazing. So love it.
- [44:10]
Allen Peterson
Yeah, I, if that's the reason, Jack, the difference in the experience that what you had to go for through you know, and, and the way I look at it is really based on something that is not talked about. It's another thing that isn't talked about enough in my view on social media platforms and people that kind of talk about SBA as relates to acquisition, financing or expansion and that is that banks you. It's the, it's the law of two masters, right? You've got the SBA sop non negotiable. There is not a better business partner to the bank than the Small Business Administration. Those rules do not, you know, yes, they're open to interpretation to a point, but they're non negotiables. Most of the clear tenants, then you've got bank overlay. And every bank has their own rules and policies in place that they need to follow. And by no malicious intent, well meaning people that do what I do and are great folks very often mistake their policy for SBA policy. So, you know, make sure that if you're working with, you know, any bank and that you're getting some pushback on something that just doesn't feel right, don't be afraid to interview them a little bit and say, well, is that an SBA rule or is that a XYZ bank rule? You know, and we have, we don't have significant overlay as far as our policies go above the SBA sop. The only thing that we have that's an overlay is our minimum debt service coverage ratio. Sba minimum is 1.15. That's not a deal I'm ever going to tell you to do.
- [45:55]
Jack
I mean, that's awesome. I'm glad you brought that up because that's extremely important thing that I tell people as well. As I said, make sure that that's not a bank rule versus an SBA rule because a lot of times bankrolls tend to be a little bit more stringent, but they're also a little bit more flexible. Can we, can we do something to appease the risk here? And some bankers will work with you and some will not. And so just making sure once again, back to that partnership that you are working with a bank who is willing to be a partner in this, not willing to just be a transactional item where you are a cog in a transactional wheel, if you will. But I love it. I mean that is, I think those are some great, great ways to position yourself is making sure that you get pre qualified. And when, when in the process do you recommend that a searcher come and talk to you? Like when should they reach out?
- [46:47]
Allen Peterson
When they see an LOI that does something to their gut. Okay, now that seems a little over the top here. But I mean, it's when you see a target business that you really feel good about, that's when I get involved. So pre loi, but post initial due diligence, feel the deal out a little bit. And another thing, I would call out on that topic, free LOI deal review. I do them all day. I have a team of people that support me. I can tell you if a deal works or not in 24 hours. If Kevin Bromberg shout out to my associate lender, who's unbelievable, he's a former Credit manager that I brought over from my old bank and they still like me. So thanks to them for being cool and Kevin for coming over. But I mean we bang these things through and we'll give you color commentary on things that we want to drill on and that you should be asking the seller about. We're going to say, hey, did you catch on page 15 of the Sim? Right after it says that the seller only works 20 hours a week from home and makes a million dollars from the beach and is still selling at age 40. That 40% of their work is to one customer. Are those different purchasing authorities within one broader organization or is this true concentration? You know, that's a basic one. A more in depth one might be. You know, the sim goes on and on about contracts in place. Is there a change of control provision here? I mean I assume that if you're pursuing an asset sale then this is going to trigger some changes. Are those contracts really yours post close and how confident can we be on those? Those are the types of feedback that we're going to give and then we're going to give you a hey, they're asking a million. It supports 850. Here's some strategies that might make that work. And we deliver that generally in 24 hours. 48 being the longest that we take on that. But we want to get involved early and we don't want. I'll be honest though, you know, I do have folks that it's month 11. The stress, the mundane nature that cold emails to sellers, getting the brokers on board with you, all of this stuff is starting to really take a toll. And maybe you've even left your W2 and you're burning through reserves. This happens. I work with these folks but that doesn't mean you start shotgun blasting me biz by sell listings that have nothing in common in regard to size, industry or geography. My brothers and sisters involved in entrepreneurship or acquisition.
- [49:19]
Jack
Yes.
- [49:19]
Allen Peterson
Do not deviate from your non negotiables established in the beginning.
- [49:23]
Jack
Ironically. Bingo. That's the same advice I give to say hey, if you're working with brokers or anybody like that, same advice, don't shock and blast deals or ask questions about hey, this one, this one, this one, this one's a restaurant, this one is a H Vac business and this one's manufacturing. Like you're way all. You don't know what you want. Come back when you know what you want and when it feels good and feels right and you're ready to pull the trigger. Because I mean there's nothing that, that screams tire kicker. Like, hey, I'm zero idea what I want to do. So awesome. I mean, Allan, that is so incredibly valuable. I don't, I really want people to, to understand that you just said that, that there is help from the bank to understand where this should go in or where this could potentially actually close at, as well as some strategy as well as, hey, we sound. We, we saw some weird stuff on the cim. Can you take a initial look at this, this and this? I mean that that's a partner inside your corner willing to work with you on how can I get this deal closed and how can I make sure it's a good enough deal for me that I don't think that, I mean, I've never experienced it with a, a bank. So I think that's an incredible opportunity for somebody to work with you and rely on you guys for that. That's, that's really cool.
- [50:40]
Allen Peterson
We love.
- [50:41]
Jack
I mean, you've been in the industry. Is that something that's normal?
- [50:44]
Allen Peterson
Oh, no. I mean my whole story, my whole SBA story is, is really abnormal compared to most of my peers, to be honest. You know, I grew up, my family were entrepreneurs, right? So I grew up around small business in general. My, you know, best friends and my uncle, you know, my heroes growing up owned Irish pubs in northeastern Pennsylvania. And by the grace of God, my mom told me we're not doing that al right, so shout outs to my mother. She's not with us anymore right now. She's still kind of, you know, she's around in my view, but you know, she was like, dude, what are you like, you know, the family business, It's a bar, it's a cash only bar that you can still smoke cigarettes in, that everybody is stealing from us and we have to work every weekend for the rest of our lives. Is that what you want for yourself? And it was weird because up until that point I'd never thought about what I wanted for myself. I think, I think I just, I took a natural progression into what I thought would be, you know, what I ended up doing, but thank goodness it wasn't so. But yeah, I mean, my background is a lot different. I approach things a lot differently. And not to beat my chest on, on a call here, but, you know, because I do a lot of volume and I have a good support team that helps me throughout the process. It really allows me to be objective as a value to my clients. We don't need. I'm not going to stretch on a deal, you shouldn't do that. Puts you at a position that's too risky because, you know, my lease on my three series is late. Like that's not like who you're dealing with. It's somebody that wants a long term true partnership to watch you grow. Because I'm a spectator, you know, ETA is a full contact sport and I'm still in the crowd eating popcorn, but I got so much respect for the individuals, you know, like yourself, Jack, like your network, like the people around us, mutual friends of ours, and even to your listeners who have already made the hardest step, which is committing to, you know what, I'm going to do this. And dude, I'm going to do something. I'm going to leave great benefits at a great salary while I have young children or plans to grow my family and I'm just going to sign a government guaranteed back personal guarantee for three million bucks and by the way, spend half my savings doing it. Those people are the people that get it done. And it's a step, you know, my golden handcuffs are tight. But I really do admire the people I work with and I love watching Post Close and Beyond and staying in touch kind of and just keeping my eye on the industry trends as well. That gives me good sight into kind of what's going on. And I can say, hey, you know, I have a client that is in Texas, you know, use my plumbing friends again and you know, they identified, they're going to buy a rooter company because that gets them in more doors as they're looking to diversify away from the large commercial projects due to the cash flow stress and the inability to manage working capital. If you've got a net 60 that turns into a net 90 and it's the biggest developer in your geography, you're not going to sue them. You're going to wait and payroll is still going to be due, right? So they're looking to diversify and they're going to get routers. That gets them in more doors. That's a cool little strategy. So when I heard about that, I called my friend in Washington state. How are you doing? Hey, have you thought about this? Do you guys ever see that? You know, and it's not right for everybody, but it creates community, right? Your deal. The members of your deal team should care about your long term success. If at any point it feels transactional, get out of there, get on LinkedIn, find another SBA guy or gal, I hope it's me, but if it's not, I've got a lot of friends in the industry and can point you in a lot of good directions as well. If it's not a deal for me, I always know where to put you because of my vast network.
- [54:41]
Jack
Awesome, Alan. I, I, I appreciate that. I think that, that people should definitely take you up on that. And if they want to reach you, where, where can they find you? I know we have a plug it alan.f I b.com a l a n f I b s I in first Internet bank.com there's a interest form where you can reach out to Allan directly there. But if not there, Alan, where should other people see more content from? You get updates, you know, social media style stuff. Where, where should they head over to?
- [55:13]
Allen Peterson
Well, I would say, you know, the best way to actually book a call or like a more formal meeting would be to use the Allen. That's A L A N F I B Use that because what that actually does is it'll integrate into my calendar. So that way, you know, I can make sure that we're at a great time where I can give you my undivided attention and handle any questions. If you're more curious about what I do in the marketplace or want to look at some short form content that I haven't produced in three months because I've been so busy and I'm telling myself I need to get back on the content train, I know it's important to give my message in the tone that I give it. Compared to a lot of the other noise out there, it would be Alan Peterson SBA A L A N P E T E R S O N S B A that's on all platforms. So that's a good way to kind of see some more info, some other stuff, see what I'm about. And if you'd like to learn more, remember you're not wasting my time. Very often I'll engage with folks that are just early on and they might not find the right target for some time. But I'd always advise it's easier to get early to the party in acquisition financing for certain. And even if you don't want to necessarily send a PFS yet, but you just want to talk sba, know that that's totally cool with me as well. You know, I like meeting folks in the space. As long as you're really pretty serious and committed to going this route, I want to talk to you. If you're not sure if you're ready to take the jump, then hold off for now out of respect for both of our times. But if you've got that gut feeling and you're ready to go, and, you know, this just feels right. And there's something driving you to do this. You've got that passion, you've got that spark, but you don't have a target yet. Get on my calendar. Let's have a conversation.
- [57:10]
Jack
Awesome. Well, Alan, I appreciate the time today. This was so much fun. Like I said, I love talking shop much as yourself, and so this is always a great time for me. And I think that this is going to be a huge value to the listeners. So I really do appreciate it. And if you like what you heard today, blah, blah, blah, the total spiel, give us five stars. Go over to owned and operated dot com.
- [57:34]
Allen Peterson
Better smash that like and subscribe, comment.
- [57:37]
Jack
Subscribe, do all that stuff. Because I'm extremely good YouTube personality. I have a mustache. If you are listening, there's a jack with a mustache. You. The, the. I'm sure the thumbnail for this will just be absolutely wonderful. It'll be just outlandish, but we'll see. So I appreciate you guys have a good one. And thanks, Alan.