Resources for Buying and Selling Online Businesses

SBA Spotlight – New Regulations for 2023


Joe McAleerJoe McAleer is the Senior Director of Business Financing at MultiFunding, which helps businesses achieve their growth goals through creative and personalized funding solutions. The team at MultiFunding has a robust network of relationships with hundreds of nationwide and global lenders to ensure they find the best business loans available for their clients’ unique circumstances.

With over 15 years of experience in the finance industry, Joe has worked in both small and large corporate structures worldwide. In his role, Joe’s expertise is in SBA loan facilitation, and he has found his passion in helping current and aspiring entrepreneurs utilize SBA loans to purchase businesses.

Here’s a glimpse of what you’ll learn:

  • [04:14] Joe McAleer talks about the significance of SBA loans for aspiring entrepreneurs
  • [13:07] Why it’s advantageous to use an SBA broker for funding rather than going to a bank
  • [21:12] Joe discusses the SBA loan requirements for business acquisition
  • [26:31] SBA loan pre-qualification strategies
  • [29:07] The new SBA regulations and how they impact business acquisitions
  • [47:20] What are the current SBA loan market issues?

In this episode…

SBA loans are a great way to fund a business, whether you’re looking to acquire a company, scale an existing business, purchase equipment, or expand into new markets. Once you identify your needs, how can you qualify for an SBA loan?

The Small Business Administration (SBA) is known for its strict requirements and lengthy application process, making it challenging for many business owners to obtain financing. However, don’t let this discourage you from pursuing your business aspirations. Joe McAleer shares some new SBA regulations that favor entrepreneurs. However, he recommends hiring an experienced SBA broker rather than using your bank to obtain funding. A broker can guide you as you navigate the complex application process, ensure you meet all the eligibility requirements, and find the right lender for your specific needs.

In this episode of the Quiet Light Podcast, Pat Yates and Chris Duty sit down with Joe McAleer, Senior Director of Business Financing at MultiFunding, to discuss the intricacies of SBA loans. Joe talks about how entrepreneurs can leverage SBA loans, how to qualify for financing, why using a broker is advantageous, and how the new SBA regulations impact acquiring a business.

Resources mentioned in this episode:

Sponsor for this episode

This episode brought to you by Quiet Light, a brokerage firm that wants to help you successfully sell your online business.

There is no wrong reason for selling your business. However, there is a right time and a right way. The team of leading entrepreneurs at Quiet Light wants to help you discover the right time and strategy for selling your business. They provide trustworthy advice, effective strategies, and honest valuations. So, your Quiet Light advisors aren’t your everyday brokers — they’re your partner and friend through every phase of the exit planning process.

If you’re new to the prospect of buying and selling, Quiet Light is here to support you. Their plethora of top-notch resources will provide everything you need to know about when and how to buy or sell an online business. Quiet Light offers high-quality videos, articles, podcasts, and guides to help you make the best decision for your online business.

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Episode Transcript

Intro  0:07

Hey folks, it’s the Quiet Light Podcast where we share relentlessly honest insights, actionable tips and entrepreneurial stories that will help founders identify and reach their goals.

Pat Yates  0:32

Welcome back to the Quiet Light Podcast today. It’s Pat Yates sitting in for Joe Valley and I have the pleasure of having Chris Duty and amazing advisor here at Quiet Light. How’re you doing today, Chris?

Chris Duty  0:43

I’m doing good. Thanks for having me on.

Pat Yates  0:44

Absolutely, man. This is exciting. We’re trying to do this three-part series to educate people that SBA there’s been so many changes. So today we have Joe McAleer. Joe is a senior adviser, an SBA Acquisition Specialist for MultiFunding. One of the leading firms of feasible term debt facilitation for business owners and entrepreneurs. Joe has eight years of corporate finance background partner with seven years of MultiFunding where he’s developed an expertise found a niche segment with MultiFunding through fielding a vast number of acquisition opportunities and business brokerage firms like Quiet Light who work closely with their buyers seeking to leverage help with their purchase. This should be a great combo, because there’s a whole lot going on in SBA these days. Maybe Chris, maybe you can give some the listeners a little idea of what we’ll be talking about today.

Chris Duty  1:29

Yeah, well, there’s a lot changing. So SBA has put out some new guidelines, those guidelines generally have to go through a few processes of feedback from the bank, which is happening right now. And Joe’s gonna talk quite a bit of that I think it’s going to be super interesting to buyers. And then from a seller perspective, Joe’s gonna talk a lot about the things that a seller should do to get their business prepared and what they might want to think about as they’re going through the process of getting their business ready to sell and how they might qualify from an SBA perspective. And I think finally, you know, my biggest takeaway from this conversation was, a lot of people think of SBA as a very rigid, you know, government entity, you got to follow the rules, and it’s hard to get. And I think what Jonah’s talk about is that that’s not the case, it’s kind of individual from a bank perspective. And that there’s a lot of flexibility. And ultimately, not surprisingly, the SBA and the banks themselves want buyers to succeed. And so they’re changing rules around that they’re a bit more flexible than you think they are, and they’re there to help you succeed if you’re a qualified borrower, and you have a business that you’ve won successfully to the point where you can become pre-approved from an SBA perspective.

Pat Yates  2:49

That’s a great point. And for the people listening, whether you’re a seller or a buyer, we’re doing these to make sure people understand the change in regulations, how much more easy it’s become to look to get a business listed or bought through SBA. So I’m just excited to talk to Joe about this and hear his input. And so let’s get right to it. How are we doing today, Joe?

Joe McAleer  3:09

Doing well, thank you, Pat. Doing well, how are you?

Pat Yates  3:13

I am great. Well, I’ve obviously got Chris Duty, an amazing advisor here Quiet Light with me today. And I appreciate you joining us to talk some more SBA today. It’s really exciting, a lot of changes in regulations. So we’re trying to be able to get everybody up to speed on that. How are you doing today, Chris?

Chris Duty  3:30

I’m doing great. It’s great to be on the podcast today. I think it’s my first time on the podcast. I’ve done a webinar before but excited to be on.

Pat Yates  3:40

And those of you listening don’t know, Chris, you should read his bio on really amazing, unbelievable background for M&A, super smart guy before I go any more but he gets start blushing. And we don’t want to do that during the podcast. And Joe, we’re just excited to talk to you and want to learn more about your firm and on SBA. So I know a lot of people out there they understand SBA loans, money for businesses, most people don’t realize some people don’t understand you can do it to acquire a company if you’re trying to change your life and you want to do something different. So maybe give the listeners an overview of what the SBA does and what you do to help people with their businesses.

Joe McAleer  4:14

Yeah, absolutely. When you talk about SBA, or business acquisition, and you think about feasible term debt to do it, I mean, there’s nothing better than SBA, SBA 7A for business acquisition, reason being of course, there’s no greater ability to get maximum loan to value up to 90% loan to value and a maximum term of 10 years when we’re talking about non real estate, business acquisitions, Goodwill acquisitions. And you have some banks that can be very, very forward-thinking with leveraging that SBA government guarantee right. The SBA is not your lender. This isn’t a disaster loan made directly by government. It’s a conventional loan made by a bank that’s guaranteed upwards of 75%. And even in some limited circumstances 90% government guaranteed on that loan, so incentivizing right banks to make loans that they normally would not right, you approach your bank, I want to buy this business, this e-comm, or this other business. And really all we’re talking about is buying another business’s cash flow or goodwill, most banks don’t want to carry maximum exposure, SBA, of course, limits that banks then will look at opportunities look at you, your ability to successfully take over a business and be more forward thinking about the lack of collateral lack of substantial assets to be able to be liquidated and still be able to get comfortable making those loans. So it’s a tremendous program. And a great program that many folks have taken advantage of to do exactly that, right, by businesses, change their livelihood, maybe switch gears a little bit from what they’ve done, historically, and take over possess and grow some tremendous businesses. So that’s the beauty of it, the really bread and butter we’ve found in the most recent years of SBA seven A’s business acquisition.

Pat Yates  6:21

Really good. So I think qualifications a lot of times people think, and maybe there’s an expansion on that, that it’s really hard to be able to qualify for an SBA loan. And I think there’s a lot of fear for people of reaching out and trying to understand that if they’ve only ever done those kinds of things. So, I mean, what are some pitfalls? Maybe some reasons people wouldn’t qualify or other qualifications that people would want to know about if they came to you?

Joe McAleer  6:44

Yeah, I mean, I think, what people need to understand is, first and foremost, don’t believe everything you read out there on the internet, right? Or don’t believe the all the stories you hear, excuse me, the nightmare stories about SBA or even if you approach a bank, right, and a bank tells you no, this business isn’t qualified or you’re not qualified, you may really be subject to a certain banks credit box, because the SBA themselves what their qualifications are, to actually lend to an individual, the list is relatively short. In fact, they’re really looking for more qualifications from the bank, in order to make that loan and receive that government guarantees. So when you approach a bank, or you’re looking to use an SBA loan to purchase a business, really what the SBA is looking for is a couple things from you, I mean, do you have relatable experience in the subject business, and does that need to be an absolute straight line that you’ve worked in or owned, the industry that you seek to purchase absolutely not another thing, where it’s going to be a little bit different from bank to bank, and how they consider you relatable, or how they gauge your past professional experience, and whether they feel that you would be a good potential owner operator of the business that you’re seeking to purchase. The other thing that the SBA is looking for is that you’re going to be a full-time owner-operator, they don’t finance passive investment. So a lot of folks and especially in this day and age, when folks are thinking about investing in businesses, right? It’s this new wave of as we’ve moved a little bit away from the real estate market, and stocks are all over the place, I mean, more folks have come to me in the last couple of years and said, I want to buy a business, right? I want to invest in a business? Well, if you go to a bank, and you say I want to buy this business, and it’s got a great staff that runs the business. And I’m going to keep my day job. And I’m going to run it from afar. So that’s probably going to get a door shut in your face pretty quickly. The idea with the SBA is they’re creating opportunities, right? So if you’re going to buy a business, you’re going to take over a business, you’re going to be a full-time owner-operator and be fully involved in that business. So really, I mean, again, very, very short list, the SBA themselves does not even necessarily have minimum personal credit requirements, right? Many folks might approach a bank and the bank says, oh, your credit is not good enough for an SBA loan. I mean, they don’t even have a minimum score requirement. That’s a bank-to-bank thing. bankruptcies, right, if you have a past bankruptcy, a bank may be telling you, oh, you need to separate yourself, two, three years or whatever, five years, 10 years from that bankruptcy, again, not something that the SBA is necessarily drawing a line in the sand that you have to have separated yourself so far from a bankruptcy. So it’s those types of things where I feel like people have probably gone to a bank and been told, this doesn’t qualify or you don’t qualify, and you’re really just talking about that banks credit box, and you being on the outside of it, maybe then blaming the SBA. So those are just some of the key things that really the SBA is looking for. And then the rest of it is really becomes about what the bank is looking for to fully qualify that opportunity to help you buy that business.

Pat Yates  7:29

That makes great sense. Again, we’re talking with Joe McAleer with MultiFunding about SBA. Chris, let me ask you a question. I know that we talk at Quiet Light a lot about deal dynamics and how it opens up the pool of buyers when you get SBA pre-approval for a business, maybe you could talk from an M&A standpoint, just pancaking on what Joe was talking about, about how it can help people that want to sell their business if they can qualify for that.

Chris Duty  10:53

Yeah, I mean, ultimately, from a seller perspective, if you’re enabling the buyer to leverage themselves and the money that they can put down to buy a business, that’s better for everyone, right, it’s something that the buyer is looking for. So instead of putting a million dollars down on the business, they can put 100,000, or $200,000, down or whatever that might be, that’s great for the buyer, ultimately, because they can then amortize that loan over 10 years, or up to 10 years. And then they can use a lot more of that money for cash flow to grow the business that they might have in their pocket. There’s all sorts of different dynamics that I’m sure Joe can talk about in terms of additional lines of credit and working capital that the banks can kind of bring up to help that buyer. It’s also great from a seller perspective, because not always, but in general, for the types of deals that we do at Quiet Light, it’s mostly cash at close, right. And so from a seller perspective, you’re not carrying any of the burden yourself in terms of seller notes, and those sorts of things. Now, that can be a part of the deal dynamics, but oftentimes, it’s not for various reasons that we’ll get into. And so if you’re able, from a seller perspective, to run your business in a way that looks good, as Joe mentioned, meets the basic SBA requirements, but is interesting to two banks from both kind of the growth of the business, how it’s being run kind of the future outlooks, but also the buyer that’s looking to buy the business and most importantly, that you’re not trying to do any tax mitigation sheets on there, that your tax documents need to look exactly like what your business is, then you’re doing yourself a great favor in terms of the valuation that you’re going to get, you’re gonna bring a lot more buyers to the table as well.

Pat Yates  12:39

That’s a really great answer. I know that, Joe, I think one thing that we talked about, we were discussing the SBA is that I think people’s initial reaction, okay, I’m gonna go get money from a bank, I’m gonna run down the street to my buddy Stephen, who runs the bank down the road, who may not be the best resource if you’re trying to be able to do SBA. Talk a little bit about why using someone like you that would be an SBA broker will be better possibly than a direct banking relationship they have.

Joe McAleer  13:07

Yeah, I mean, it goes right back to the point I made about credit box, right. And that’s the thing. Every bank has their own interpretations of SBA rules, but more appropriately, has their own internal guidelines about what industries they will lend to what sort of collateral requirements they have, what personal credit requirements, they have to echo that statement from earlier. So, you may be looking at a business like let’s again, use the example of e-commerce, right, because these businesses trade hands pretty often and hold their value seemingly well, I think if a prospective buyer of an e-commerce business approach 10 banks that said that they do SBA, I would guesstimate that about at least seven of those banks would probably have zero appetite to lend on e-commerce and you guys have been in the space and dealt with it. And you probably could echo that sentiment, right? A lot of banks consider it too risky. The barriers to entry are quite small at times. They have older credit folks or board members that just feel like it’s a bubble that will eventually burst. All these reasons, it’s too risky, right? Or a bank, maybe three of those banks that will consider the e-commerce transaction, they associate so much risk to it. So they want to only lend it ADL TV or they want a certain amount of personal collateral coverage on that particular opportunity from the borrower for it to qualify. So these are just some good examples of, if you’re approaching one bank, or you seek to approach one bank that you think you have a great relationship with, or is telling you all these great things about what they can do on potential loans for business acquisition, you’re playing within their box. And you may very quickly realize that it’s restrictive, or you’re not able to get to where you want to be, or you’re not able to get that loan approved, or you’re not able to reach that loan consideration. And you may spin your wheels and waste time and get three, four or five weeks down the road. And suddenly, the bank is changing their tune or telling you no, or changing that original proposal or structure that they want said they could do for you. So when you work with somebody like myself, I take that guesswork out of the process, I’m approaching the one to three banks within my network that I know is going to be comfortable with the opportunity with the risk factors with the industry. I’m pinpointing those, I don’t just shop an opportunity and throw darts and hope I hit near a bull’s eye or a bull’s eye with one of my resources. And I have a vast network of SBA-preferred lenders from all over the nation. It’s not the community or regional bank down the street, it’s not the big names, BOA Chase, to throw a few out there not that they’re not capable. But we find them to be sometimes a little bit less small business friendly. So we go to these SBA preferred resources, some of them are in the top five, top 10, or top 25 list. Some of them you may have never heard of, they have interesting or weird names. But there are tremendous resources for SBA-preferred loans to acquire businesses. So that’s what I’m doing, I’m really eliminating the wasted time wasted efforts, going to the resources I know are going to be able to get things done presenting a deal in a certain way, making sure we’re getting ahead of trouble spots, things that banks may become iffy or may see as problematic. And making sure that when I get a proposal for some, for a client I work with, that’s going to end up as an approval through underwriting. I think, I’m sure some of the Quiet Light brokers could attest to, when I put expectations out there, we go down the road with somebody, or I’m sharing precautions on a certain deal, or again, setting those expectations. And I like to be very careful if I recognize a risk. But when I get a proposal, or I say can do something, that ends up being what happens, right? Rarely, if ever, will my banks propose on a deal, we get down the road through underwriting, and then they say, wait a minute, we changed our mind, if that’s the way my banks are going to do business, then I’m not going to be able to work with them. And we hire and fire banks all the time. So, I think that’s the biggest value add and working with me, there’s no fee for my services, of course, the banks take care of us. So kind of a no harm, no foul, and again, allowing me to pinpoint that right resource and make sure that we get you to that approval is definitely a reason why it may be more beneficial to allow me to be an intermediary.

Pat Yates  18:10

That’s great. So Chris, I know you obviously have a lot of experience in this and you work with people that have done SBA deals before. Do you encourage like buyers, I know we could talk about buyers and sellers combined, but more concentrating on buyers, you encourage them to go in and get pre-qualifies. They’re looking for businesses, for businesses themselves that are going to list to go in and get pre-qualified. Chris, maybe you could talk about how preparation in the success. Like I don’t know if that’s a good way to put it. If you’ve seen deals in the past that being that prepared, as he says helps to deal close at the end.

Chris Duty  18:39

Yeah, well, the way that I approach buyers is obviously there’s a lot of eager buyers that have decided they want to buy a business and oftentimes were their first point of contact and a lot of them have a good salary, a decent network, collateralized assets, those sorts of things. And the way that will come through, they’ll say yeah, I’ll get SBA pre-qualified and, and I can get you a letter and those sorts of things. What I do is I send them straight to Joe, primarily because I know Joe lives in reality, and he’s going to qualify them based on doing a detailed assessment of their finances and get a better understanding of what they actually will qualify for. And I think that’s what you’re looking for, if you’re going to an SBA broker, from a buyer perspective, is to make sure that that person that you’re working with is doing their diligence on you and not just providing you a letter on based on what they’re telling you. So I think that’s one and then two, this kind of goes for both buyers and sellers were kind of the two terms that we need to get them familiar with is the debt coverage ratio and the loan to value and how to think about valuations. We get that question a lot from sellers of, how does that impact my valuation and maybe we can do go through two examples. holes here that will help illustrate that kind of, the first one being, we sometimes have these businesses that have a lot of extra kind of goodwill and intangible value that could be a patent, utility patent, those sorts of things where all of a sudden multiples go kind of 5, 6, 7 and beyond based on that. Now, this can sometimes create a problem with SBA deals because of the loan to value and debt coverage ratio, which I’ll let Joe get into in a second. The second is more of a traditional loan, we’re listing between kind of three kind of four and a half multiples, those sorts of things. And then it might be a business that stable or slightly declining, and that can put a cap on what can be lent against that. So in those two scenarios, I’ll kind of kick it over to Joe. So he can talk a little bit about what that means. I think that’d be useful to our seller, both our sellers and buyers. Because that’s a question we get most often about, how can this limit what I can borrow or what I can get for my business?

Pat Yates  21:02

That’s a great point. And I think, Joe, maybe for the people out there that haven’t dealt with those two things. Maybe you can expand a little bit. I know we’re going to talk about some deal dynamics, too. But I’d love to hear your thoughts on that as well.

Joe McAleer  21:12

Yeah, Chris is right. I mean, when you’re utilizing SBA for business acquisition, you are put in a little bit of a box, right? From a debt service coverage valuation perspective, how much of a loan can I get towards the purchase of a business? I think the most financial businesses, when people say to me, what is a multiple that I shouldn’t be paying for a business where I can pretty much assure myself to be able to get an SBA loan, and my short-winded answer to that question is, somewhere in a three to 4x range, right. And we don’t really use multiples we use at the loan level and bank level, we look at debt service coverage ratio, but when you’re out there shopping in the marketplace, you’re seeing multiples everywhere, right? So it’s that three to four times usable EBIT, I like to say. Now, if you’re getting a deal below three, awesome, that just means you’re getting a better deal, right. And if you’re getting it above four, it doesn’t necessarily mean it’s not financial, it means as we creep up towards the fives in the five plus multiple range of means our cash flow, that debt service is probably getting squeezed a little bit. And now we may be moving away from that maximum loan to value may be having to put more than 10% down, or 15 or 20, it really just depends on I get it. Some sellers really value their businesses differently or have certain assets that need to be included or go beyond just the goodwill purchase of that business that can you know, make that valuation go higher. But to break it down. When folks say to me, well, what is the minimum debt service coverage ratio that banks are looking at, again, it’s going to vary from bank to bank, I would say that in this day and age of kind of rising interest rates or a year where interest rates have really taken a jump, I feel like, if I can speak from what I’ve seen is we’ve moved away from like banks getting more comfortable with the minimum 1.15 times and you’re probably more at 1.2 to 1.25x. And that needs to be on a relatively consistent basis. Banks are looking at a weighted average of the most recent year of performance on the tax returns, and then kind of at a less weight on the years prior. So right now speaking to today, we’re looking at 2022, looking at 2021 and 2020 really holds very little weight businesses that have experienced some growth. And then if we’re really leveraging a strong 2022, a lot of businesses have experienced some very rapid growth. And we look at those historical taxes, and we’re saying, okay, we’re really getting all of our debt service support from that 2022 tax return, then we’re really focusing on the year-to-date financials as well, what’s the ongoing trajectory. Is it continued growth, and that’s how banks are going to get more comfortable with maybe the years prior, not hitting our minimum DSCR. And that most recent year is we’ve got some backbone to be able to make a loan, and then we start to look at who our sponsor on that loan is. So again, if you’ve got consistent basis, year over year, a business that’s flat or depending on where it’s priced, and you’re hitting that 1.2 1.25x I think you’re good to go there. But again, if it’s a business that is just rapidly changing and growing, that most recent year may Maybe it needs to be at a 1.5 or a little bit higher, right? If the years prior are not hitting that minimum, and again year to date, how are we looking? What’s are we on the up and up? Has the business kind of rounded back down? Those are things where we start to scrutinize it as well. And it all obviously goes together multiple goes hand in hand with, you know, debt service coverage ratios. And I think again, the key is maybe deviating a little bit from STE to what I like to call that usable EBIT. Ah, and that’s just speaking to what the banks look at, right. STE is certainly one marker that sellers commonly use, and I know brokers commonly use, but we need to break down, what is comprised of that Ste. And what things within that figure are going to be problematic for a bank to use, or hard to prove really is the things where we kind of move away from some of the add back. So as long as that usable EBIT is giving us enough of a comfortable debt service coverage ratio, that’s what we’re after. I mean, plain and simple.

Pat Yates  26:08

That’s great. So again, we’re talking about Joe McAleer with MultiFunding and Joe, let me ask this, when people are coming in to get pre-approved, let’s say their goal in the next three years to buy a business through whoever and they want to get pre-qualified, you can obviously explain everything they need to pre-qualify, do you advise people to get that done ahead of time? Because their search, they can just plug that in based on what they are pre-qualified for? How should people go about that?

Joe McAleer  26:31

That’s a good question, Pat, I think there’s no harm whatsoever in allowing me to work with you gather some pertinent documentation and set some expectations, whether you’re rapidly searching to find a business, or you feel like this is going to be an ongoing search. I love it, I love the ability to build out a file for somebody have access to that information. So when they start to find businesses, we can rapidly put it all together allow me to put it all together fully analyzed an opportunity, and should they go under LOI, allow me to be able to approach one of my banks and present that opportunity as a whole. So I can come back to them within 24 hours or very, very quickly, and say, hey, here’s a proposal, we’d like to move forward with this transaction. Other folks, they prefer to wait, but ultimately, that just, when they find a deal, where they’re trying to get further along with a broker or seller, and the ask or the demand is that they’ve been vetted, and they don’t have that pre-qualification letter. At that point, we need to kind of go through it, put it all together, and I’m pretty demanding, if you want something from me, I need these items from you. And it’s, it’s nothing remarkable, it just requires a little bit of dedication, maybe a half hour to an hour of time to put together a couple pieces of paper, and then I can set expectations for you. So it’s the thing that I would say, do it earlier, because it will open the door for you with conversations with brokers and sellers, when you have that piece of paper that shows you been vetted. Otherwise, you may find something and find yourself scrambling a little bit.

Chris Duty  28:27

That’s great. Joe, we’ve done some interesting, some unique deals lately that have had some interesting deal dynamics that have certainly helped the buyers take on the business and banks have been fairly accommodating in terms of understanding the type of business, maybe the seasonality of the business and given them the financial instruments that enable them to be successful. And I assume that you’ve been a pretty big part of that behind the scenes, you want to talk a little bit about some more nontraditional deal dynamics that can be worked in, and maybe talk a little bit about some of the changing SBA rules that could further enable that

Joe McAleer  29:07

Yeah, absolutely. You bring up a great point, Chris. And I mean, speaking to my involvement, not that, banks on their own are not capable of being a little bit forward-thinking or being accommodating. But yeah, I see all types of businesses, we worked on a rather unique one where the business really made all their money in like, what a three to four-month period, right? So, you look at that transaction and we were saying to the bank, you know, are you comfortable with this number one, and they were it was a tremendous business, it just evolved around being able to sell product in the winter and we had a great highly qualified borrower that made the bank feel comfortable during the slower months that, if times were really bad, you know, that buyer was going to be able to comfortably help in situations where the debt would need a little bit of a boost from some personal income, but what we’re able to do is get the bank to provide, I think it was at least six months, if not maybe a little bit more of some interest only payments, or a little bit of forbearance on the front end of those payments, they also provided the borrower with a working capital line of credit to accommodate some working capital at cash at close for operations, but also floating some of the slower months or unforeseen circumstances with inventory and other things, as they took over that business. And had to transition, that’s the most difficult time for any given new business owners, that is the immediate transition or takeover of a business and being hit with some of the unexpected. So we felt like, we really, really positioned this borrower in a way that he could be comfortable taking over this business in a time where I think he was, he was going to be afforded the ability to take most of the busy season, and make it his own, but be prepared for the slower months to come and float him to the next year when the business would be making their strides again. So, that was something where I had to kind of, you know, push on my resource, but lean on them, get feedback of what they felt, they could do work with my client, the borrower to make sure he was going to be comfortable, and that this was enough for him, we don’t want to set folks up for failure. All right, that’s the key, got to make sure that the bank is giving you what you want, or as close to it to where you feel comfortable, that you’re going to be successful with the business and be able to make those loan payments. So that was that was a good one. And that’s a good example, a lot industries have their ebbs and flows or their seasonality. So make sure you’re teaming up with a bank that’s being, somewhat accommodating to that. And if not, maybe it’s time to speak to somebody else. In terms of some of the new rules, there’s some tremendous things happening, which I think is going to open the door for a lot of people, and I’m already seeing it open the door on some deals that I’m working on right now. The biggest ones that I’ll mention is number one, this partial buyout rule. For years, we’ve struggled with the inability to have ongoing seller or owner involvement in a business and people come, sellers have wanted that, a lot of sellers want to retire right off into the sunset, do the transition and be done with it. But a lot of sellers, this is their baby, right? They want to make sure that there’s ongoing success in a business and they’re willing to stick around. And the SBA had kind of drawn a line in the sand. And it’s still drawn when we’re talking about complete buyouts that a seller can only remain for a period of one year, and then they have to go away. And I think they finally realized that that was a little bit silly and it really helped create success with new ownership and transitions of businesses to allow an owner to continue to advise and be involved and have some stake in a business. And it’s gonna do some really great things and assure that these transitions, these acquisitions are more successful, right? So now, you can buy a portion of a business, you can buy 50% of a business, you can buy 90% of a business, I mean, you throw whatever number out there, you can keep a seller involved in the business that the one key factor, of course, is that any owner, the rules still exist at any owner in the borrowing entity or in the business would need to personally guarantee the loan if they own 20% or more of the subject business. So, owners, we see a lot of deals already where, okay, you know, owners will stick around with 15% 10% 5%, something like that, but that still allows us to leverage their experience. And another key is leverage their license, we have these businesses where there’s a license that is required to operate that business. And another instance in the past, where you had a lot of deals that were seemingly great deals but specialty contracting and services businesses, where somebody can’t go out and get a license in a month or a year. You really couldn’t close a transaction saying, Oh, I’m gonna borrow the sellers license or I’m going to eventually get it. That was really difficult, if not impossible, to get banks comfortable because the SBA states that you’re supposed to have that license procured before you close, so we were having to kind of figure these deals out and find people or key employees, it just it was messy. Now, I’m already working on some deals, specialty contracting style deals, where that license, we’re able to keep the seller no involved in the business 5% ownership 10% ownership, and we can leverage their license on an ongoing basis, the beauty of the SBA in these partial changes of ownership, you actually have the ability in two years’ time to go and get another SBA loan and take the seller out of their remaining position. You don’t even have to use your own cash if you don’t want to. So 24 months, if they’re ready to move on, you’re ready to buy them out, you can seek another SBA loan, if things have gone really well. So awesome things with partial buyouts, that’s a big one, that the SBA has finally opened the door. The other big one is the changes to sellers helping with the required 10% equity injection. Again, very, very restrictive in the past, if the seller were to help you with any of your 10% equity injection, it required a seller note on complete standby, complete standby meant the life of the SBA loan, which of course, non-real estate 10 years real estate involved even longer. So, I saw a lot of deals where sellers, were not really willing to say, yeah, I’ll wait 10 years to get paid on this 5% or whatever to be able to help, you know, this random buyer who wants to buy my business. So they’ve removed that restriction. And now a seller can actually provide the entirety of your 10% equity injection, and all it requires is a 10-year amortization, or 10-year amortized seller note and only a two-year standby period. Okay. So way less restrictive, I’m already seeing deals happening, where banks also have to get comfortable with a complete lack of equity injection, but already seeing some deals coming together where, you know, banks are more open to allowing a borrower to retain their cash, if a seller is willing to provide that equity injection. The other one, of course, is okay, if somebody is bringing at least 25% or 2.5% of the 10% equity injection, the rest can come from a seller by way of a 10-year amortizing note with only a two-year interest-only period. So, payments can begin on day one, not even required to do standby and they can be bringing 7.5% of your required 10% equity injection. So, really has quickly opened the door. And then there’s another role, which we’re still kind of feeling out or figuring out, but I know it’s out there that you can trade equity for down payment. So I think they just need to hone in on that one. And it has to do with a business’s debt-to-worth ratios. But there’s a rule out there that I think will also open up come August 1, when more banks can be a little bit more understanding of the latest SOP, where you may even now be able to be trading seller equity, retained equity for down payment. Having seen that one used quite yet. Again, I think it’s still one that there’s a lot of gray area, but we’re rapidly seeing sellers providing down payment by way of the seller notes in a far less restrictive environment. So, those are your big, big rule changes, as it relates to things that really have impacted the business acquisition space, and that I think are going to really, really open the door for a lot more businesses to change hands under some more friendly structuring.

Chris Duty  39:03

Yeah, that’s a great overview there from the new rules, I’m sure all of our buyers that are listening, they’re kind of ears just lit up when you said that they could bring nobody down to a deal for those specific things. So as a bank, you’re looking at a borrower that is ultimately not going to bring any cash to the table. Right? From a bank perspective, how do you think they think about the best type of borrower in that scenario? Like what does that borrower need to show to be able to come to a business where the seller obviously agrees to do a note to put down their down payment. What is the bank look for that bar?

Joe McAleer  39:45

YI think I think the instances when you’re gonna see that the most is like maybe there’s a key employee or manager that wants to buy a business right and from the seller sellers ready to move on and they just don’t have a lot of Cash, right. And I think you’re gonna see opportunities where banks look at an individual, and maybe they see that there’s limited liquidity. But generally speaking, they see this potential borrower, buyer as a really great fit. I think those are the instances where you’re going to see banks getting a little bit more comfortable that somebody doesn’t want to or a seller is willing to provide them their equity injection. When that rule was first announced, back in the second week of May, we all within our organization, and many bankers we spoke to were like, huh, we don’t see any banks allowing people to bring nothing to the table. Banks always want borrowers to have some skin in the game, even deals in the past, when borrowers were looking to really, really leverage outside individuals and sellers for their down payment, most banks would be a little bit uncomfortable with that. Now I’m already seeing again, I’m seeing banks being open to it in certain circumstances and situations, that you allow somebody to retain their cash. And otherwise, this is a really, really great opportunity, this is still a really, really strong opportunity, if that’s the only thing that’s lacking, or if we’re allowing a seller to mitigate someone exhausting their liquid resources to get a deal done. Yeah, let’s go ahead and let a seller help if they’re willing to do that. So, it’s a really nice tool. And I think in certain instances, with banks that are the most forward-thinking it’s going to be highly utilized.

Chris Duty  41:51

That’s great. And  I think that’s a good message for the sellers out there. Oftentimes I talk to sellers that they do have a key employee that they would prefer to sell the business to, but for various reasons, because that key employee might not have generated enough wealth or kind of savings to be able to purchase the business with an SBA loan, this might open the door for that. And that could be the best outcome for both the seller and the employee, and ultimately, the business going forward. Because obviously, that key employee likely knows the business better than any possible person that could end up buying that business

Pat Yates  42:24

Absolutely. Joe, let me ask a question. I know, you gave so much good actual information about this. We could talk for a couple hours about this, I’m sure. I do have a question. Because sort of when you look at these changes, it seems that they’re focused on one thing, and it’s consistent throughout a lot of things that I heard, whether it’s an aggregator who paid cash for business in the past, people sometimes don’t know what they don’t know, when they buy businesses. So is there really, to me, there’s a strategic advantage of being able to keep that owner on at least for a period of time, that expertise, that consistency, that ability to grow in it, it just to me, it kind of can be a win-win from two standpoints. Number one, that consistency. Second of all, maybe a buyer or a seller is able to sell a business and in a more creative situation that makes it thrive even further in the future. Can you talk a little bit about that? Because it seems to me the regulation changes came from something really specific or possibly failures or difficulties scaling a business once they buy it because they don’t have that owner? Is that part of the idea here from the SBA?

Joe McAleer  43:22

I do believe so. I mean, I really think that, like the SBA finally opened up their eyes a little bit and said, we could be allowing more successful transactions to happen are more long-term success, or yes, remove some of the risk of failure in an immediate change of ownership by allowing current business owners to have ongoing involvement and ongoing ownership in a business. It is I mean, I can’t tell you, like if you look up the default rates of SBA loans, they are extraordinarily low. And in our 14 and a half, 15 years in business, we were looking up all the defaults we’ve been tied to, and it’s like, I think we had like 13, or something like that it was an exceptionally low number. These loans tend not to fail. But again, I’ve also had a lot of business owners that I’ve helped buy a business and it was seemingly a tremendous opportunity, a really solid business that was making really great money. And those folks reached back out to me months later, or a year later, and were lamenting to me, Wow, Joe, you know, I didn’t know that I had to dedicate 60 hours of my week to this business. The seller made it seems so easy. And Joe, I didn’t know that there were these expenses, and I didn’t know that there was this and there was that and not that they were in jeopardy of going into default. But I think about those opportunities. And in some of those conversations, it was like, my client was almost lamenting that the seller was gone, like literally gone wouldn’t even pick up a phone call to help them through a difficult time, something that they probably would have very easily understood everything about, but now this new owner of this business was kind of on their own. So I think that’s the idea here, if you can remove the risk of these transactions failing in the first year, first two years, first three years, and create a higher trajectory, or a path to growth, ongoing growth and success of that business, that’s what you want to do here. And again, the other one with the licensing, and the relatable experience, where now we’re able to shrink that gap, where somebody that wants to buy a business that really doesn’t necessarily have that overall experience and industry experience or having that license. That’s one of the things that this is really, really opening the door for. So, I think that’s where they got it. Right. And I think that’s immediately where I’m starting to see some transactions come together, where, four months ago, I would have had no clue how to make it happen.

Chris Duty  46:36

Got it, that’s super helpful. And then as you think about some of the current market issues that are out there. So, you know, we hear from both buyers and sellers, interest rates have gone nuts, right? Or there’s scenarios where businesses are declining 20% year over year, or possibly even more to that coming out of COVID, things are stabilizing those sorts of things. What are the issues that you’re seeing now, which ones can kind of be overcome, and I think you had a really good LinkedIn post the other day talking about where interest rates are at for SBA loans? Maybe it’d be worth kind of restating that here.

Joe McAleer  47:20

Yeah, I mean, I think one of the things I’ve definitely seen in the market over this past year is the market has somewhat reacted to higher interest rates. I think what it is done is really, it’s shrunk the buyer box a little bit, right, I mean, if you don’t have that appetite to pay a higher rate right now, then this isn’t the time to buy a business. So you have that the removal of, of some of the iffy buyers, or you have the folks that, really stick to their guns with debt service and all this stuff and factoring higher rates. So, another thing again, where you may be able to lean on some of these recent rules and keeping sellers involved to remove some of that risk, both mentally and realistically, higher payments, on that note, ongoing performance of a business growth, declines that you may see in a business, I know, a lot of businesses I’ve been seeing, there’s been some struggles to the start of 2023, maybe a slower start, or some months that have been a little bit troublesome. And there’s a little bit of explanation for that, whether it be like inventory turn, or just a slower period, or maybe some trouble with advertising or something like that, or maybe a seller who’s taking their foot off the gas just a little bit as they prepare to sell a business. So again, instances where ongoing seller involvement may be key, and maybe that’s beyond that one-year period, we really were never able to leverage, like this whole, oh, the seller is going to be a consultant for a year. And that changes the mindset of a bank to be willing to make that loan. Banks just think worst case scenario, that’s their job. So no longer is it the conversation of that quickly gets kind of dismissed of like, hey, the seller is going to help me. Now, it’s like, okay, the seller is going to retain five or 10%. And this is what they’re going to continue to do with this business. They’re going to continue to manage these hurdles, or some of the difficulties we’ve had in April or March or whatever it is, they’re going to continue to make sure the ongoing relationships with suppliers and customers, their name is still tied to the business. These are the types of things where some of those things can be overcome and not be immediately dismissed by a bank when you’re trying to convince them to help you buy a business that maybe has had some trouble spots or maybe has some certain risks with a complete change of ownership.

Pat Yates  50:10

That’s really incredible. I mean, Joe McAleer, again, from MultiFunding, we could sit here and talk about this all day or so many things, I think, really, the overview to me right now is that the SBA is trying to work better with buyers and sellers to be able to try to make SBA opportunities available to be able to buy a business, sell a business, whatever it’s going to be. I’m just excited about it. So I think it gives so many more opportunities for people and obviously some consistency going forward in the business, if you hold on to that owner. Chris, were there other things you wanted to go over? I think he answered every one of my questions, even though I’ll probably like 100 after this.

Chris Duty  50:45

Yeah, I agree. I think we could talk forever. I mean, I think the takeaway for me in pretty much every conversation I have with Joe was that, people think of the SBA as being a government entity, and it being very rigid, but ultimately, you’re working with a set of banks that are interpreting the SBA requirements, of which there are kind of quite minimum, as Joe mentioned, like most of those requirements are actually stated by the bank, there’s a lot more flexibility here than then one might think, when you think SBA and government. And so, I encourage buyers that, if you’re thinking about buying a business, reach out to Joe, he’s the person that I send all of my prospective buyers to, can give you a really good sense on where you might be at what you’re gonna qualify for it, he’s going to do the diligence to make sure that you would be comfortable putting in an offer for a business.

Pat Yates  51:40

That’s great commentary. I agree with that. Thanks, Chris. So Joe, if anyone needed to reach out and get in touch with you, maybe you could tell everyone that’s listening, how to get in touch with you?

Joe McAleer  51:48

Yeah, absolutely. Google me, you’ll find me out there on the internet. But yeah, if you go to MultiFunding, you’ll find me there My email is [email protected]. And then of course, my direct number, which you can call text. Reach out to me anytime is 856-325-9796. Those are all the ways that you can find me and get a hold of me. So yeah, anytime anybody has questions or wants some help, or wants to talk SBA, because again, like you guys noted, 45 minutes, you can’t even scratch the surface of all the things that encompass SBA lending, but yeah, I love to be a resource for folks. I’d love to be an educator, somebody people can rely on and reach out to. So yeah, really appreciate the opportunity to be here, Pat, and have Chris on here with us as well. And I enjoyed it. And hopefully there will be more to come.

Pat Yates  53:05

Absolutely, man. Appreciate your time today, Joe. It’s been awesome. Thanks again. Appreciate it.

Chris Duty  53:11

It’s been a pleasure.

Outro  53:14

Today’s podcast was produced by Rise25, and the Quiet Light content team. If you have a suggestion for a future podcast, subject or guest, email us at [email protected]. Be sure to follow us on YouTube, Facebook, LinkedIn, Twitter and Instagram, and subscribe to the show wherever you get your podcasts. Thanks for listening. We’ll see you next week.

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