Small Business M&A Lending

A Brief Overview from a Fellow Searcher

One of the most important parts of the search process is securing your financing. For smaller deals, especially ones with no significant tangible assets, like real estate or large equipment, but that are enduringly profitable, a Small Business Administration backed loan, or SBA loan can be extremely helpful to open up access to business buying. 

As part of the Private Market Insights series, we brought on an expert to break down the process of buying, lending and creating a long-lasting relationship with business owners. Jarryd Osborne, from Osborne Capital Ventures has experience in both the technology and banking sector, working with banks like JP Morgan, Fannie Mae, CITI Bank, Bank of America, and Wells Fargo, and has also been acting in the SMB world as a full-time searcher. In this interview with Josh Levine, our host and CEO of Private Market Labs, they talk about some of Jarryd’s learnings along the journey of finding the right small business mergers and acquisition lending partner. 

Tune in and find out more from Jarryd by listening to this episode:

Financing a Small Business Acquisition through Lending

Jarryd set out to outline what the main elements you should think about as a future business owner and searcher seeking SBA lender partnerships:

  • Timing is important – as a searcher, you can get SBA lenders more heavily involved when you are working to put your financing together, if you have a company identified and secured via an LOI
  • Build a good relationship with SBA lenders early on, so you can call upon them when you find that good deal to acquire
  • You can start building this relationship even before you have a deal or LOI (Letter of Intent), where you can opt to get a Letter of Support in lieu of a company to evaluate, then come back with the acquisition target once you’ve identified it
  • This relationship you build with the lenders will give you an idea of what to expect when it comes to getting SBA loans

Additionally, you should note the following when you are working to get financing to acquire a business:

  • Bring forward an enduringly profitable business. Lenders need to see a consistency in your earnings (EBITDA / SDE / Cash Flow) in order for them to get comfortable with your business, even if they are non-recurring
  • Find businesses that don’t have a high concentration of revenue on certain customers, or if they do, make sure you have good strategy to retain the relationships
  • Don’t worry about collateral, there is not much focus on it compared to the past 
  • You will be surprised that some banks are interested in working with you to acquire certain businesses with little or no collateral

Finally, as a searcher, the conversations and relationships you have with lenders matter a lot in helping you show that you will be a great future business owner. You need to convey confidence and good leadership qualities in those conversations to get banks to trust you with the loan. 

Understanding the SMB M&A and SBA Banking world

From Jarryd’s experience in the banking world, he suggests dividing the banks into big, medium and small and tailoring your approach accordingly. The big banks will be more strict on the criteria of the company they choose to invest in and this makes the decision process long, but when compared to the small and medium banks, they usually provide better rates.

The small and medium banks on the other hand, lean on the side of creativity and they are flexible with their criteria when evaluating your target business, so you will have more opportunities to close faster, but at a higher rate than bigger banks, depending on the risk they identify with the business. When talking to banks regarding a business, understand that they are not just there to make money. They will be knowledgeable about what you do, so your best bet is to talk with them in confidence and get suitable deals in front of them to build that relationship to help you close when the time is right. 

As a searcher, you should work to build a relationship and connect with lenders who understand the space you are buying into, as this will help in putting your business forward and getting the financing you need. Remember to find businesses where you can show consistency in earnings with confidence, as this would help you in closing the deal. 

Our goal with Private Market Labs is to ensure that entrepreneurs have access to all the services and knowledge they need regarding SMBs, loan and financing amongst other things. Tune in to our next episode on our Twitter Spaces every month, ask questions and let us know your thoughts, topics and guests you would like us to bring to the next conversation. 

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