Case Study: First-Time Business Buyer Acquires Two $3M Businesses with SBA Financing. $4.88M Funded through SBA.
Recently I had the privilege of assisting my client in acquiring two successful businesses simultaneously, a real estate firm and a marketing company, using an SBA 7(a) loan.
This case study highlights what is possible under the SBA loan program for ambitious business buyers, and who can actually qualify for larger projects such as these. I frequently talk to many ambitious searchers who want to buy $3M+ businesses on their first go - they lack the liquidity or experience necessary to get backing from an SBA lender. It is important to calibrate your expectations for debt financing to your actual borrower profile.
(*side note - This is why I’m such a big fan of starting smaller - it can fix a lot of problems, as far as building experience and liquidity. If you’re serious about buying a business and you’re unable to qualify for financing for a larger transaction, just consider going smaller. It is true - smaller deals incur their own risks - more owner dependent, can be more difficult to exit, sell at lower multiples, etc. But your first acquisition does not need to be your last, and doing one can make your subsequent, larger transactions much easier to accomplish.)
This case study also highlights problems that can occur when making a run at a larger picture. Larger transactions incur more complexity and are much more time consuming.
Client Background
My client, a seasoned financial services executive, brought nearly two decades of corporate leadership experience (EVP, VP, Director) to this opportunity. With a strong background in mortgage products, real estate, and strategic leadership at top-tier firms, he was well-prepared for this specific deal. He had experience launching and growing a HELOC business unit at a FinTech startup, generating $100M in revenue in its first year. Prior to this deal, he had recruited, trained, and managed large teams, underscoring his capacity for leadership.
With nearly $600k in an IRA, he was able to use a 401k ROBS (Rollover as Business Start-Up) and draw from that to contribute as a down payment and have leftover liquidity post-close.
The Businesses
Real Estate Firm: This reputable brokerage offers services in buying, selling, renting, and property management, emphasizing a personalized approach to meet clients' needs.
Here is a snapshot of its financials:
2022 SDE: $1,705,432.05
2021 SDE: $1,160,001.70
2020 SDE: $1,367,639.94
The business boasted strong operational efficiencies, a skilled team of agents, and untapped opportunities for growth through enhanced digital marketing and expansion of its agent base.
Digital Marketing Company: A dynamic company specializing in advertising and digital marketing services. Its financials revealed strong revenue and SDE performance:
2022 SDE: $1,394,898
2021 SDE: $1,109,420
2020 SDE: $177,151
Deal Structure
Marketing Company:
Total Purchase Price: $3,000,000
SBA Loan: $2,320,000
Seller Financing: $500,000
Equity Injection: $180,000
Real Estate Firm:
Total Purchase Price: $3,005,000
SBA Loan: $2,075,000
Seller Financing: $750,000
Equity Injection: $180,000
SBA Loan Structure
The acquisition was financed through an SBA 7(a) loan. The loan structure was tailored to ensure my client’s financial flexibility while covering all acquisition costs and providing working capital.
Loan Amount: $4,887,000
Equity Injection: $360,000 (approximately 7.5%)
Interest Rate: WSJ Prime + 2.25% (variable)
Term: 10 years
Monthly Payment: $65,943
Use of Proceeds:
$2,320,000 to purchase assets of Marketing Company
$2,075,000 to purchase assets of Real Estate Firm
$309,053 for working capital
$25,000 for franchise fees
$23,000 for closing costs
$134,947 for the SBA guaranty fee
Why This Deal Worked
Alignment with Skills: My client’s expertise in real estate and financial services made him an ideal operator for the real estate firm. His strategic vision and experience in workflow optimization and technology positioned him to drive growth at the digital marketing company. While buying two companies at once is exceptionally ambitious, his resume demonstrated a track record of high level execution.
Strong Financials: Both businesses demonstrated consistent revenue growth and profitability, creating a robust foundation for success.
Synergy Opportunities: The complementary nature of the two businesses allowed my client to leverage shared operational strategies and expand their market reach. For example, the marketing company helps the real estate firm address its brand awareness challenges.
Operational Efficiency: My client had the marketing company relocate its operations to the real estate firm’s office, reducing fixed expenses like rent. Additionally, shared back-office functions, such as accounting and administrative support, have created further cost efficiencies.
Key Questions Answered
Prepayment Penalty? The loan included an SBA prepayment penalty (5% in Year 1, 3% in Year 2, 1% in Year 3).
Closing Costs? Closing costs were estimated at $23,000 and fully integrated into the loan structure.
Refundable Deposit? A good faith deposit of $2,500 was required, refundable after lender costs.
Hurdles
From generation of initial term sheet to funding, the transaction took 6 months. By the end, everyone was exhausted.
There were a few reasons for this.
There were key documents that we frequently had to wait on. For example - we had difficulty getting the balance sheet and the Franchise Disclosure Document for the real estate firm. At one point, the landlord for the office building left the country on a remote vacation where he was unreachable, leading to a further delay of 2 weeks as we waited for the lease assignment.
Understand that buying a business is not like any other purchase. It can be a complex, time consuming transaction which requires cooperation, responsiveness, and clarity from the many parties involved. Legal - sell side and buy side, your SBA lender, their closer, underwriter, business valuation experts, listing broker, financial DD, etc. These people are your teammates in a given transaction.
If any one of these parties fails to provide requested docs in a timely manner, huge delays can occur. Time kills deals as deal fatigue sets in. Everyone being fully prepared early on can allow you to circumvent a lot of these challenges.
However - it wasn’t just delays on documentation. We funded two large transactions simultaneously - this requires a lot of back and forth from legal, additional docs from underwriting, etc.
The real estate firm was also very addback heavy. The seller was trying to reduce his tax liability, artificially inflating expenses like advertising and consulting services.
The first few lenders I had shopped this deal to denied it outright for that reason, citing that it would be tough for an underwriter to work with that. Fortunately, we were able to find the right lending partner who could get on board with our buyer and get it done.
Reflections
This case illustrates the importance of relevant experience and liquidity in making larger transactions like these possible. My client’s extensive leadership background in financial services and real estate, and his strong personal financial standing, were critical factors in securing financing and navigating the complexities of acquiring two businesses simultaneously.
Larger transactions can come with additional hurdles. Greater complexity, extended timelines, and reliance on multiple parties to provide timely documentation and cooperation are a few. These challenges can be daunting, especially for first-time buyers who may lack the requisite experience or resources.
However - the synergies between both firms exemplify how complementary strengths can unlock new growth opportunities while addressing operational challenges. By leveraging shared resources and aligning strategic objectives, my client has positioned both businesses for long-term success.
For those aiming for larger acquisitions, understanding these difficulties and preparing accordingly can make all the difference in achieving your ETA goals. At Arena Commercial Capital, we’re committed to helping motivated searchers like you navigate the complexities of SBA financing and buy your dream business.
If you've got an acquisition you're considering or are under LOI, feel free to email me at jason@arenacommercialcapital.com. Our firm, Arena Commercial Capital, is a full service commercial lending brokerage with over 100 lenders across the US.
