Master the SBA Lending Process

Another one of the top 10 guests of 2018 is returning today to review the SBA process for both buyers and sellers. We'll discuss what's changed and things buyers and sellers need to look out for in 2019.

Stephen Speer of ECommerce Lending, based in Florida, is a specialist in eCommerce acquisition deals. He offers a superior financing experience to buyers and sellers. Stephen urges sellers reach out to him to get their game plan ready and advises buyers to get pre-approved in order to get the ball rolling in the right playing field.

Episode Highlights:

• What Stephen looks for in a business when prepping SBA on the seller side.
• Why co-mingling of multiple business can be problematic for a seller.
• His recommendations for cleaning up and consolidating financials when preparing to sell.
• What the the "debt service coverage ratio" (DSCR), also known as "debt coverage ratio" (DCR), is all about.
• Where the add backs come from and where Stephen's team looks for them.
• He advises companies to use an external bookkeeping outfit – for a great ROI!
• How Steve and his group think outside the box when it comes to SBA lending and refinancing in order to make the purchases happen.
• What he looks for in an SBA financing candidate.
• Just because you can write a check doesn't mean you don't have to be likeable.
• Situations or factors that can stop an SBA loan.
• The importance of reaching out to Stephen before starting to shop for the business that falls into your price range.
• Stephen reveals his lending sweet spots – the floor, the ceiling, and his averages.
• All the financing details – down payment, terms, and interest rate.
• Why sellers and buyers both need to go through the vetting process.

Transcription:

Mark: Joe last week we aired the episode with Shakil Prasla and we started out the episode with me basically having you fess up to the fact that I have the number one most downloaded and listened to episode.

Joe: You're amazing Mark. Let's just say it right now you're incredible.

Mark: But you're [inaudible 00:01:07.9] with Stephen Speer and at the risk of becoming a rethread podcast where all we do is bring back our top guests. We are having back one of our top guests this week again.

Joe: Stephen Speer that's right. He's an SBA lender which is interesting in that the top two podcasts that we had had been about buying online businesses and we're brokers that sell online businesses. But hey … look you are amazing and you started this company 11 years ago and your focus was education and helping buyers understand the process and helping them as much as the sellers. So it's worked. And the fact that our top two podcasts are about buying online businesses has proven out that theory. We had Stephen back because last year there were a lot of changes in the SBA policies and guidelines. The dollar amounts came down a little bit, seller financing wasn't required on certain deals, and we recapped some of that and we reviewed the process both for if you're a seller what you need to do to get yourself in good shape to be SBA pre-qualified. And if you're a buyer out there looking to build that portfolio of businesses or buy your first one what you need to do in order to connect with someone like Stephen and get yourself in a position that you best be able to act quickly when that perfect business comes along.

Mark: So yeah these rules do update on a yearly basis but fortunately this year it doesn't sound like there's a ton of new changes. With that said there's a lot of good information in this podcast because we get these questions over and over and over again about what does it take to qualify. And I think one thing that … I know we talked to Stephen the other day as a company. We had him and a couple of other SBA lenders come into the company and just—

Joe: Yup. Bruce from [inaudible 00:02:47.2] bank, yup.

Mark: Yup. Bruce from [inaudible 00:02:48.8] bank. You know I think it's important for people to understand that there is SBA guidelines. Yeah, that's one thing, but then outside of the SBA guidelines, there are some individual bank guidelines as well. And to understand that even though these rules and these guidelines that we're going to cover in this episode might be out there they're not hard and fast when it comes to finding an individual lender. Did you cover any of those guidelines from Stephen's group with the podcast?

Joe: Yeah, we went over some specific things that he looks for and his firm looks for. He's with Bank One now … or I'm sorry First Home Bank but some of the topics that we touched on on the podcast and even when we talked to him separately and that you and I talked about is why is it important to pre-qualify your business for an SBA loan? Sellers may be thinking well it doesn't matter why should I do that. And the answer is because it casts a broader net and not a broader net of buyers. There are definitely some buyers out there that only want to use SBA funds because that's … they only have 10 or 15% to put down. And then there's another pool of buyers that could stroke a check for one, two, three million dollars but they're building that portfolio like Shakil and using SBA money so they're only putting 10 or 15% down each time. So it's really important from a seller's standpoint to understand the value of clean financials and getting prepared so you're pre-qualified for an SBA loan. And from a buyer's standpoint, it's a great way to go if you're comfortable with that option.

Mark: Absolutely. All right let's get into the episode, let's find out what's changed in 2019 and then also recap some of the rules and some of the things that both sellers and buyers should know about SBA loans.

Joe: Let's go to it.

Joe: Hey, folks, it's Joe from Quiet Light Brokerage, today I have one of our top 10 guests back for 2019 Mr. Stephen Speer. Welcome back Stephen how are you?

Stephen: I'm doing great. Thanks for having me Joe I appreciate it.

Joe: Awesome. Man, well listen I want to go through all of the SBA lending practices, what it takes to qualify for a business, what buyer's should be looking for, and I also want to get an update on you and your team. I think you made some changes in 2019 … I'm sorry '18 I want to cover those as well. But for those that have not listened to you in the podcast in the past can you give us a little summary, a little background on yourself?

Stephen: So I have an e-commerce lending team at First Home Bank. The bank happens to be located in St. Petersburg, Florida. Our team are lending throughout the country. As a matter of fact very few of our loans are actually in Florida but I made a transition months ago with the privilege of being able to grow my e-commerce team and we provide a level of support as we go into the new year. So I'm pretty excited about that.

Joe: Yeah, it's exciting and I know that we've done a number of deals together and you've done a lot of work with Quiet Light and some of the other website brokerage firms. How big is your team going to get to? Where are you at now and how big are you going to be compared to where you were before?

Stephen: So my team comprises of four people. Myself, a gentleman named Bill [inaudible 00:05:55.9] who is kind of my right hand man along with my underwriter and closing team. So I'm pretty excited about that. I plan to add an additional person in Q1 and another person who I have identified for Q2. So I plan to have three people do what I do. In other words, myself and two more and then stick with my underwriter as well as the closing team.

Joe: That's huge. I always worried about you getting hit by a bus. Now you can get hit by a bus and we'll be fine.

Stephen: Well yeah, my wife would love to hear that so.

Joe: We don't want her listening to the podcast [inaudible 00:06:32.5] buy a bus and start driving around looking for you. That's great man, that's great. One of the things that I want people listening to this to understand is that we've dealt with a lot of SBA lenders over the years and you're a … you're not a banker. You don't come across as a banker. You don't have certain boxes that you must absolutely check every time when you speak our language. And you hang out with e-commerce entrepreneurs which is great. Let's talk a little bit about what it takes to qualify for an SBA loan from the sell side of the business. What do you look for from a business? When I send you a listing and say "Hey Stephen will this qualify?" what things are you looking for?

Stephen: Well, first I'd like to … I would say I'd request financials. So first what I look for is what type of business is it? Is it FBA driven, is it 3PL, or do they provide their own fulfillment? So I look at that. If it's a product based business I look at the number of SKU's, type of product. I really do dive into that because one thing I try to avoid is having … trying to finance a single type business that's [inaudible 00:07:45.1]. So that's one thing I look at. So once I get past that I really kind of dive in to the financials. When I mean financials, the holy grail of financials are the tax returns. So for example now that we've entered 2019 I look for tax returns for 2017, maybe 2016 [inaudible 00:08:05.5] year, solid tax return for 2017, and solid year ending financials for 2018, and as we continue down the path of Q1 obviously 2018 tax returns. So basically back to your question a wrap up of … in 2016 of the business, solid year of 2017, and a strong trailing 12 month or strong and the word strong –

Joe: Lots of people listening that are on their business will say "Hey that's not a problem. I got tax returns. Everybody files tax returns." and then they give you a tax return and it's co-mingled with four other businesses that they're selling and they're only selling one … I'm sorry four other businesses that they run and they're only selling one. That's a problem isn't it, the co-mingling of multiple businesses under one tax return?

Stephen: That is a problem and unfortunately, it's a problem that seems not to go away despite your best effort and your team's best effort as well as my team's best effort. They just seem not to follow that advice so that is a challenge. Now I do … with that coming up so often I do have a set of things I'm able to put in place, for example, I direct this seller back to his or her accountant and be able to income streams and expenses done in a professional manner. It can't just be Quick Books and I've been able to still get financing for businesses that do have co-mingling within a tax return.

Joe: Does it just take a little bit longer to get those worked out and closed?

Stephen: It does take longer. Generally, it adds roughly two months to the entire process.

Joe: Woah.

Stephen: It does take time depending on the responsiveness of the accountant. Especially as we enter Q1 and then start working on returns and start getting buried because [inaudible 00:09:52.5] season. It does take a little bit of time but it's not something that's not doable. The biggest recommendation I have either if you're thinking about selling a portion of your business now is to get on that and have your accountant provide or put together what I call consolidated financials. And basically what we do is we take the tax return and compare it to the consolidated financial which show a delineation of the different businesses and we're able to perform.

Joe: Okay so for the sellers out there listening to that and going well I don't have to have an SBA buyer I can just sell to a cash buyer. You're absolutely right, there's a ridiculous amount of money out there in the landscape for people buying online businesses. The reality is though that you want to cast this broad of a net as possible for potential buyers. And we see this over and over again somebody that's from another country that is selling a business if it's a multi-million dollar business but you're not US based, not filing US tax returns. It is more difficult to sell because the buyer pool is not as large. There are buyers out there that I know personally that have the ability to stroke a check for five million dollars but they're smart and they don't want to. They want to keep as much money as they have … as they can and buy multiple businesses and maybe use someone like Stephen and SBA lending and only put down 10 or 15%. So you do cast a broader net if you can do the consolidated financials. If you're just starting off in business your best approach is to have one LOC for that line of product that eventually you may sell. We had Syed Balkhi on the podcast as well and Syed has a number of different businesses and every time he says "okay I'm done with this one" we're able to list it and sell it very, very easily. And the last one I think we did cash … actually, I think we did two SBA loans and it was very easy because he files separate tax returns for each business. That's the ideal situation. How do you feel Stephen about someone selling a business and they're coming to you with Excel spreadsheets for their profit and losses versus Quick Books? You don't really care about that you're looking at the tax returns and a P&L anyway that's in excel format right?

Stephen: Primarily if we're talking just a single business, single return, single P&L's yeah that is fine. So that's not a problem at all. Obviously, the more … accounting is all about substance over form, it's kind of an accounting term. That is true but it can't be hand written or something very unprofessional I mean because ultimately underwriters look at that. If that's just kind of run together and it doesn't make much sense it's not done by someone who knows how to do a P&L or a [inaudible 00:12:47.0] but as long as it looks presentable that's fine.

Joe: Well, you and your team are betting on the future success of the business. So first you want to see that the business is run properly. And if somebody is not using Quick Books or Xero or some form of accounting software it's an indication that it's not being run in as professional a manner as possible right? So that … okay, and the buyers look at that that way as well. And I could tell you from a brokering standpoint when you're using Excel spreadsheets for your financials and co-mingling it's much more difficult to get maximum value for it because no matter what things are missed. I had a call this morning where there was several thousand dollars that was buried inside of a marketing budget that was actually a personal thing. We had to dig very, very deep to find it. And that times three adds nine, ten thousand dollars up to the value of the business. So ultimately your view is you want to make it a safe investment in financing this loan and make sure there's a success down the road for the future. Is there a … some sort of multiple barrier that is a ceiling for you? Is it … how do you … it's … I can guess you call it debt to income ratios right?

Stephen: Debt service coverage. So let's say … okay, so debt service coverage is primarily what we look at. We really don't look at EBIDTA multiple. I mean we do and we don't. The valuation piece definitely we look at that but primarily we look at a debt service coverage. So for example, if the overall loan is the obligation, annual obligation for a loan is $100,000 let's say, the bottom line number on the tax returns needs to reflect at least $115,000. Giving us a debt service coverage of 1.15. Now a lot of sellers run their similar personal expenses through the tax returns. I'm able to add those back so you can't just take a tax return and say okay it's a bottom line of 115,000. You got to take whatever the bottom line number is and then their add backs. Standard add backs would be interest, [inaudible 00:15:02.7], depreciation, amortization, those are primarily some of the add backs. Some of the seller discretionary add backs might be … especially if it's an FBA setup type business where there's run expense, well, the new owner probably will just run it as a home based business, some people add that back. Some people tend to run their car expenses through even though it's a home based business. I'm able to add that back. And any one time expenses, the revamping of a website or other ancillary things or a one time they could add those back. And I take that number and determine the means and debt service coverage.

Joe: Do you pull those from our spreadsheets because we have add backs and do you look at those or do you dig into the tax returns for the add backs? Wouldn't it be hard to find them in tax returns?

Stephen: Yeah so both, I look at what you provide in terms of your spreadsheet but some of those I'm not able to add back like typically insurance would be really hard. It'd be hard fought to have an underwriter add back insurance expense for example.

Joe: It shouldn't be added back. I agree. If it's an expense that's going to carry forward it shouldn't be an add back.

Stephen: Yeah and really those … so of your add backs, the ones you reflect typically on your spreadsheet I'm able to add most of those back and those … I use that spreadsheet as a roadmap. But I do go into the tax returns and make sure that the numbers are aligned. And then I'm able to really dig into a tax return and see if there's any other type of add backs that I'm able to find.

Joe: Okay, so from a seller's perspective they want to do the best they can not to co-mingle multiple businesses under one tax return. Obviously, have tax returns and a good financial so we can dig into the add backs and make sure that debt to income ratio is going to work, anything else that they should be considering? I think you said obviously you don't want a business that's balanced on just one SKU doing 90% of the revenue. Ultimately the bottom line is you want to make sure that the bank is going to get paid from the person buying the business and it's going to be a success right?

Stephen: Yeah and another thing we look at if there's any sort of declining revenue or a blip where … for example I had a client last year that completely lift Chinese new year and didn't have inventory to sell. So there was a blip but I was able to explain that to an underwriter. And obviously with the new buyer who felt that this business [inaudible 00:17:38.3] little bit higher. He was able to avoid any blips in the coming [inaudible 00:17:42.9] for example. So it's also an explanation there. The key for sellers is even if you're not considering selling your business now get these things in place so when you go to sell you're going to get the most amount [inaudible 00:17:58.5] of your business. I had a lot of sellers come to me and it's kind of like they want to list now and their financials are a disaster now. So I recommended that buyers kind of get on the ball. Maybe it's a new year's resolution to fire your current accountant and hire a good one and to really get the financials in place and put certain financial things in place now or pay dividends in the future.

Joe: Yeah, I'd refer people to certain e-commerce bookkeepers, two or three of them on a regular basis and have them go back … they'll go back in this case to 2019 and import all the bank statements and vendor invoices and everything and get things updated and accurate. And Quick Books actually helps the CPA do their job better. On a go forward basis, it's the best thing in my experience for a decent sized business to use somebody else. Let them focus on the bookkeeping and you focus on running the business and doing … driving revenue and maximizing profit. I think that's really going to work.

Stephen: Oh absolutely. And the return on that investment Joe, I mean you had a podcast recently that—

Joe: I'm touched.

Stephen: The return on that investment is enormous.

Joe: And it's incredible. I've seen it happen firsthand where we've had P&L's in Excel spreadsheets and the deal fell through three or four times and then the guy took the same information, hired a bookkeeper, they put it into Quick Books and we sold the business for 50,000 more of that … I think we had again three or four LOI's and it sold quickly which is fascinating; a fascinating study. Let's talk a little bit Stephen about you. About e-commerce lending and your group and how you think outside the box. Because I want to talk about this a little bit. Not all lenders are created equal. You and I have a transaction going on right now where you had to really think outside the box. And I'm going to summarize it and I want you to then just talk about what your thought process was and how you approached it. We have a buyer at Quiet Light Brokerage that again has the money to stroke a check but he is in a situation where he's building a portfolio of businesses and he's using the SBA lending process. Buyers can take up to what … five million dollars in money right?

Stephen: Primarily.

Joe: So somebody could buy five … I guess that would be one million dollars I'd then be putting in loans right? They're liable for up to five million. So he's buying multiple businesses—

Stephen: One loan or 10 loans it doesn't matter.

Joe: Okay perfect. So he has two under a letter of intent with Quiet Light Brokerage now and mine is in the process first. And he's got the wherewithal but I think he had some pretty sizable loans that threw off his overall debt to income ratio. How did you work that out?

Stephen: So … and that definitely took a lot of out of the box thinking in the sense that he had … he has an Amazon loan and I can't divulge too much personal information but the monthly payment on the Amazon loan was staggering. It was five figures on a monthly basis. I looked at debt service coverage and throw in a very large five figure monthly payment through all the numbers ROI.

Joe: And this is on a separate business that he owns.

Stephen: Separate business that he owns.

Joe: Right, okay.

Stephen: Because it does affect what's called global debt service coverage. So on a separate business that he owns which happens to be an online business.

Joe: Right.

Stephen: He has very large payment and then he purchased a bunch of inventory and financed it through Amazon. So it threw all the numbers off. So you kind of have to dig deep and say okay how about we refinance at that, take that monkey off his … that large knot off his back and be able to incorporate, be able to reduce that monthly payment and still get the new purchase done. And that's what I'm in the process of doing. His new purchase, his loan on his new business acquisition was just approved and I'm going to process at refinancing his Amazon loan.

Joe: Now the Amazon lending loan is very prevalent these days with Amazon based businesses. And you and I have done just for the record content site, SaaS business, all sorts of [inaudible 00:22:00.5] certainly not just Amazon. But in this situation, this particular individual had several hundred thousand dollars in loans and the money gets withdrawn out of their Amazon deposits. Do you recall what the interest rate was then? What his payments were? What the interest rate was and compare it to what you're going to be able to do for him? I just want to emphasize you thinking outside the box and how much money you're going to save this guy on a monthly basis. Because he's thrilled right now I got to tell you he's thrilled.

Stephen: So his monthly knot with Amazon was 48,700 and something.

Joe: Holy cow, okay.

Stephen: It's going to be a couple of grand.

Joe: No way 48,000 down to $2,000 … that's amazing. Thank you for thinking outside the box. You're helping him and you're helping a couple of the sellers of the businesses that were doing deals on now. That's fantastic.

Stephen: Yeah, and you touched on something really important now. I do have a fair amount of buyers out there, actually, currently 347 buyers out there looking for businesses to buy. And quite a few of them can easily [inaudible 00:23:03.5] for a two three million dollar business but they're building a portfolio. So back to your comment about portfolios a lot of buyers out there right now are building portfolios. They want to buy two, three, four different businesses … online businesses for the course of the next two or three years. And they don't want to use up all their cash. And the fact remains is that when you're trying to scale a business cash is king. You need cash to scale a business. You need to buy additional inventory. You need to grow it. And if you're cash strapped it's really hard to grow an online business. So I'm helping several of those buyers accomplish that. So an SBA loan is not just for the person who needs a little bit lower barrier to entry. An SBA loan is also for the person that could easily pay cash but chooses not to, to stay in line with his or her business goals

Joe: Absolutely. Well, let's talk about the buyers a little bit and what you look for in a buyer? You and I have never had a situation where we brought a buyer and you said yes and then it turned out they weren't qualified. But I had a situation a few years ago where I had a couple of Harvard MBA graduates. They literally just graduated a month before from Harvard. They got their Master's in business and they decided to partner on an investment in an online business. And they had some funds. One of the graduates had some funds from a parent. It went through the process. They're pre-approved from a different lender and then underwriting said these guys have absolutely no real world experience we're not betting … I think the deal was two million dollars. We're not betting two million dollars on these guys. Yeah, their pedigree is good, their education fantastic but no and the deal fell apart. What do you look for? Are you looking for real world experience? Is there a certain asset value that they need to have? How do you handle it when somebody comes to you? What do you look for?

Stephen: So first I look at … I try to determine and I do interview my buyers. So once you refer them to me I do interview them as you know and one of the first things I really touch on is experience; so first determining if they have direct experience or indirect experience. And then as I mentioned in a previous podcast it's almost like going for a job interview, even if you don't have direct experience you need to make the person real comfortable with hiring you. The same goes with a loan is that even if you don't have direct experience what business … what skill sets do you have that's transferrable and also who's going to fill the void of having direct … let's say SEO experience or direct experience in the space? So those two things I look at. So if the person has direct experience, pretty much a no brainer. A person that doesn't have direct experience it's putting together the narrative like paying underwriter even though here she doesn't have direct experience but indirect experience in these categories. And additionally, they're going to have support via an employee or a contracted employee that that fill a void.

Joe: I got you.

Stephen: So I'm able to … I've never … honestly, I've never had a deal where an underwriter has said gosh that's great they went to Harvard but they have no direct experience.

Joe: We had a situation … I'm going to name a name here but I'm only going to use their first name; a guy named Rocky. Rocky was I think he was in his 60's. He retired and ran a General Manager for some car dealership something … somewhere in the country. I loved the guy. I thought he was amazing. Just as a broker, as a lender you just … you connect with somebody like I want to help this guy. I want to find him the ideal business. Although let me say I told him he's crazy. He didn't need to buy a business. He was retired. What for? You have plenty of money I'm like you're crazy just go play golf or something. But he ended up buying something from us and he didn't have any direct online experience. He was a GM for dealerships that yeah they had websites but he didn't run them himself. I find there are a lot of people in the corporate world that are putting in 60 hours a week that look at the e-commerce entrepreneurs that are selling a business when they're working 20 hours a week and they're making more money and they want to live that life. They want to spend more time with their family, with their kids, travel. Are a lot of the folks that come to you these types of people, and is that in direct experience still okay?

Stephen: Yeah so to answer your question yes a lot are. Be it Rocky or any other, they don't have direct experience. So the thing about Rocky is that … first, off he is incredibly likable, incredibly well spoken, and have a very strong resume. The guy was successful in his professional career.

Joe: Yeah.

Stephen: And then unlike somebody working at a low skill job the guy ran the car dealerships which he was 60 hours. Or he was probably working 90 hours a week now but with a transferable skill set. And also he filled that void of not having direct experience in running an online business but was able to fill that void by bringing somebody in. So we felt very comfortable with that and he ultimately was approved. And the last time I talked to him he's doing very well.

Joe: Yeah, I think he bought a business from Amanda. I didn't have one for him at the time but Quiet Light, in general, had one. And I think Amanda loved working with him as much as you did. So the likability factor that Rocky had, when buyers come to you is that important? Do you have to like them to do business or?

Stephen: Well not like … I think—

Joe: Make a difference with human right? Does it make it a better—?

Stephen: They are human. So an underwriter is human and if they have a good dialogue with the buyer, for example, Nathan was incredible as well.

Joe: Yeah.

Stephen: One of the reasons Nathan's loan sailed through is because he was very well spoken and had the incredible background to be successful. So yeah it does.

Joe: Okay so we're going to just touch on that thing that everybody knows but they don't talk about and that is if somebody comes to me, if somebody comes to you and they want to buy a business we want to sell you a business. But if you are 10 times more difficult than the next person and they also want to buy a business, my client … my seller is going to say okay well I've got an offer from each which one do you like more Joe, talk about the plus and minuses. And we've got to do that. And in your case you just said you've got something like 354 buyers on your list. They're looking for a business, they're not buying it from you, they're buying it from the likes of Quiet Light Brokerage.

Stephen: Right.

Joe: But you still have to work with them on a regular basis and you still have to go through the process with them and be likable. Simple thing guys, everybody listening just be likable. Just because you've got the ability to stroke a check doesn't mean that you can push a guy like Stephen around. There's lots of people that are trying to buy a business, lots of people that are trying to sell businesses and being likable is so-so key because this is an online world. We're not sitting across the table from each other and it makes a huge difference being likeable in the process.

Stephen: We've kind of touched on that. I was recently … I have a buyer who's been looking for a year and a half. Not to scare new buyers out there but sometimes it does take a while. But he's not likable.

Joe: Okay.

Stephen: And he was on a phone call … I was on it as well with the seller and he was beating up the seller on the phone in front of me like I wasn't on the call. I don't know but … and the seller chose another buyer.

Joe: It's not hard. I'll talk from personal experience. When I sold my business I remember being on one of these buyer conference calls. I had three or four. Jason Yellowitz here at Quiet Light sold my business way back in 2010. And I had three or four calls with potential buyers before it went under contract and sold it. But I remember sitting … I was in the car on a call and I'm sitting in a parking lot and I've got this guy just belittling my business and talking about all the negative things and I'm just to all I can do to end the call. It's you know … to not end the call and to be polite and it was really hard. And even if he made me a full price offer … all cash, full price offer I have to take into account, sellers have to take into account how difficult that particular type of buyer is going to be in due diligence and in the training and transition period. There's a cording, a relationship it's … it ends at a certain period but you're going to be in a relationship with that person and you want to make that as pleasant and as enjoyable as possible. So being likable is critical without a doubt.

Stephen: Absolutely.

Joe: What are the top two or three qualities that you look for aside from good financials from the buyer? Like, do they have to have a certain debt to income ratio? Do they have to have certain assets in order to buy a business?

Stephen: As I would say assets it's more present driven unlike buying a house. I think we definitely look at what's called post-closing liquidity. For example, when all the dust settles is it broke after closing or still has a fair amount of cushion. So we definitely look at that. Is there outside income? Does [inaudible 00:32:09.5] have a … what I call a day job to … for outside income? That's another thing we look at. So those are two very important variables. Credit score is important but it's not like buying a home where you get to really perfect your lending terms. It's pretty much either get a loan or you don't get a loan in the SBA world. A recent issue … if the person is being down with a ton of personal debt that's something that we look at. Generally, that's a character … it's the ones living beyond their means that's generally not liked. So those are just some of the variables. And also what I look at is does this person have the skill set to be able to scale a business or is the business going to go stagnant as it transitions over to him or her. So that's another thing we look at but [inaudible 00:33:00.5] just some of the variables.

Joe: So when someone comes to you and says I want to buy a business part of what you do is you look at their financials. You look at all those variables and you say okay great you qualify to buy a business up to a certain amount. Is that the process? Do you say okay … do you give him a guide as in terms of you can buy something up to a million or two million [inaudible 00:33:19.8] like that?

Stephen: Yes and a lot of the determining factor is based on their … is it direct, do they have direct experience or indirect experience? So that is going to move—

Joe: Noted. Okay.

Stephen: Secondly, post-closing liquidity that's really what I focus on. If the person is trying to buy a million dollar business he has to inject or put down a hundred grand and he has 110,000 in the bank that's not going to work. So we kind of have to move the needle down.

Joe: And in that situation, they wouldn't … it's not that they don't qualify to buy a business but in that situation, they wouldn't qualify for a million dollar business maybe a half a million dollar business.

Stephen: Right, it would move the target price down a little bit.

Joe: Okay so just let me clarify that so that somebody has a $110,000 and they want to buy an SBA business and put 10% down, for those listening that's generally the number 10 to 15% down, 110,000 you're going to be left with 10 grand; not going to work. So you got to look at a half a million dollar business.

Stephen: Or 800, 750 something like that.

Joe: Yeah and then you look at their debt, what they have, what they need to live off of and that smaller business is not going to cash flow as high especially after the debt service from your loan. So you look at all of that and help them with what they're capable of buying first and foremost right?

Stephen: Yeah, most of my buyers have what I call a day job so most of their … in most cases their day job covers their personal debt so that's rarely a real factor. Now I do have an individual recently who didn't have a day job and had tons of personal debts so that kind of blew her out of the water. But generally we do look at that. So again back to post-closing liquidity what I do is … so for all of you out there once Joe refers a client to me for pre-qualification I'm able to have an interview with that person on a scheduled call and ask some questions and also they provide me what's called a financial statement. And then I'm able to in most cases issue a pre-qualification and give them a target amount. In the case … in the example that was well over 800,000 for example. And then that person goes back to Joe and says okay I'm pre-qualified with Stephen, he told me to look at businesses around 800,000 let's go.

Joe: And then they have a path which is the most important thing. Somebody that doesn't know what they're looking for, doesn't know what they're buying capabilities are is less qualified from our view. So one of the things we want you to do folks if you're out there as a buyer reach out to someone like Stephen and get pre-qualified so that it will help you narrow your focus. And then the next step is to look at as many listings as possible from the online world and figure out what you like and don't like about the business. When you find the right one if it's a great business you want to be in a position where you're already prequalified to act quickly. Because if it's a great business guess what other people are going to be looking at it and making offers as well, really important there.

Stephen: Absolutely especially since there are a lot of buyers out there and if you snooze you're going to lose. So you need to kind of get your house in order before looking.

Joe: Absolutely, I agree 1000%. So let's talk quickly about the qualifications of the buyer. Do they have to be a US citizen?

Stephen: They could be either a green card holder or a US citizen living in the United States.

Joe: That green card holder or US citizen living in the United States, the business itself does it have to be a US citizen or a green card holder filing US tax returns?

Stephen: In most cases yes depending on the structure of the business.

Joe: Okay, there's always a sort of gray area in the situation.

Stephen: Yes, it depends on the structure, you kind of different components as in the past few company on the foreign entity—

Joe: Right.

Stephen: Things that does affect that answer.

Joe: Right. Okay and then your business and the size of loans that you guys generally do, are we're looking at you're looking for a half a million and up two, three million, where is your sweet spot in terms of lending?

Stephen: So generally my personal loan floor let's call it is half a million dollars. But obviously, if it's a client I've been working with and happens to just look at $800,000 businesses I would grant one for 400,000 on that person. My average loan amount is about a one and a half million dollar range. So … and you know looking at my 2018 numbers that's close to 60 million, 40 transactions, that's about that number.

Joe: I got you. I think we have 38 of them that were directed at me I think right? No, I'm kidding.

Stephen: 41.

Joe: So you're loaning on the value of the business. And what about if it's an inventory based business are you loaning for the value of the inventory as well? And then working capital … does somebody, do you always loan … give working capital money so that they—

Stephen: Always. So a very good topic here so obviously I'm going to finance the business itself. I'm also … if the purchase price of the business does not include inventory I finance the inventory, the on-hand inventory. And what I do is I work with you Joe in determining what that number is going to be at closing. So I finance that. I also include working capital. And that working capital I generally work it into a loan in a sense that I'm able to include it in your market … not directly your market, so okay of that 100,000 working capital 50 is going to be for additional inventory above and beyond what's being purchased with the business. And the other 50 is going to be marketing campaign or advertising campaign, it could be for hiring support staff.

Joe: Okay and then lastly I want to talk about the term of the loans. We're talking five years, 10 years, 30 years, what are we looking at?

Stephen: It's a 10 year loan and of all those components, by the way, it ends up being all in one loan. It's not where you have separate loans for each. So it's all incorporated into a 10 year SBA loan.

Joe: Okay and 5, 6%interest rate somewhere in that range; five to seven?

Stephen: Base prime plus two and three quarters, right now it's 8.25.

Joe: Prime plus two and three quarters. Okay so for those that want to run their own numbers 10% down, 10 year note, prime plus two and three quarters, do the math on that.

Stephen: Yeah.

Joe: The seller note in 2017 and prior to that in most of the transactions that we did or did together you required some sort of seller note. And that changed in 2018 so for … got a business that's a million and a half and somebody wants to put down 15% are you requiring a seller note on a deal of that size or are you not anymore?

Stephen: So up to 2017 a seller note was required by the SBA and not by the invidual lender.

Joe: Okay.

Stephen: So typically it was 10% down payment let's call it from the buyer, 15 from the seller or vice versa in terms of the seller note for a total of 25% down payment rejection.

Joe: Okay.

Stephen: In '18 the barrier to entry was lower. The overall requirement paying on a deal is the minimum 10%. In terms of what lenders require, some lenders require a seller note. We do not. Sometimes I incorporate a seller note to strengthen the loan especially if the buyer does not have direct online experience. So it gives kind of the underwriter warm fuzzies in the sense that the transition will most likely go smoother. The seller has a little bit of skin on the game. So there are situations where I do incorporate a seller note for approval purposes.

Joe: So for buyers, sellers, even other brokers listening to this, this is you know you're hearing Stephen say I incorporate this or I incorporate that to help the underwriter feel better about the loan and make sure it goes through. What I do personally is when I have a deal that's pre-qualified by Stephen or someone like Stephen when I get an offer on the business A) I want to know if Stephen knows who they are and if they're working with him and how they look qualification wise. But B) I really like to send the deal structure to you Stephen and say this is the deal structure is this going to float with your underwriters? And I think that's critical to the ultimate success of the loan and the transaction process. Because the last thing that we want … it's happened once or twice and I don't recall if it was with you or not but … where you've … actually no it was with you where the underwriter looked at something and they had to tweak it just a little bit, had to increase the seller note by 5% or something like that. That's not what we want to do so now I run everything by you prior to having a letter of intent signed. I recommend everybody to do that if they're going to do an SBA loan through Stephen and e-commerce lending.

Stephen: Absolutely, so that's a very good point as we continue down the path of e-commerce lending I am constantly tweaking the way I do things. And that's one thing I do is I bet really hard upfront so there aren't changes on the backend. Fortunately some of my buyers don't [inaudible 00:42:26.4] the businesses that they're looking at prior to signing a letter of intent. It's kind of an after they do that they come to me and say hey I just bought this business and here's the deal structure I want you [inaudible 00:42:38.3] well that's not going to work.

Joe: Yup they don't do that with Quiet Light they have to [crosstalk 00:42:41.7] so the whole process we require that conference call. Because we … it's not, we don't want people to go under a letter of intent just to tie it up and then make a decision. We want them to make the decision, go under letter of intent, and close and go through that process. It just saves everybody a lot of time and hassle.

Stephen: It really does.

Joe: Okay, any last thoughts about … you want to share with the buyers or sellers that are listening to the podcast today?

Stephen: Yeah in terms of sellers even if you're not selling a business now please reach out to me in general and have us put together a game plan for future sale. It's really, really important and again it will be dividends on the backend. And then for you buyers out there reach out to me. I'm more than happy to pre-qualify you for a business. You can reach me at stephen@ecommercelending.com and the first name is spelled ph or call me at 813-766-4524.

Joe: Thanks. I will put that on the show notes as well. The last thing I want to say is just to reiterate what you're talking about there with the sellers and it's called choose your pain. Go through the pain of getting your financials in good shape now and having a great transaction and a sale or don't do it and you're choosing your pain later because it's going to be difficult. You're going to be … you're bank account is going to be in pain because you're not going to get as much value for your business. So make the choice and hopefully you'll choose that first one. It's not fun, it's not exciting but it's the right thing to do. Do some valuation exit planning, reach out to Stephen; reach out to anybody at Quiet Light. Go to inquiries@quietlightbrokerage.com myself, Mark, anybody on the team is happy to help you even if you're not planning to sell your business for another two, three, four years. That's what we're here for. Stephen, you're awesome as always. Thanks so much for your time. I look forward to a great 2019 with you.

Stephen: Absolutely, Joe. Thanks for having me. I'm looking forward to it as well.

Joe: All right man, talk to you soon.

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