Right now I am seeing some amazing financing opportunities in both the U.K. and U.S. that allow us to raise additional (and very cheap) debt to close deals.
Both countries are furiously passing legislation to help small businesses through COVID-19…
And a couple of really clever loopholes means we can leverage all this additional support financing to actually BUY businesses.
I’m NOT talking about taking resources from businesses in need…
I’m talking about taking advantage of these new bills and incentives while you can.
For example, there’s a great new program in the U.K. called CBILS – Coronavirus Business Interruption Loan Scheme.
Under CBILS, U.K. businesses can borrow up to 25% of annual revenue (turnover in the U.K.) and there is NO personal guarantee (PG) on loans up to £250,000. (PGs are needed for any incremental lending over that level. However, the U.K. has a very mature and competitive PG insurance market, so that de-risks you significantly.)
CBILS has replaced the traditional Enterprise Finance Guarantee (EFG) loan scheme. This was originally a top-up loan for acquisitions (once you have leveraged the assets in the business first).
Now it’s been disbanded and CBILS is all the rage!
In terms of financing a deal with CBILS…
The seller raises the loan (it’s super quick – typically less than one week) and then that additional cash is taken by the seller at closing. As the new owner of the business, you inherit that debt and the business makes the repayments.
It’s business debt, not personal debt.
And the terms of the debt are amazing. Among the best I have seen in the U.K.
Interest rates are as low as 1.4%, with up to six-year terms, and the U.K. government is underwriting the loans so EVERYONE is providing support – from High Street banks to crowdfunding platforms to specialist lenders.
This is a game changer.
Since this scheme was introduced about a month ago, I have revisited multiple U.K. deals I passed on in the last year as there wasn’t decent fundability.
Now many of these deals will work.
In fact, I’m meeting with two sellers this week to reopen negotiations now that I can quickly get my hands on this super-cheap financing.
Let’s look at an example…
You are buying a business for ¬£500,000. It’s generating ¬£2 million in revenues at a 10% profit margin. Profit is ¬£200,000 and you are buying at a 2.5X multiple, so the purchase price is ¬£500,000.
Remember, under CBILS the business can generate 25% of revenue in financing. That’s 25% of ¬£2 million, or a ¬£500,000 loan.
You may want to keep £100,000 in the business for closing costs (and some for yourself). So the deal structure is £400,000 at closing and £100,000 in seller financing.
No other financing required!
With CBILS, the U.K. now has something similar to a U.S. SBA 7(a) loan.
The SBA has also sweetened the offer for acquisition financing…
It’s the Coronavirus Aid, Relief and Economic Security – or CARES – Act.
When the U.S. Congress passed this act in March, the focus was on making billions in funding available to small businesses via the Paycheck Protection Program (PPP).
Now the focus is shifting into the SBA 7(a) loan program.
This is a financing strategy for U.S. citizens or permanent residents (I’ve written about it before here). Unlike PPP, 7(a) loans are not forgivable – meaning no portion of the loan can be forgiven or deferred – however, the rules have been sweetened.
SBA loans have always been popular because the SBA guarantees the loans, allowing banks to de-risk their process so they don’t have to rely on traditional collateral or strong financial history.
Now there is a window of opportunity up to and including Sept. 27 (my wife’s birthday!)…
Any 7(a) loans closed BEFORE that date will have the first SIX months of interest, fees and principal forgiven.
Here’s how you could use this to your advantage…
Assume you are buying a business for $1.2 million and the SBA is kicking in $1 million over a 10-year term.
You would need to fund the $100K buyer deposit (via yourself, angel investors, etc.) and the seller would have to sign up to a $100K standby loan note, which is repaid only when the SBA loan is fully repaid (after 10 years).
That’s $100K from you (or an investing partner), a $100K seller note and a cool $1 million from the SBA.
Now, check this out…
In the first six months of the term, you would normally be required to pay around $70,000 in interest, fees and principle.
But now the SBA is forgiving that money, so the cash flow from the business can repay you (or the investor) $70K of the $100K you need to find to do that deal.
Which means you only require $30,000 in out-of-pocket cash to close this deal. And if it’s investor cash, you can lower the amount of equity dilution once you have paid back the bulk of the investor’s investment within six months.
With all this new financing available, isn’t it time you closed a deal?
Until next time, bye for now.
Carl Allen
Editor and co-founder, Dealmaker Wealth Society
P.S. If you’re struggling to find motivation… you don’t know where to start… or you just need a little push to get a deal over the line… let us know how we can help! Send an email to [email protected] so Adam or I can address it in a future issue.
