Can this work as SBA 7a loan? $1.6M loan needed for business partner buyout.
Hello all,
So I'm trying to buy out my business partner. It's a credit repair company with heavy cashflow (and essentially no assets) and I already own 10% equity in the business. The purchase price is $2MM, and the seller (my partner) is willing to carry 10% as a second position to help with the down payment. So that *sort of* gets me to 20% equity for the down payment. The last $1.6M would come from an SBA 7a loan.
Here's the basics of the business numbers:
- 2014 tax returns show profit of $60k, 2015 tax returns show $420k, and 2016 tax returns show $580k. If you add back in deductions, it amounts to about an extra $40k in cashflow each year.
- Revenue for 2016 was $1.7MM
- YTD shows that we are on track to do about the same profit as 2016. However, revenue is probably going to come in at $1.2MM to $1.3MM.
- No existing liens/debt on the business.
- I've got a FICO 08 score showing 800+ on every bureau. No derogatories of any kind.
Here are the problems:
- I've already been declined by Lendio because they don't like the 20% equity "down payment" that I'd like to structure it as. They want to see a 10% real cash injection for the down payment. I already bought in 10% with a real $130k 2 years ago when I first started as a partner and have the business operating agreement which shows that. I don't have another $200k lying around for a down payment, so that's a non-starter for me. Also, my partner doesn't necessarily want to carry any more than 10%-15% max.
- Lendio also did not like the rapid growth from the few years. If you average the last 3 years tax returns, it averages to about $350k in profit per year. I'm guessing they don't see the $2MM purchase price as reasonable based on that average.
- I also spoke to a local bank and they did not like the fact that the revenue dipped from $1.7MM last year to $1.2MM projected this year even though the profit will stay the same. The reason we will maintain the same profit is because we cut some major costs which increased the margin for each sale. However, we also increased our verification/fraud detection process so it decreased the sales due to losing some brokers who were not inclined to move forward with stronger verification.
- Every lender hates credit repair companies (ok not everyone, but you know what I mean)
From what I've experienced in the rejections so far, it seems like it's mostly the bank having issues. However, they don't really tell me whether it's because of their banks' policies or if it's because they think the SBA will reject the loan. Perhaps someone in the lending sphere can shed some light on this?
At any rate, do you all think I should continue trying to pursue this as an SBA 7a, or is there some other vehicle that I should try? I haven't looked into private financing but I doubt they would go for this deal anyway if the SBA is going to reject it. Perhaps the price point is wrong? Or maybe this whole deal is a pie in the sky dream?
I appreciate any feedback from the community! Thanks in advance!
