Scenario: Small fish buying big fish in the building materials industry.
- The seller is in poor health with no heirs.
- Buyer is a husband-and-wife team.
- He is a contractor.
- She is an accountant and non-professional athlete representing the USA as a representative at a sporting event outside of the country in late September.
Deal: $3.5MM purchase price using SBA 7(a) 10-year loan 90% LTV. No real estate.
Seller Metrics:
- Employee T/O – near zero – most there since 1980s. Everyone is willing to stay after sale.
- Debt to Equity Ratio – 0% on seller’s balance sheet.
- Customer Acquisition Cost – Zero. Business in the same community location for 65 years. High percentage of repeat customers with no marketing.
- Gross Profit Margin: 56%
- Operating Profit Margin: 21%
Challenges:
- Buyer has the right experience and high FICO but limited assets.
- Business sale only / no real estate makes the deal a 10-year term versus a 25-year term = $20,000/Month more in payment.
- Prime-based deal puts the rate at 8.25% with additional rate exposure from the Fed.
- Seller still does financials by hand and refuses to email/fax anything.
- Seller doesn’t think buyer can keep the employee bonus structure in place because of SBA loan and wants to walk away from the deal, keep the business, and run it for three more years, then close it down permanently to make more money.
- Buyer is grousing about ‘high’ interest rate even though they are getting 90% LTV.
Solution
- Visit seller on-site during business hours unannounced – and listen.
- Let the seller complain – and listen.
- Acknowledge the seller’s complaints and obvious physical pain because of poor health.
- Offer to make homemade “arroz con pollo” (rice with chicken).
- He takes the food offer.
- Ask the seller for remaining financials to complete underwriting. He complies and give a wink and middle finger.
- Leave the seller’s office and call the Buyer. Wife First.
- Wife is all-in – She is unafraid and asks all the right technical questions.
- Wife tells me husband is upset with rate and monthly payment.
- Call Husband. Ask how he is feeling. “I’m hurt, Marcelo.”
- Let husband complain about seller – and listen.
- Let husband complain about the SBA, Bank, rate, and term – and listen.
- Answer the husband’s questions and recognize husband’s lack of comfort with numbers/metrics and offer to meet in person – it’s 2pm on a Friday afternoon. Agree to meet at 6:30pm.
- My youngest teen is making dessert and expecting me to be home for dinner after having picked up my mother-in-law to spend the weekend with us at our house.
- Call the family and explain my dilemma.
- Offer to buy Chinese food from their favorite restaurant and eat early.
- The wife and kids understand the business because I speak to them regularly about my pipeline.
- We talk about revenue, not wages.
- Pick-Up the food. Eat together. Make jokes. Hugs. Kisses. Wash face. Go to home office.
- Anticipate all questions and print out metrics to answer those questions.
- 6:30pm. Drive to Stonehaus – Westlake Village. Packed to the gills. No tables. Loud music.
- Sit with the client on a park-style bench near the valet/parking lot. Not sexy at all.
- Listen to buyer’s concerns.
- Answer technical questions.
- Listen to buyer’s complaints.
- Answer technical questions.
- Listen to buyer’s “What if” worst-case scenarios.
- Answer technical questions and show printouts because I anticipated those scenarios.
- Listen to buyer’s misguided “If I” scenarios.
- Show buyer mathematical proof he is wrong without saying it.
- Show buyer visual examples like explaining to a five-year-old.
- Show buyer why it isn’t only about increasing revenue.
- Explain profit, value, and wealth gaps most business owners ignore.
- Ask buyer to walk away and not to buy business if he plans to act like an employee and not an owner.
- Buyer says, “I like that you know how to explain things to me like I’m a kid.”
- Ask buyer to sign term sheet from lender.
- Ask buyer to write check for good faith deposit.
- Ask buyer to sign pending diligence documents for lender.
- Walk buyer to their car.
- Husband gives me the firm handshake, half “I’m not gay” hug and thank you.
- Wife give me full hug and says, “You probably should have been a therapist or psychiatrist. Thanks for putting up with us.”
- Head home.
- Eat dessert with my daughter.
- Kiss wife. Show wife signed documents with Stephen Colbert raised eyebrow…
- Bom chicka bow wow…
And that, ladies and gentlemen, is how I saved a $3.2MM transaction after eight months of hard work.
