Most professionals familiar with the lower middle market mergers and acquisition (M&A) space will agree that when the deal parameters fit, the SBA business acquisition loan program offers many advantages over conventional financing vehicles. The loans offer a longer repayment term, lower equity requirements and much more flexibility over the course of the loan due to the lack of financial covenants when compared to conventional programs from commercial banks and mezzanine lenders. Of course, these advantages come with some caveats: A personal guarantee from anyone owning greater than 20 percent, a complete exit from the sellers after the transaction and a variety of other restrictions. All in all, though, it is a very attractive structure for buyers of companies with $250,000-$1.25M in EBITDA. The limit to the program, however, is not based on EBITDA. It is based on the SBA’s limit of $5M in debt to any single borrower.
Many buyers are forced into more challenging and costly conventional credit structures for deals to acquire companies just over $1M in EBITDA. Live Oak Bank fills this financing gap with a companion loan product that allows us to lend up to $7.5M for acquisitions across all industries. For SBA-eligible projects, we can provide the initial $5M from the SBA 7(a) program and a companion conventional loan of up to $2.5M. The SBA loan will have the typical structure and 10-year term and amortization, and the companion loan will have a five- to seven-year amortization, five-year term and a slightly higher interest rate than the SBA loan (but still lower than most mezzanine programs).
This companion loan product is being applauded by industry insiders on both the buying side and the selling side. “We often find ourselves in a position where SBA funding limits don’t allow us to get a deal done in the range of $7M-$10M transaction value. This additional $2.5M definitely expands the transaction possibilities,” says Larry Willis, founder and president of The Independence Group, a leading M&A Advisory firm in California. Dan Mytels is managing director of Salt Creek Capital, which has a proven track record of completing transactions of companies with EBITDA from $750,000-$10M. According to Dan, the companion loan “represents a welcome product for deals a bit too big for the $5M max SBA amount.”