From The Vault:
Why Acquisition Entrepreneurs Should Know Pari Passu (who?)
We had John Thwing, "The SBA Guy" in the studio today to talk about SBA financing for acquisitions of small businesses. When it comes to entrepreneurship, John says "don't start one, buy one!" When the deal makes sense from all the fundamental angles, John says it's always better to buy a business that has cash flow on day one. Not that start ups are bad, in fact they're necessary in many situations, but most entrepreneurial endeavors include financially supporting the owner in some way. SBA financing can be a great catalyst for achieving a business acquisition, whether it's your first or 15th company.
The SBA lending threshold is $5MM, but there's an option that many buyers are not aware of that allows you to finance more than $5MM with the same terms as the SBA loan and in the same lien position. It's called "Pari Passu", and it basically allows for two loans on the same business with SBA terms in an equal priority position. With the right mix of cash flow, buyer expertise and down payment (still a minimum of 10%) this can expand buying options beyond a mainstreet size company. As long as the business can support the debt service on the loans, this type of financing can be a gamechanger for the opportunistic entrepreneur.
Live Oak Bank is the largest SBA Lender in the United States. The point of entry for any bank is to become an "SBA Preferred Lender", but John says that working with a lending specialist is key. Most bankers, he says, are not deal professionals because they perform other services for the bank, like opening accounts and other customer related services. When you need creative deal structure, especially when SBA financing is your path, you need someone who does it everyday.
You can connect with John here and Julie here
Listen to the episode here
Connect with Julie Keyes, Keyestrategies LLC
Founder, Consultant, Author, Pod-caster and Instructor
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