EXECUTIVE SUMMARY: A Midwest woodworking company was acquired through a $5.3M purchase with $350K in working capital after another bank would not structure the deal to close. The final structure included a $3.8M SBA 7(a) loan, seller note, standby note, and buyer equity injection.

This Deal Was With Another Bank Who Wouldn’t Structure It to Close

This Midwest woodworking company was a $5.3M purchase with $350K in working capital.

The way we structured it was the following:

• $3.8M 7A Loan
• $750K Seller Note
• $500K Standby Note
• $650K Equity Injection from Buyer

It cash-flowed really nice with this structure, so we aren’t really sure why the other bank couldn’t get it done.

I think it was just because there wasn’t sufficient collateral for them, and it was too large for them to justify lending on.

The Real Issue Was Collateral, Not Cash Flow

This is exactly where deals get frustrating.

A business can have the revenue to service the debt, but if a bank is only focused on collateral, the deal can still get stuck.

That appears to be what happened here.

The company had enough cash flow to support the structure, but the other bank seemed uncomfortable with the lack of physical assets and the size of the transaction.

That is how good business acquisition deals get slowed down or killed.

We Structured It Differently

Anyway, we facilitated this with a partner bank of ours who was just fine with the lack of physical assets.

This is due to the fact that the revenue was sufficient to service the debt without an issue.

Just be aware that it is critical to use a cash-flow lender and not a bank who is only preoccupied with collateral when the deal is hinging on cash flow to close.

Why This Structure Worked

The structure worked because the deal was built around the actual cash flow of the business.

The capital stack included the SBA 7(a) loan, seller note, standby note, and buyer equity injection. That combination gave the deal enough structure to move forward without forcing the entire decision to revolve around collateral.

That matters in acquisition financing.

Not every strong business has a pile of hard assets sitting on the balance sheet. Some deals need a financing source that understands how to look at debt service, cash flow, and structure together.

Key Takeaway

If a business acquisition cash-flows, lack of physical collateral should not automatically kill the deal.

The wrong bank may see a collateral problem.

The right structure may see a closing path.

Time is the most valuable commodity we have. Let’s not waste it.

Frequently Asked Questions

What type of financing was used for this woodworking company acquisition?

The deal included a $3.8M SBA 7(a) loan as part of the acquisition financing structure. The full structure also included a $750K seller note, $500K standby note, and $650K equity injection from the buyer.

Why would another bank pass on a deal that cash-flowed?

Based on this deal, the issue appeared to be lack of sufficient collateral and the size of the transaction. Some banks are more focused on physical assets, even when the business has enough revenue to service the debt.

Why does cash flow matter in business acquisition financing?

Cash flow matters because it helps determine whether the acquired business can service the debt after closing. In this case, the revenue was sufficient to support the debt structure, which made the deal workable.

What is a standby note in a business acquisition?

A standby note is seller financing that is typically placed on standby for a period of time. It can help support the deal structure by reducing immediate repayment pressure and improving the way the transaction cash-flows.

Who should care about this type of deal structure?

Business buyers, business owners, and business brokers should care because a strong acquisition can still fail if the financing is structured poorly. The right structure can be the difference between a stalled deal and a closed transaction.