Will walks through the changes covered in this post in about ten minutes.
Transcript (auto-generated from the video)
Hey guys, this is Will Shaw, managing partner at Lighthouse Capital Group. I'm shooting this quick video just specifically to talk about the new rule changes with the SBA requirements that are pending a rollout on October 1st. So, about 30 days from the time I'm shooting this video. Thereabouts, depending on when you're watching this. So, there's a quite a few rule changes in there. There's only a few that I think that really matter depending on whether you're buying and whether you're selling a business. And so, I'm going to really recap the important items that I think on this and how this affects you as a business
buyer. And then here in a little bit, if you're actually selling your business, I think it's important you know about this because it's going to affect your buyer pool. and that's maybe why Lighthouse is a little bit unique is we work both on the buy and sell side. So, I just think it's important to be to to know what the rule changes are and how it can affect your business whether you're acquiring or whether you're potentially looking to sell your business. So, the the main thing that has changed is the SBA is requiring a QOE, quality of earnings, on all businesses that are going to
be transacting at $3 million or more in a purchase price. I do suspect that within the next 6 to 12 months that will roll out to smaller businesses, but for right now it's going to be $3 million or more in a purchase price. So, normal cost of that is going to be somewhere between 20 to 25,000 and $40,000. That is either going to be paid for by the bank, which they are going to charge the client for upfront by the way, because just because you're doing a QOE does not mean your business transaction is going to go through, or you're going to be required to
pay for one separately through an approved vendor. So, what that means is what in our experience when a QOE is done, about 60% of those businesses that we actually do a QOE, we do about 50 or more a year at this point, that we're doing on both buy side and sell side, about 60% to 65% of those transactions actually move through once we have gotten through a phase of doing and completing a Q of E. So, what that means is if you're in if you're buying a business, you could be looking at two to three Q of Es that have to be done before you
actually purchase a business. That means you need to be prepared to be spending on the low end 60,000, on the high end 100,000 plus to go and acquire your first business. Okay? That is a material amount for sunken cost in transaction that may or may not go through. that's the big change here. And I'll talk more about how to you know, potentially think about that situation or ways you can protect yourself in that situation later in this video. The other thing is that it's going to require is a 5% personal injection from the buyer. So, no longer can you just use 100% of investor raise
to go and acquire a business. If you're acquiring a $3 million business, that means $300,000 or more is going to be required down to qualify for SBA. 150,000 of that has to come from you. Now, some of that could be gifts or grants from your family or people around you, but 5% is going to have to come from you, not just investors. The other thing that is investors are going to be treated on full standby standby. And so, investor relationships have completely changed and we have to look at bringing on different types of investors to actually invest and fund these transactions because they're asking investors
to sit on a full standby for the note, meaning that oftentimes they may not be able to be paid dividends or distributions for the first 10 years. Again, there's ways to get to work around that and different types of investors that may be okay with that or different programs. We have access to those. Those are the kind of people that we work with. But, for the average buyer, that's what you have to deal with and that has completely changed the game. and how that affects you if you're selling is we project that these two these rule changes will eliminate about 20% or more of the
buyers in today's network that are buying what I call SMB deals, which is the small market of the small to mid-size market. So, under $10 million purchase price. All right, so at Lighthouse we focus on small to mid-market. So, 0 to 10 million is our kind of small market transaction value. 10 million to 15 million be our mid-market value. purchase price. So, what you're going to experience as a seller is smaller buyer pool, reduced by about 20%, more scrutiny from the banks in deals, and deals that will potentially fail the underwriting later in the process, greatly making it much harder to sell your business and
go back to a buyer pool once you've already gone through that. What we see now is averages with a seller taking 12 months to sell your business, and only about 30% actually completing that transaction. We expect it to be longer and a lower percentage. So, what is Lighthouse doing about that? both for buyers as well as sellers. Well, some of you know may know our program already exists to be a little bit different. Lighthouse Capital Group is not just a buy-side or sell-side advisory. We are a buy and sell-side advisory firm. And so, what that means we work with buyers specifically to figure out what
kind of businesses and create their search criteria, what that they are trying to buy. And our we work off a retainer plus success fee model. And a part of our program is we include all the costs that you incur for QOVs and financial due diligence during the acquisition process, as well as some legal work as well for contracts and purchase agreements, different things like that. So, what that means is if you're a buyer, you pay you pay us to go out and do your search, but once you go under contract, not only do you stop purchasing paying us, our retainer stops once you go under
contract, but get a QOV done automatically. So, before we ever bring it to a bank, before we ever go and proceed forward, we are going to do a QOV. And if that QOV comes back and it's not what we expected, then we can renegotiate the sale price if we still want to, or we can walk away, and we go right back into the search criteria. There is no out-of-pocket expense for you for the QOE as part of our program, and we've had buyers where we've had to do two, three, even four QOEs. That is all included in our fees. So, that is an advantage to
you. That is something that we are doing it about this specific scenario. We've already been doing this. I always say you should have a QOE done, whether it's a $3 million purchase or a $1 million purchase, it doesn't matter. and so, we already do that. And for sellers, what does that mean for you is that when we work with you, not only do we have pre-identified buyers that are financially qualified that we're bringing to you, so we do this very personally, very quiet, and on a unique schedule, much faster than normal. That's why our average seller sells with us in 4 months and at a
90% success rate versus the 12 months at a 30% success rate that the industry sees. but before you ever have to go to a bank for the buyer that's, you know, pre-qualified trying to go through the lending process, and now you're going through QOE, and now things are changing, the price may change. There you know, they might have to fall the deal may fall through. We are able to do the QOE beforehand, before it ever goes to the bank, so that we know exactly what we're dealing with. And that shows an added benefit cuz we're going to do that for the buyer. so, that way
by the time you get to lending, there's no wasted time for the buyer or the seller. Now, what else are we doing for buyers for some of these other SBA requirements? First of all, we have increased the amount of non-SBA lender relationships we have, lenders that we're working with. non-SBA has been a probably about half of what we have done because we work with some larger acquisitions that don't qualify, or maybe there's no bank financing, or we need alternative SBA financing, let's say, for non-citizens, or for whatever other reasons. so, we expect that the change to be about 60 to 70% of the deals we
do in to be non-SBA. so, we have already an existing non-SBA lender pool and relationships and we are continuously and continuously trying to grow that at this time. so we feel confident that if we don't want to use SBA or we feel like a deal's not going to qualify for SBA, we have other alternatives. We also have different structures that we are working with investors and our council that we are working with to find different alternatives to investment being able to to be made and different investors that are still interested with these new requirements. so we actually have a deal that's going through right now
under the new SBA guidelines that's going to close after October. It's going to close it probably November. October November time frame. And so we are already prepared to handle the financing means that are needed both lending as well as investment that meet guidelines that are needed. Again, how does that help sellers is when you work with us is we have more confident buyers that are already pre-qualified. We have structures that are pre-vetted that we can move much faster and not have to go through this whirlwind where you have to work with a buyer, they have to figure out financing, it doesn't work because the QA
came back or the structure has to change. We don't retrade unless there's a material change in the financial due diligence or something that wasn't disclosed up front. We don't believe in that. We believe in honest deal where seller gets what they want, a buyer gets what they want and a successful match is made. So, that is what we are doing at Lighthouse to with these new SBA rule changes. A caveat on all of this is that these that final guidance is still pending. if you're interested in learning more, I'm going to put a link in the comments depending on where you're watching this if you're
on YouTube or if you're on social media, I'll put a link in there. Feel free to book it for a call. There's no cost to that obviously. We'll spend 20-30 minutes together, 15 minutes and discuss what you're looking on, what we do, if there's a mutual fit and however we can be helpful, we want to do that. so feel free to click that link, book a call, or just shoot us an email. Well, lhcapitalgroup.com or respond to one of our newsletters or join our newsletter, learn more. Thanks, guys.
