Acquisition of Electrical Contracting Business with SBA 7(a) Loan
Overview:
In this case study, we examine the acquisition of an established electrical contracting business valued at $3,000,000. The transaction was financed using an SBA 7(a) loan, with additional support from an SBA Express line of credit. The deal structure included a 5% seller note on standby for two years, followed by five years of principal and interest payments, with no balloon payment at the end. The buyer also secured a $250,000 SBA Express line of credit to meet ongoing capital needs.
Transaction Structure:
Purchase Price: $3,000,000
Working Capital: $250,000
SBA Guaranty Fee: $75,338
Closing Cost: $22,250
Down Payment: 5% of the purchase price ($150,000)
Seller Note: 5.5% of the total project ($180,000)
SBA 7(a) Loan Amount: $2,768,000
SBA 7(a) Term Length: 12-months (10-years)
Prepayment Penalty: None, SBA requires 20-day notification of payoff
SBA Express Line of Credit: $250,000
Seller Note Terms:
- Standby for 2 years
- Principal and interest payments over 5 years beginning month 25
- No balloon payment Due
- 7-Year total term
SBA Express Line of Credit Terms:
- $250,000 available for working capital needs
- 36-month interest-only revolving draw period
- at conclusion of draw period, outstanding balance termed out with ability to add another revolving facility, extend existing facility draw period, or term out and pay outstanding balance
Due Diligence and Common Red Flags
During the due diligence phase, several red flags were identified and successfully mitigated. Common red flags in business acquisitions typically include:
1. Financial Performance Variability:
- Issue: Fluctuations in revenue and profitability can indicate underlying issues.
- Resolution: We conducted a thorough financial analysis over the past five years, focusing on cash flow stability and revenue trends. We also compared financial metrics with industry benchmarks to ensure consistency.
2. Customer Concentration:
- Issue: Heavy reliance on a few clients can pose a risk if those clients are lost.
- Resolution: We reviewed the customer base and identified any concentrations. We verified the strength of client relationships and assessed the risk of potential client losses. Additionally, we developed a strategy to diversify the client base post-acquisition.
3. Outstanding Liabilities:
- Issue: Unreported or hidden liabilities can impact the financial health of the business.
- Resolution: A comprehensive audit was performed, including a review of existing liabilities and off-balance-sheet items. We negotiated with the seller to address any uncovered liabilities and adjust the purchase price if necessary.
4. Operational Risks:
- Issue: Operational inefficiencies or outdated practices can affect the business's future performance.
- Resolution: An operational audit was conducted to evaluate processes and identify areas for improvement. We also reviewed the condition of equipment and facilities to ensure they met operational standards.
5. Legal and Compliance Issues
- Issue: Unresolved legal issues or compliance violations can result in future liabilities.
- Resolution: A legal review was undertaken to identify any potential legal problems. We ensured all licenses, permits, and compliance measures were up-to-date and in good standing. As the buyer wasn’t a licensed electrical contractor we identified an existing key employee who was able to qualify the business until the buyer could obtain their own licensure. This employee was provided with an employment contract as well as a raise.
6. Market Position and Competition
- Issue Changes: in the market or increased competition could impact profitability.
- Resolution: conducted a market analysis to understand the competitive landscape and potential growth opportunities. We also developed a strategic plan to enhance market position and address competitive pressures. A marketing plan for growth was established with a focus on higher margin residential service opportunities of which the business was currently not advertising for in any capacity.
Successful Acquisition and Post-Acquisition Strategy
The acquisition was successfully completed, leveraging the SBA 7(a) loan and the SBA Express line of credit to secure favorable financing terms. The careful due diligence process allowed us to identify and address potential risks, ensuring a smoother transition and a solid foundation for future growth.
The SBA Express line of credit provided essential working capital, supporting the business’s ongoing operational needs and allowing for investment in growth initiatives.
Post-Acquisition Strategy:
- Operational Improvements: Implemented recommendations from the operational audit to enhance efficiency and productivity.
- Client Diversification: Initiated a targeted marketing campaign to expand the customer base and reduce dependency on major clients.
- Strategic Growth: Leveraged the SBA Express line of credit to invest in new equipment and expand service offerings, positioning the business for long-term success.
Conclusion:
This case study illustrates the effective use of SBA financing options in acquiring a business, addressing common red flags through diligent preparation, and implementing strategic initiatives post-acquisition. By following a thorough due diligence process and leveraging SBA resources, the acquisition was successfully executed, paving the way for sustainable growth and operational excellence.
For those interested in purchasing a business, this case underscores the importance of careful planning, risk assessment, and strategic financing in achieving a successful acquisition.
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Sebastian H Amieva
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