Stephen Speer has been a lender for various financial institutions for over 20 years. In 2018, he founded E-Commerce Lending Inc., a company that specializes in acquisition financing of online shops, FBA, and SAAS. With over $250 Million funded in this space and a 97% loan approval rate, they’ve become the trusted lender of choice for the top online business brokerage firms in the U.S.
In this episode, Stephen walks us through the ins and outs of acquiring online businesses using SBA loans. We cover all the important details and discuss the benefits of SBA oriented transactions for both buyers and sellers.
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Joe: 00:00 Hey everybody, it's Joe Troyer here again. Welcome to another
episode of show me your nuggets. Oops, I'm sorry. I mean show me the nuggets. And today I'm here with none other than Stephen Speer. And so guys, today we're going to be talking about something a little different, but I'm super, super excited today. Really, I want to talk to you guys about buying and selling e-com businesses using SBA loans. And so I brought on a, a referral and now a friend I would say of mine, Stephen Speer to talk about buying businesses specifically with, with SBA loans. And for those of you guys that don't know Stephen, he's the founder of e-commerce lending inc and also a platinum, what is it? Platinum BanCorp inc. And I'm super excited to have him on the line. My, my team did a little bit of digging and they found that he's done over $250 million in funded loans. So man, I'm super excited to chat with you today. Welcome to the podcast.
Stephen: 01:05 Thank you, Joe. Thanks for having me.
Joe: 01:07 Yeah, man. So tell us a little bit about how you got into this
space and, and what you're doing today.
Stephen: 01:13 So about five years ago I kept you know, I have, I was focused on business acquisition financing, but more on the traditional sense, you know, brick and mortar. And I had a client approach me saying, listen, I'm, I'm thinking about buying a business but it's online. It's, it's not brick and mortar. I'm going to be selling through Amazon and, and can you finance that? And I said, well tell me a little bit about it. And I thought, well, I don't see why not. I mean, it ticks all the boxes even though there's not a traditional storefront. I don't see why not. So I started looking at guidelines and all that boring stuff and realized I can do this. So I started with him and it led to another, a transaction for a friend of his, and it kind of just blossomed over the last five years to quite a viable business model. So that's, that's how I got started. I fell into it like probably a lot of us have.
Joe: 02:10 That's fantastic, I feel like for ecom businesses, web based
businesses that at the end of the day, like there's, there's not a lot of people like you in the industry that's specializing in and financing these types of businesses. So it's great. UI had to seek you out right to find you and I think that there's definitely a huge opportunity for guys like you in the space. Uand I'm just curious Stephen, to, to pick your brain and to figure out, you know, what, why,uwhy are we should be financing, right? What rates look like, what do we have to do to get qualified and what kind of, you know,ugo through some of these questions step- by-step. Uwhen, when it comes to e-commerce loan, so to speak, I'm curious,uis, is SBA all that you do?
Stephen: 02:53 Well, you know, there are basically two types of ways to acquire an online business. One is to pick, simply pay cash and the other one is a three SBA financing. Really, there are no other, you know, for the most part, there are no other viable financial vehicles to acquire businesses primarily because there's no there, there, there's no brick and mortar, there's no collateral, there's no building, there's really nothing there. So it's all considered Goodwill lending and what SBA allows. And, and by the way, SBA is not really a lending source. They just happen to insure the loans, allowing lenders to lend on what's considered Goodwill, lending on loans without any collateral or any sort of a, you know, a tangible asset. So really it's not only the only vehicle, but it's a very good vehicle because allows lenders to really lessen their risk and be more open to lending within the space.
Joe: 03:51 Perfect. Yeah, we're doing some stuff, creative financing wise,
merchant lending and, and things like that. We have an audience and we're doing some crazy, crazy things to get deals financed and SBA is big and it's on my mind. We haven't went that route before. This year I've been a part of three acquisitions so far. And and next year I'm looking for more. So it's super excited to be chatting with you about why SBA. So can you give us kind of a high level rundown of, of what SBA stands for and, and really who it's for.
Stephen: 04:25 So many years ago the government, you know, truly realized that the way to, to spawn growth in increase the economy is lending to small businesses, which are essentially the backbone of our country. And so the biggest challenge was that banks didn't want to lend to small businesses or they're very hesitant because of the amount of risk. So to make it kind of a win win situation, because obviously banks make money on lending, lending funds. The government said, I'll tell you what, if you lend the money, we'll insure the loan. And so it was really a match made in heaven and it's, it's spawn growth through the small businesses. So really it was designed for the small business owner, be it a start up, you know, somebody opening up a restaurant or a now online, online business acquisition. So here we have it.
Joe: 05:19 Perfect. So who really are SBA loans built for, I'm assuming
Americans, right? First and foremost backed by the government.
Stephen: 05:27 Right. So SBA loans in general, they're permanently for
American citizens or green card holders. So they're pretty much limited to that for the most part. And also, you know, in terms
of the online space, there are only available to finance online businesses that are domiciled in the U S and that filed us tax returns. That's one of the major questions I get is, well, I have this great business I want to buy. It's based in the UK and I like stop right there. It doesn't qualify. So, and I've actually assisted some sellers you know, two years prior to be able to get their businesses foreign sellers to get their businesses domeciled in the U S and start filing us returns. Because ultimately if you have a us based online business, you're going to reach typically higher multiples when you go to sell than you would with something that's foreign owned.
Joe: 06:22 And I would imagine as well, if you can get it kind of ready and
pre-qualifying for SBA, right, then your pool of potential buyers. I mean, depending on the price point, I would assume your pool of potential buyers gets, you know, massive.
Stephen: 06:36 It does. And you're right, Joe, in terms of the price point, the
higher the price point, the larger, the larger percentage of, of of the buyer pool because you know, and kind of the sub million dollar range, you still have a lot of cash buyers. So in, there are buyers getting financed in that, in that, you know, let's say 250 to a million, but once you push beyond a million, there are fewer and fewer cash buyers. So it's essential for a seller to be able to have a business that is financeable, for lack of better term in the higher echelons of, of acquisition.
Joe: 07:12 All right, perfect. What are some of the other no-nos? So to
speak? We talked about kind of gotta be a green card holder or be an American. It's, it's actually got to be an actual business, right? So if it's just, I'm assuming being taken under like your social security number and it's not an LLC or something like that, it sounds like it's probably not going to qualify for an SBA either.
Stephen: 07:36 No. If it's on a schedule see you would still qualify acquisition
because the prime, the bulk of the acquisitions are asset-based purchases, not stock based. So it would be an easy transition because essentially really a new companies being formed by the buyer and that new company is acquiring the old company or acquiring the assets of the old company.
Joe: 07:59 Okay. Gotcha. So when I look in, in the marketplace of website
listings that are for sale from any of the individual brokerages to kind of the, the, the sites that aggregate all the littlest things together some of them are pushing SBA pre-approved and they're saying that in their marketing and some of them aren't. Why is that? Shouldn't everybody be doing that or,
Stephen: 08:25 Well primarily because if I'm a buyer and I'm interested in a $2
million business, but financing is not available to me. I mean, how many people could stroke a check for $2 million? So it's telling a potential buyer, Hey, you know, there's $2 million business but you only need 200 to $400,000 down payment to acquire that business. And it, it, it opens up the buyer pool. So and we do a lot of pre of, of pre-qualifications of businesses and we're provide a prequalification letter to those brokers for the most major brokerage houses.
Joe: 09:01 All right. Gotcha. What are the big things that you're looking for
right, to get that pre approval done? Like help us understand, like if we go look at a business listing and it's not preapproved like that, so to speak, what do we need to do in terms of due diligence to know whether or not this potentially would qualify, right. Steven, to actually be able to work with you, right. If we're the perfect you know person to actually get the loan, right. So what I make sure the business is qualified so to speak.
Stephen: 09:34 So I front load a lot of things with, with my buyers. You know,
first I, I prequalify them and we'll talk about that in a minute, but when they start their search, we are deeply involved with their search and as a search for businesses and the ones that they're really interested in, they provide us with the financials of that business, the offering memorandum on that business. So I'm able to vet to tell the my buyer, yes, that business is financeable through with SBA financing or no, it's not. Whatever the case may be. So if there's a business out there that doesn't, isn't, you know, SBA preapproved or prequalified, it doesn't necessarily mean that it's not just me may mean that it just hasn't been. So there are a lot of acquisitions that, that I, that were involved with that weren't pre-qualify, but they do qualify.
Joe: 10:25 Okay. Does the timeline have anything to do with it? Like how
long it's the history of the sale. So to speak.
Stephen: 10:31 So, yes, I mean, I, I've looked for businesses that have been
around at least two and a half years. I'd like to see two years of filed tax returns plus year to date at this point in time. Now with, you know, 2020 right around the corner, it should be easily attainable, but that's what I look for. I look for businesses that are pretty well diversified, not necessarily in, in how they saw their wares, but, but you know, how many skews they have, you know, is it, is it based on one product? Is it kind of a fad based product or is it something that's, that's more commonly used with everybody? So I look at those things. Is it strictly FBA or is it three PL or a combination thereof? I look at a myriad of different things to determine if it's, if it's financeable.
Joe: 11:20 Perfect. so I guess moving into how a buyer becomes
prequalified, right? And, and what, what, what are kind of the qualifications for them? So if somebody's sitting on the podcast right now, they're listening and they're like, Stephen, this sounds great. SBA loans, you know, backed by the government, you know, low rates, you know, a potential opportunity for me to get finance. W what do they need to look like? Right? What, what do they need in terms of assets? What's their credit needs to look like? What are kind of the, the starting criteria, so to speak, to know if they should come to a guy like you.
Stephen: 11:54 So once they reach out to me, I set up a, a buyer call and I ask
them a series of questions. I also have them provide me with a personal financial statement that shows, shows that reflects their liquidity if they have outside income and what their debt load is. Just to kind of give me a broad range, broad idea of what they're about. So I look at the personal liquidity. I also look at business acumen. So I, I'll ask a series of questions during that interview to determine, you know, you know, if they have direct industry experience or indirect, if they have indirect, what kind of, what transferable skillsets do they possess to really get an overall profile of the buyer. And I have some buyers that have, you know, tick all the boss's boxes, but you know, they're trying to acquire a $3 million company and they have no direct industry experience.
Stephen: 12:49 That's going to be a tough one. But but those are some of the
things I look at. In terms a credit. It's not so hypersensitive. Like when you go buy a house, as long as you have good credit, quote unquote, it's fine. It's not where you know, it, it's so hypersensitive. When you buy a house, it's, you know, every last numeric, you know, an indicator determines what kind of interest rate you get. It's not like that on the, on the commercial side. So but those are some of the things. And then I tried to get a sense of what price point they're looking at and determine if, if that fits, if, if they're if their profile fits that price point. And sometimes it does, sometimes it doesn't.
Joe: 13:32 Okay. And then in terms of the process when you're working
with buyers, like what's, what's an SBA loan cost? How's the process work? Like I'm sure that there's gotta be attorneys involved funding time. Like what's, what's that process look like?
Stephen: 13:48 So once my client's prequalified and goes out and finds a
business, he or she goes under LOI. Typically. Sometimes some brokerage houses go straight to APA, but generally it's LOI. And then once I received the LOI, we send out a loan packet by email
requesting certain documents, they upload the documents to our secured server, and then we move forward with the submission part of the loan. Generally the process, once we have everything from the client's 45 to 60 days, it's really predicated a lot on the buyer. We have some buyers that get us everything we need right away and some buyers, I have one buyer right now, it's been two months and I still am waiting for things. And so it's really predicated on the buyer in terms of speed. So that's, you know, but the, the one thing I need to note is that the, you know, sometimes SBA gets the, gets the, the, some people are, are kinda hesitant to the SBA route because of timing. And usually the thing that determines time is the buyer. It's not the lender, it's not the SBA or anything. So you know, so the cash transactions obviously are quicker and all buyer or all sellers probably want a cash transaction. But you know, when you have financing available, it drives up their price points. So you've gotta kind of look at positives and negatives towards a buyer getting financing
Joe: 15:20 And in this space, I mean, I would say probably above what, half
a million getting a full cash offer without terms, I mean, what are the chances? I mean, so like really like really, I don't think like an SBA should turn people off. I just, my point of view, I mean, what do you see or what are your thoughts?
Stephen: 15:41 My thoughts are, you know, all things remaining equal sellers
end up getting more money for their businesses when there is financing available. They just need to be patient and it's really not heavy lifting on their side. It's more heavy lifting on the buyer's side. So it's not where the seller has to really go bend down and bend, you know, bend over backwards to help facilitate the loan . Part of it, it's really all buyer, so they just have to be patient that it's going to take up to 60 days. That's it.
Joe: 16:11 Yep. And at the end of the day, I mean, every LOI that I've done,
and I haven't done that many but every LOI that I've done, I mean is 30 days at minimum. Anyway. That's your inspection period. That's when you're going through everything, vetting everything out. So, I mean, if that's happening at the same time that you're getting everything approved, it doesn't seem like that's really going to hold the process up either.
Stephen: 16:35 Joe, that's an excellent point. One thing that I really encourage
for my buyers to do is during their due diligence process, kind of running two rails during their due diligence on the business. At the same time they're, they're doing the loan process and you're right, it doesn't really add that much time at the end of the day. So
Joe: 16:53 You were going to do LOI or if you're going to do due diligence,
right, you're going to put down an LOI then do due diligence for 45 days or 30 days and then start the financing. Obviously that's going to add unnecessary time, but if you do them, like you said, in parallel yeah, I think that that's a no brainer.
Stephen: 17:10 And that's one thing that I would say 100% of my clients do
through my encouragement is do it parallel. If, if you, if something happens during due diligence that you don't like and you want to pull out of the deal, that's fine. I mean it doesn't, you don't lose anything on my end. So, yep.
Joe: 17:27 On, on the seller side, you brought up that there's not a whole
lot to be done, right? It's more on the buyer's side in terms of an SBA loan. Can you talk us through that
Stephen: 17:37 Of the buyer side with [inaudible],
Joe: 17:39 With the, with the seller, right. What's required for them on the
Stephen: 17:44 Really just as taxes and tax returns, shields, P and Ls. Maybe
some questions in regard to suppliers, but really very minimal. Very, very minimal.
Joe: 17:56 All right, great. So I mean that's pretty simple. So I'm assuming
these deals, you're looking at probably a turnaround time of somewhere around 90 days realistically. Is that, is that right? If, if somebody comes to you and they're preapproved, so to speak, right. To get a business actually funded and out the door, get the deal done,
Stephen: 18:19 Six 60 days on average,
Joe: 18:21 Man, that's tight. That's better than I would have thought.
Stephen: 18:26 Again, it's predicated on the buyer. I have some that I'm at four
or five months because of the buyer. So
Joe: 18:33 In that initial loan packet, so to speak, what are the things that
you're that you're asking for? I mean, I'm sure it's pretty simple. I mean, tax returns and things like that, right? Like
Stephen: 18:45 Everything that you have in your possession, probably on a PDF
on the cloud on your, you know, one of your [inaudible] or Google docs account or somethings, but, but basically your, your tax returns your asset statements and really just a couple
of, for SBA forms need to be filled out. Very basic, a resume. And that's really it. As it gets deeper, we do require a business plan. So now you, you've put an LOI in on your business. What are you, do you plan on doing with this business? So that's one of the things that that we, we request as well as projections.
Joe: 19:24 How formal does that business plan need to be? Are you looking
for like a 10 page or a five page or a hundred pager? Obviously there's like, there's varying degrees.
Stephen: 19:35 Fordham is a, the accounting term is ultimately I've had ones that are really good. They're three pages long Really, you just have to convey what you, you know, what skill set you have to be able to scale the business. Really what you, your plan is on scaling the business. That's really what it's about. It's, it's not all this fluff. So I've had ones that are three pages are really good. I had one recently, it was 34 pages long and I could eliminated 30 pages and it would have been just equally as strong. So you just, you know, some people and we do help them during that process, not in writing them, but we do refer them to to a website that assists in writing business plans. And I've had so many people say, gosh, I'm so glad you made me write a business plan because now I have a clear, concise idea of when I, when I want to do with the business.
Joe: 20:26 Perfect. Have you have you heard of Allan DIB by chance? No, I
have not. He wrote a book and I just interviewed him here for the podcast, the one page marketing plan. And it's, it's brilliant. And really I would argue that everything that you really need on a business plan besides projections is on that one page. It is very, very well thought out. So I'm thinking, yeah, probably that one page plus projections. And your resume isn't on there either. It's truly a business plan. So if you have that one page kind of your, your projections and a resume, I mean, it's, it's all the marketing stuff that you're going to do, how you're going to drop costs. Like it's all the things that somebody's gonna want to see, like you said, Stephen, of of really how they're going to grow the business and what that plan looks like.
Stephen: 21:14 Yeah. And I think the common mistake that some of my clients
make is they describe the business and tell me all about the business, but they never say, here's what I plan to do with the business. That's the major thing I try to tell my clients to do is that you need to, you need to fluff your feathers and why you're the person for that business and why the business is the one for you.
Joe: 21:33 Hmm. Perfect. Steven, I'm curious, what's the biggest loan
you've facilitated for ecom?
Stephen: 21:40 Right at the maximum $5 million? Yeah. Okay. So that's the
maximum. Yeah. Maximum is 5 million. Our average 1.5.
Joe: 21:49 Okay. Does it get substantially harder going from that 1.5 to five
or not really? It's like if you're qualified, you're qualified. Okay.
Stephen: 21:57 Does it get substantially harder? There's more risk for a bank, so
they're going to be a little bit more scrutinizing. And obviously the business acumen has to be quite a bit larger or higher than someone buying a one and a half million dollar business. But it's still, it's everything's the same.
Joe: 22:16 Yeah. Interesting. What are the common reasons that you see
deals falling apart in the marketplace today? Right, so deals that you're actively working and you're trying to get financed that end up not actually being funded and not actually end up going through.
Stephen: 22:31 That's a really good question, Joe. During due diligence, buyer due diligence they uncover something that wasn't disclosed to them by the seller. That's the common one. I just had one recently where the seller was involved in some things that he probably shouldn't have been and got fined by the sec and my buyer, this just happened yesterday by the way. And my client, my buyer found out and pulled out of the deal that's directly because of the actual business he was buying, but it showed a lack of character on the seller's behalf on seller's part. So he pulled out that primarily that I would say during, during due diligence.
Joe: 23:16 Interesting. Yeah. Is there is there a multiple on a business right,
that SBA loans are looking for right, for you to stay at or state under? So it's really more, like you said, based upon the buyers, so to speak.
Stephen: 23:35 It's based upon the business. So you know, certain businesses,
SAAS for example, the multiples are different than they are with FBA businesses for example. So you really can't, can't really pinpoint a multiple. And I know that you know, I've seen multiple charts depending on price point, how they, how they continue to go up. So really it's, it depends on the business really. But we look at cashflow. Ultimately, SBA requires us to look at the cashflow of the business. If the business generates
enough cash flow to support the monthly payment, it's, it's T, I mean that's, that's what we look at primarily
Joe: 24:14 Perfect. Perfect. Let's talk about those monthly payments and
how long the loans are for, what interests lakes rates kind of currently are looking like et cetera. Let me break down the math.
Stephen: 24:24 Okay. So I'll break down the typical business or the typical loan
structure and then I'll go into that. So the loans are 10 years, not five, not 20. They're 10 year loans. And they're, they, there are different pieces of the loan. You have the business, the business acquisition, you typically also finance the on on hand inventory that the seller has. So that's another piece. The other piece I always incorporate into the loans I do is working capital. And and that's generally for post-closing inventory acquisition. So obviously, especially closing at this time of the year, the buyers want to close and order inventory ASAP for the holidays. So, and then I also roll in the closing costs into the loan. So those, those comprise of the entire loan structure.
Joe: 25:19 Okay. And what's closing cost since you brought it up? What's,
what are these look like? Typically
Stephen: 25:24 If you had to add up the SBA fee plus the third party fees, for example, for business valuation and title and attorney and all that, it's about 4% all in and that gets financed into the loan.
Joe: 25:37 Okay.
Joe: 25:39 And then rates for the 10 year term. Like what, what's, what's
normal or how's it change or tell me about the rates on the time.
Stephen: 25:46 Normal is prime plus two and three quarters, which right now is
at seven and a half percent.
Speaker 3: 25:52 Okay.
Joe: 25:53 Yeah, I mean, compared to anything else that you could
potentially get on the market, how do you even compare it?
Stephen: 25:59 I know exactly.
Joe: 26:01 So that's amazing. And so go ahead,
Stephen: 26:04 I was also touch on a down payment or injection depending on
the size of, of the transaction is, determines how much down payment you have to put in. It's called injection on the business side of things. But you know, the SBA only requires 10% down payment, but lenders have their own overlay. So as the per acquisition price goes up, the amount of down payment requirement goes up as well. So you can basically assume up to a million dollars, a 10% injection or down payments required a million to 2 million, roughly 15% maybe 20 and then above million, generally 20, maybe even 25% injection or down payment.
Joe: 26:50 Yeah, that helps big time. So up to 10% a million to 2 million
Stephen: 26:55 So it kind of scales up. Additionally generally a transactions above 2 million have some sort of seller note, although not required, but most of my buyers want to have a seller, have a, like to have the seller have some sort of skin in the game once to help with the smooth transition and they have a vested interest in the, in the success of the business moving forward.
Joe: 27:18 Okay. So you're saying deals are being structured over 2 million
with some type of earn out or are you saying or some type of performance?
Stephen: 27:27 It can't be performed form a seller note. Okay. So sell our note
for typically five or 10% of the acquisition price. Joe is generally a factor. And in it's again, not a lending requirement, but most of my buyers have some sort of seller note. You know, kind of deal.
Joe: 27:47 Yeah, exactly. All right. Any other things that you think people
should know about in terms of who qualifies, what types of businesses qualify and then how the loans are structured?
Stephen: 28:04 Not let's really, one thing I want to touch on from a, from a
seller standpoint, it's absolutely imperative that sellers clean up their books. You've gotta if it means hiring a bookkeeper or better yet a CPA to really clean up the financials because that could make or break the business in terms of when, when he or she goes to sell it. And the other thing is if there's any sort of co- mingling between businesses, start untangling that web because it'll pay dividends when you go to sell your business.
Joe: 28:37 100%. Yeah, it's a biggie. But most people, it seems obvious,
right? But most people, I mean, of all the deals that I looked at it's, it's almost always the case. It's almost always commingled.
So interesting. What, what do you think is up and coming in the marketplace? Obviously FBA, I know you probably, it seems like do most of your deals but that would just be an assumption, but what's, what's kind of up and coming in the industry, so to speak,
Stephen: 29:07 In terms of our deal flow, we're seeing more SAAS businesses
that are being financed. Price points have stabilized. We saw a big increase of price price points from 17 and 2018. They pretty much stabilized this year. But SAAS is starting to incorporate more and more of our, our deal flow. I'm seeing a lot more of that. I like it too. I think there's, you know, the fact that you don't have to deal with actual products. Generally, generally it's service-based and I kinda like that. We do a lot of FBA type transactions. Even a hundred percent FBA transactions where everything's done through Amazon. We do quite a bit of that. We're okay with that. It's just all boiled down to, you know, what products are being sold through Amazon. Is it one product or 10 I mean, what does that look like? So we definitely look at that.
Joe: 30:01 I'm curious on, on your point of view, is one product better or is
Stephen: 30:06 10 diversification? Yeah. Yeah. So
Joe: 30:10 From a buyer's point of view, like I don't want to market, I was
looking at a product, a as an example. I think this highlights it well do they had, they probably had 2000 active SKUS they were selling on Amazon. I mean their cost of goods for each item like in the profit margin was huge. But to have inventory at Amazon and minimum inventory for all those 2000 skews. I mean that's ridiculous.
Stephen: 30:33 It's mind numbing. Absolutely mind numbing.
Joe: 30:36 I had to manage all that inventory like and like you said, I was
looking at having to fund right for the holidays and to get all that done right and not only take by the existing inventory. Right. But then to order for the holidays, I was like, that's ultimately like what made me back out of the deal.
Stephen: 30:55 Yeah. I mean there's definitely, I've, we've done some
transactions where we've had hundreds of SKUS and it's totally mind numbing. It is so interesting.
Joe: 31:07 Are you seeing, are you seeing a lot of e-comm come across
that is maybe some FBA but more direct to consumer Shopify, you know, typical advertising routes versus just FBA or use, you'd say it's mostly FBA business?
Stephen: 31:23 No, I've seen some diversification this year. I think, you know,
with some of the Amazon changes in 2017, 2018 kind of spooked out some, some sellers, some third party sellers. So I've seen more diversification, Spotify as well as fulfillment, diversification, being able to, to fulfill through three PLs and sort of the strictly Amazon. I'm seeing a little bit of that as well.
Joe: 31:48 Perfect. So let's pretend I got a four month old business, which I
may or may not have. That is like going like this. Right. and I'm concerned about being able to keep up the trend of that. Right. Longterm for stability purposes and being able to exit. Right, right. Because I don't want it to go like this and then start flat- lining. When I go to sell, obviously it's going to make things harder. What are you seeing as, as the optimal or minimal timeline of, of sales history, so to speak, to be able to facilitate an SBA type of deal?
Stephen: 32:35 I think two and a half years is a good marker. It's not, it's not a
hard fast rule, but I like to see two and a half years also gives me as the lender some indication of, of what, you know, how much dry powder the buyer needs after closing. Because the last thing I want is one of my buyers two months later calling me up for more money because they're out of inventory and they're being sanctioned by by Amazon or something. So I've had a couple of transactions that come to mind in the last few months that were really inventory heavy and that needed a lot of dry powder and I was able to shore up an additional 350,000 on each of them for post-closing working capital. So the, the biggest struggle with buyers I think is, is is cash after closing, being able to have enough cash to, you know, continue that trajectory. And that's why you start getting Sawtooth because you know, so you're, you're almost become a victim of your own success as a buyer.
Joe: 33:36 Yup. 100%. and, and I want to talk about that and kind of segue
way there. Ultimately the conversation so far has been all about really, really buying businesses versus building, right? It's kind of the context of the conversation and, and why you would want to do that is pretty simple, right? Like most businesses fail at the end of the day. Like somebody has figured out how to do this. You're probably buying a business for three X or somewhere around there. EBIDTA and your getting a loan term through SBA and through Stephen for example of of 10 years. Right? So you
can do the math. And if you have the skills as a marketer is that, that you're being taught right? And you really have good skills and growing businesses and marketing businesses. You can do the math and you'd understand very quickly why this is a very appealing type of model. And I don't think that there's any faster way to accumulate wealth and that's really ultimately why I'm stuck in this space and spending so much of my time on it.
Stephen: 34:41 Yeah, and that's a very good point. I mean, think about it, Joe.
You buy a million dollar business, your injection or down payment requirements, $100,000, the business is growing at 20% inter or 20% year over year. Excuse me, that's a 200% return on your money. Like where are you going to get a 200% return on your money? It's a no brainer. So to pay three X for a business is, is also a no brainer. And you know, it's just like the space shuttle, you know, and I have a lot of my buyers going, maybe I'll just start my own business. And I'm like, okay. It's like the space shuttle though. It uses 90% of its fuel on takeoff and 10% the remainder remainder of the, of the trip. So why not buy a business? They have some sort of historical track record and scale it and get 200% return on your money. Yup.
Joe: 35:33 And then in three years dump it and do the same thing all over
again. Right. Like if you did that three or four times in your lifetime, like how are you not set?
Stephen: 35:42 And I have buyers, I've done that. They've walked away for a lot
of money just because of that.
Joe: 35:48 So that's interesting. I think they've, they've come back to you
multiple times for SBA loans. What does that look like for them and for you? Right.
Stephen: 35:59 Okay. Quite a few of my buyers aren't looking just to acquire
one business. They're looking to acquire similar businesses over a course of time where they could have kind of a plug and play type ma business model where they could buy multiple businesses over time and, and really be able to scale them simultaneously. I love that first off. It's exciting to see how they progress over the course of three, four, five years. And secondly, when they go to sell, I mean it's, it's pretty exciting there because they're able to either parcel off the businesses individually or sell it as a, as you know, all of them combined in one one fell swoop.
Joe: 36:39 Yup. So that's really like, I don't know, I'd call it like a portfolio buyer. Right, right. So how do you help and aid those portfolio
buyers and financing? Right. They come to you, they, they, they finance a deal, right? It's going well and they come back to you. Is that how it happens? And then they're looking to, to fund another or they're flipping the other one first. Like how do, how have you been able to, or what use cases have you seen with portfolio buyers so to speak?
Stephen: 37:09 Usually they, they buy one business and maybe six months or a year later they buy a second business and they continue to buy businesses over time. It's not where typically they don't buy the businesses simultaneously. And it also kind of muddies the water when on the loan side of things when they're buying simultaneous businesses. So, but I've seen that as they continue to grow their portfolio.
Joe: 37:34 Yeah, that's beautiful. That's where I want to be. But I've been self funding and creative financing all of it without about SBAs. And they're working and, it's going really, really well. The disadvantages that the cashflow is very poor because I'm shoving the cashflow right into the business. And there's not always a ton of cash flow to grow the business then. Right. Because I'm just worried on I'm just paying off the debt as fast as possible, basically.
Stephen: 38:02 Right. And I have quite honestly, I have a lot of buyers that have
the cash to pay cash for a business and they choose not to for that very reason. They're able to finance the business, the acquisition of business and have money left over for either subsequent acquisitions or be able to put cash on cash that they have in reserve towards towards purchasing inventory or scaling that business.
Joe: 38:30 I think that goes right into Stephen. I think one of the things I
wanted to talk to you about today was, are you only lending to people looking to buy eCommerce businesses, right? If I have a eCommerce business that like we talked about earlier, in example, was the money's being caught up in inventory, is there, do you help people in that regard kind of finance and get funding? Or no? Yeah,
Stephen: 38:56 I, we do some inventory funding through our private lending
channel for, because again, my job, my goal is to help my buyer succeed. And there are cases where they do run out of money and they don't want to get one of those crazy Amazon loans and pay 50 grand a month [inaudible] debt service on those loans. So I have helped clients through our private lending channel and, and generally 200 to 300,000 inventory acquisition. So we do help, it's not the bulk of our business. The bulk of our
business is business acquisition, but we do, we do help our clients obtain those loans.
Joe: 39:35 Okay. and you can get SBA lending though for your existing
business though. Correct? Right. Like so you guys just don't do anything in that regard, so to speak.
Stephen: 39:49 You can get us for your lending. In terms of what for for
Joe: 39:54 Yeah. I've seen inventory, equipment, things like that. SBA loans
being marketed for, but how real that is, I don't really know.
Stephen: 40:03 Yeah. It's not it's questionable and I, I, we don't get involved
with that at all.
Joe: 40:08 Gotcha. Gotcha. So that's good enough for me.
Joe: 40:15 So your the other financing options for inventory, what's, what's
a deal like that look like, or what's interest rates look like? And you said, obviously, you know, Amazon money is expensive, right? Merchant financing money is expensive. I mean, and I've used some of those methods, right, to acquire things so that I didn't have to pull as much cash out of pocket. And ultimately then because of the interest rates, it's all about just paying that off as soon as possible. Right. and so all the profits just getting shoved back into basically paying off whatever that high interest loan is as fast as possible. So what are the other options there that, that you guys deal with?
Stephen: 40:59 So when we do you know, here and there do an inventory loan
generally it's a two to three year loan interest only, which totally helps cashflow and generally it's around 10, 12% interest. Okay. And generally on average it's about for two to 300,000. So in other words, if someone came to us for a $25,000 inventory loan, it probably wouldn't work, but generally a 200 and above. But it really does help our clients because again, the last thing I want is our clients would be struggling post acquisition.
Joe: 41:36 Yeah. That's the biggest problem obviously. I mean, marketing
changes and you got your marketing costs, but that money is freed up pretty quickly, right? It cashflows, right? So to speak, the inventory costs can be a big problem.
Stephen: 41:50 And here's another thing that we do and we have done is that
we have clients that have, that have taken the bait with Amazon and have these, these crazy one year loans with, you know,
huge debt service. We've refinanced those into our product and help cashflow tremendously.
Joe: 42:07 Oh, that's, that's amazing. Yeah. Fantastic. All right man. I really
appreciate you being on the podcast. I want to kind of wrap things up, Steven, as, as you look back on what we chatted about here today, is there anything you think we missed or that you think maybe we need to chat about to make sure that we do service for everybody listening?
Stephen: 42:25 You know, and, and again, thanks for having me on. I think the
major thing is not only do we help buyers, but we do help sellers. So feel free to reach out to us. You know, either by email my email addresses Stephen with a pH at e-commerce lending.com or you can reach our offices at eight one, three, seven, six, six, four, five, two, four.
Joe: 42:48 Awesome man. So we'll put your website, we'll put your email,
we'll put your phone number in the show notes so everybody has it. And imparting, I'll ask you one more question. So of every podcast it seems like everybody asks, the show hosts, asks everybody to recommend three books. You do something a little different here on, show me the nuggets. I want to ask you, what's the one book that as you look at your business today and what it looks like in the operations and, and what you have and an hour things are ran, what's the one book that you think has made the biggest impact on the way that you do business?
Stephen: 43:24 A four hour work week by Tim Ferris, and primarily when he touches on the Parkinson's rule, which essentially says if you give yourself all day to do a task, you'll, you're gonna take all day to do that task. So I really try to, to give myself limited amount of time to do a specific task. So highly recommend that book for all you listeners and on this podcast.
Joe: 43:50 All right, beautiful. Steven, thank you so much for coming on
the podcast insurance so openly with everybody. I'm super excited to be working with you personally, and I know that, I'm sure a lot of other people will be reaching out to you as well.
Stephen: 44:01 Great. Well thanks for having me, Joe. I appreciate it.
Joe: 44:03 All right guys. See you later.
Stephen: 44:05 Bye guys.