1. All owners, including minority shareholders, even if they only own 1%, must be either a US citizen, a legal permanent resident (10 year Green Card) or US National. Equity will need to be documented, and all owners must complete an SBA form 1919.

2. Earn outs are not eligible when structuring an SBA loan. Contingent seller notes are and can be structured based on performance metrics. 3. If you are structuring a deal and want part of the seller note to act as equity, the seller note must be on full standby for 10 years.

4. A seller note is not required as part of the deal structure when requesting an SBA loan. As I have stated before, I would never suggest this however. The seller note often helps with your debt service coverage, lowering your SBA exposure and can count towards equity.

5. Each lender looks at addbacks differently. If you are relying on them to meet DSCR requirements, it is a good idea to check with your lender to see if they will be acceptable. Remember the SBA is the sister of the IRS and those addbacks must be legitimate business expenses.

6. If you have a larger transaction, there are some banks that will consider Pari Passu financing. Pari Passu is a Latin phrase and means “equal footing”. The terms and conditions match the SBA loan. This is a conventional bank loan behind the SBA loan to bridge the gap.

7. When structuring your transaction, consider what the net proceeds the seller is going to walk away with. This is important to understand to make sure that your deal will actually hit the closing table. Here is why: After the LOI is signed, the seller is going to consider

I am holding a seller note, you have asked me to leave working capital inside the business, I have to pay my business broker, I have to pay my attorney, and I have to pay capital gains tax. After doing the math, this can literally be half of the purchase price.

8. It is very important to understand why the seller is selling. This often determines if the deal actually hits the closing table. In my opinion, there are 3 reasons the seller will sell, they need to, they have to, and they want to. Those are very different reasons.

9. Each bank has their own credit box. They differ from bank to bank. The DSCR is also different from bank to bank. For example, our bank uses 1.35X for the last 2 years. When modeling your transaction it’s best to consider what you are comfortable with.

10. To calculate what the bank will consider for your salary requirements as the new owner, use a 40% DTI. Take your monthly required obligations, multiply it by 12 and then divide by .40. This will give you the formula that will populate your required salary in the transaction.

I hope the above takeaways are useful for you. As always, please share and repost so others may find value as well. @sbabmarks

@sbabmarks So useful. Thank you Bruce for sharing these and for all the insights you shared.