In this episode of the M&A Launchpad Podcast, hosts Casey Minshew & Feras Moussa sit down with Darren Palestine from Commercial Finance Partners to discuss the intricacies of SBA and middle market lending. Darren shares his extensive knowledge and experience, offering valuable insights for both borrowers and industry professionals.
The discussion covers SBA lending, including proforma transactions, unsecured loans for service businesses, and the challenges such as high interest rates and the reliance on historical cash flow. They also explore the state of business acquisitions and how Darren’s team caters to clients needing loans between $10 million and $100 million through a middle market initiative.
Darren explains the benefits of private credit loans, the importance of thorough cash flow analysis, and the structure of private credit loans tailored to business goals. The episode also addresses the significance of choosing the right originator and the impact of AI on the lending landscape.
In this podcast episode, we discuss:
- SBA Lending Challenges
- Middle Market Lending Strategies
- Effective Cash Flow Analysis
- The Future of Lending with AI
You can connect with Darren by email: dpalestine@commercialfinancepartners.com
Additional Resources:
- Access our archive of video interviews on YouTube
- Checkout our upcoming Conference – https://malaunchpad.com/
- Get in touch with show hosts Casey Minshew and Feras Moussa at – info@equitylaunchpad.com
- Looking to invest in M&A opportunities or partner with an advisor to acquire, scale or sell your business? Visit Equity Launchpad
Transcript
00:00 all right on today’s episode we had
00:02 Darren Palestine where we talked indepth
00:04 about lending and kind of how to think
00:06 about SBA lending how to think about
00:07 private credit lending and really the
00:09 kinds of businesses that you can do and
00:11 should do with SBA and the businesses
00:13 you can and should do with private
00:14 credit so lots of information in depth
00:16 about what you need to know about
00:17 financing so Casey what were some of
00:19 your big takeaways well first off I’ve
00:21 known Darren for 10 years and I’ve done
00:23 a lot of business with them trust is
00:25 through the roof right always does the
00:27 right thing in my opinion but I will
00:28 tell you this I love this part the deals
01:31 I I like the financing structures right
01:33 the thing about this acquisition space
01:35 one when you’re negotiating with a
01:36 seller if you understand the financing
01:39 products then you can structure your
01:41 deal so you don’t have a like a Loi that
01:44 has to be renegotiated absolutely
01:45 whether that’s more cash from the seller
01:47 whether that’s more of a seller
01:48 financing or even forcing a seller carry
01:50 all of those things basically go into a
01:52 deal and helping you structure the right
01:54 deal to get done that the lender will
01:55 approve on yeah my methodology is always
01:58 how once we get the information can we
01:59 Finance this right it’s like how do you
01:01 structure the financing so we can go
01:03 back plug it into the model have the
01:05 conversation with the seller and make
01:06 the right decision so having these
01:08 people on your side and and having these
01:09 relationships is critical so I I
01:11 consider this one of my favorite
01:12 podcasts no I absolutely you I think
01:14 maybe to your point it’s the way to do a
01:16 deal right is to understand what your
01:18 lending options are first and then you
01:20 back into an Loi and an offer and a
01:22 structure that can map into that that
01:24 lending option right because me and you
01:25 can guess Lois and structures all day
01:28 and we can get some we can get a seller
01:29 to agree to it but but if we can’t get
02:31 the financing if you are intending to
02:32 finance well then it doesn’t even matter
02:34 so really understanding your debt is so
02:36 critical that’s how deals kind of get
02:38 structur and that’s how deals die too
02:39 right so you know lots of information on
02:41 this one so go ahead and listen
02:46 in hey everybody it’s Ferris and would’
02:48 love to see you at our upcoming m&a
02:50 Launchpad conference in Chicago October
02:52 26th at a conference we talked about
02:54 what it looks like to value a business
02:56 how to buy a business how do you manage
02:58 a team right and ultimately we’re big
02:59 Believers in the bu than build concept
02:01 so we’re going to have one of our
02:02 friends Walker D the author of BU then
02:04 build there as well as one of our
02:05 Keynotes and many more so we love to see
02:07 you there to kind of get exposure to the
02:08 space and Network all right on today’s
02:10 episode we have Darren palestin here to
02:12 talk to us about commercial lending
02:14 Darren welcome to the show thank you
02:15 guys I appreciate you having me Darren
02:17 great to have you bud all right so
02:18 Darren you and Casey have done plenty of
02:20 business together right so maybe give
02:21 people a little bit overview right what
02:23 is it that you kind of focus on and you
02:24 know how do you add value in a
02:26 transaction to people sure so um so
02:28 commercial Finance Partners uh my
02:29 partner and I formed the business uh 10
03:31 years ago and we have two distinct
03:33 verticals we’ve got a direct lending
03:34 vertical where we focus on lines of
03:36 credit mainly asset uh asset back lines
03:39 and we have an advisory vertical where
03:40 we focus on um anything from small to
03:42 Middle Market lending but but strictly
03:44 debt related um items and so uh between
03:48 both of those we often blend the the two
03:50 programs together to sort of act as a
03:52 One-Stop shop for any small business um
03:55 financing need yeah and I’ll tell you
03:57 you know just to to piggyback on some of
03:59 that stuff so Darren and I known each
03:00 other for pretty since you y all started
03:03 CFB and uh we’ve had a lot of great
03:06 success um and I’m not talking about
03:08 just for myself but prior to that I was
03:09 a broker you know and placed a lot of
03:11 deals with Darren great partnership you
03:13 know it’s just been a a long-term
03:15 relationship now Darren just kind of
03:17 jumping in kind of to our audience right
03:19 um most of the people that are here are
03:21 looking to make their first acquisition
03:23 or they may be thinking how do I do a
03:25 rollup what type of financing is
03:27 available and we all know SBA is really
03:29 tough right now it has its challenges
04:31 but what what would somebody if you know
04:33 they’re looking to make their first
04:34 acquisition and it qualifies for SBA how
04:37 are you seeing at work these days yeah
04:39 that that’s a great that’s a great point
04:41 and a great starting point for um for
04:43 for the acquisition side especially for
04:45 someone who’s doing their first
04:46 acquisition so you know we we got into
04:48 SBA lending about 8 years ago um after
04:51 forming uh cfp almost by accident um
04:54 again traditionally offering revolving
04:57 lines uh we we needed a product for for
04:00 clients who needed um access to term
04:02 financing and often times our clients
04:05 who would come to us our only solution
04:07 at that point would be to fully lever up
04:09 the working capital assets of the
04:11 business which is not the most effective
04:13 way um in most cases to acquire a
04:15 business unless there’s just an
04:16 abundance of assets um so we we got
04:19 hooked into the sba7a program um and
04:22 what started just as an adventure
04:24 helping a a couple clients out really
04:26 turned into a whole platform for us and
04:28 so um the SBA 7A program um it’s a great
05:32 program uh there is a a variety of
05:35 lenders who are able to offer that
05:36 program and we’ve Affiliated um with
05:39 with a a good percentage of the non-bank
05:42 group um and there’s different SBA
05:45 lenders sort of take a different view on
05:47 on credit and and the SBA operating
05:50 procedures um which everyone has to stay
05:52 within and so what we discovered is that
05:55 um rather than the traditional banking
05:57 route um there’s there’s many more
05:59 incent cized non-bank institutions that
05:02 can provide the same programs that that
05:05 Banks can um but just in in my opinion
05:08 provide them better and more effectively
05:11 um so that that’s how we got into SBA as
05:14 far as uh someone that would be wanting
05:16 to to acquire their first business
05:19 there’s just a couple sort of
05:20 straightforward benchmarks that you
05:21 should have in mind when when thinking
05:23 about acquiring that first business one
05:26 is you want to have some type of
05:28 relatable experience and this is where
05:29 the bank the reason I shared some of the
06:31 bank and non-bank um items is this is
06:33 where Bank versus non-bank really comes
06:34 into play in again in my opinion um
06:37 non-banks tend to be more liberal with
06:40 um with that experience and you can you
06:41 can sort of translate just General
06:44 Industry experience to to from one
06:46 industry to another um you don’t have to
06:48 have worked in a restaurant to buy a
06:50 restaurant in in some cases um so that’s
06:52 one thing to keep in mind is is
06:54 experienced one of the the major things
06:57 as well is um the SBA generally really
06:60 will allow for um acquisition uh
06:03 financing up to 90% of the purchase
06:05 price there are ways to go higher than
06:07 that um but with a Cooperative seller uh
06:10 but in most cases we’re really trying to
06:12 show our clients um having good uh
06:14 liquidity to put towards a transaction
06:17 um so we generally are recommending
06:19 around 10% um cash injection from from
06:21 our clients so just so just to make sure
06:23 that they can either um source that um
06:27 Equity injection or have it um in some
07:30 form or fashion even in the form of an
07:32 IRA uh have access to those funds um and
07:35 then the third is is just being able to
07:37 present um what you know it combining
07:40 almost both both those aspects so
07:42 they’re going to put their own money
07:43 towards it they’re going to go show a
07:45 good background the third is really
07:47 showing what they’re going to do with
07:48 this business once they acquire it um
07:51 Can can they outline and we we jump in
07:52 and help with this but can they outline
07:54 a business plan projections um you know
07:57 what what type of salaries they’re going
07:58 to need What expenses they might but you
07:00 know when you when you start
07:01 experiencing that level of of detail
07:03 with someone um you really can set a
07:05 good road map to be able to to acquire
07:07 the business so those would be three um
07:09 areas I would I would consider as being
07:11 like the the initial starting points for
07:13 for SBA financing yeah so maybe maybe to
07:15 hop in a little bit more right so for
07:16 listeners that don’t know much about the
07:18 7A we kind of you obviously went through
07:20 what it can do what it can’t do but
07:22 maybe dumb it down for people right what
07:24 is a business that the SBA 7A is good
07:26 for and what is a business that it’s not
07:28 very good for right and kind of people
07:30 that come to you I think everybody
08:31 defaults whenever they’re they’re new to
08:33 the space they all default the SBA got
08:34 to do SBA got to do SBA and it’s
08:36 obviously I mean we haven’t even done an
08:38 SBA one today so you know what is it
08:41 useful for what is it not useful for so
08:44 the really neat thing and I hate to play
08:45 to generally is is that it can be useful
08:49 depending on the lender for almost any
08:50 type of business um where you know to
08:53 take a step back and to give a better
08:55 overview on the actual program um for
08:58 for the program that we uh mainly
08:00 um facilitate the SBA 7A program they
08:03 are traditionally 10year or 25-year term
08:05 loans that are fully amortising loans so
08:08 the reason I I I like that structure is
08:11 that you can um you can do a calculation
08:14 on what the business is generating on a
08:15 monthly basis and figure out can the
08:17 business support debt and then whatever
08:19 the acquirer uh needs to earn um on top
08:22 of that so it’s it’s it’s somewhat of a
08:24 an easy way to to to formulate um so
08:27 they they’re 10year term loans um there
08:29 are personal guarantees required uh in
09:32 in all cases from from 20% or more
09:34 shareholders um so that’s something to
09:36 keep in mind some folks do come and and
09:38 do not want to personally guarantee um
09:40 obligations and um the rate structure so
09:43 we’ve talked about term structure the
09:45 rate structure really varies depending
09:46 on the overall credit strength of the
09:48 transaction um a lot of the non-real
09:51 estate back transactions so those would
09:53 be the 10-year term load non-commercial
09:55 real estate back transactions are going
09:57 to be on a variable rate that’s
09:58 adjustable quarterly which at this point
09:00 in time is actually in my opinion a
09:02 favorable environment for that um and
09:05 then uh generally our programs for
09:08 25-year uh loans which involve
09:10 commercial real estate underlying the
09:12 the acquisition or the transaction um
09:14 could have a fixed rate component um
09:17 tied to to the commercial part of it um
09:19 so th those are just some Basics on the
09:21 program um they the loans are um
09:23 administered directly by lenders uh not
09:27 the SBA the SBA provides a guarantee to
09:30 those lenders which incentivizes them to
10:31 make the loans um and the lenders that
10:34 we generally work with um are allowed to
10:37 fund these loans without the sba’s
10:39 approval they sort of get the blessing
10:41 after the fact um through What’s called
10:43 the PLP um and that allows um a a much
10:48 quicker turn of of the process as timing
10:51 is often a critical uh element to to a
10:54 business acquisition so I want to pill
10:56 back the onion a little bit more so
10:57 let’s do a little bit of a rapid fire
10:58 round right I’m going to name some
10:59 businesses and give you some metrics and
10:01 say would that apply you know would you
10:03 say sba7a is the right solution or not
10:05 so let’s just keep it simple first one
10:07 let’s say I’m buying a plumbing company
10:08 for $5 million SBA could apply if you’ve
10:11 got the 10% down $5 million purchase
10:13 price sounds great client would have to
10:15 come up with about half a million
10:17 dollars and we can return the client
10:18 some working capital in that example all
10:21 right so then let’s say I’m buying a
10:23 landscaping company that has you know
10:26 assets it owns the building that it’s in
10:28 and I’m buying it for $10 million all in
11:30 and that’s inclusive of the real
11:32 estate so so that’s a good that’s a good
11:35 jump off um once you get above the five
11:37 so a good point that we didn’t address
11:39 prior but the the maximum SBA 7A loan
11:42 size is $5 million now some of UL why we
11:45 haven’t used it either right typically
11:46 we’re focusing kind of that lower Middle
11:48 Market so kind of a little bigger than
11:49 that exactly the maximum size is five
11:52 million on on as as funded dollars now
11:54 some lenders will do comp what’s what
11:56 they call Companion loans so they’ll
11:57 lend an Ungar portion of
11:00 6 million 7 million um but generally
11:03 where where we found the most Comfort is
11:05 is up to $5 million in the sba7a program
11:07 so when you start looking at larger
11:09 transactions that involve real estate
11:11 and there’s multi-layers to it um you
11:13 get into um a variety of other uh
11:15 lending products now one of the neat
11:17 Parts with SBA is you can sometimes
11:19 combine an SBA loan with another type of
11:22 loan so in a $10 million example let’s
11:25 say um let’s say half of it was tied to
11:27 commercial real estate you could do um
12:30 100% financing of the commercial real
12:32 estate not even 90% 100% financing of
12:34 the commercial real estate and then the
12:36 the remainder of the loan could be
12:37 funded through another product whether
12:39 it be um a revolving line of credit or
12:41 you know a middle Market type product
12:43 like we we’ve done prior but you
12:44 wouldn’t split that into two loans say
12:46 hey the business is in SBA five million
12:48 and the real estate’s five million with
12:50 a different product sounds like you’re
12:51 doing something else that’s kind you
12:52 could you you you could you could that’s
12:54 the that’s the neat part is there’s so
12:56 much um there’s so much flexibility
12:58 within the structures that you can use
12:00 it as an as needed product so in in the
12:03 example that we just discussed if
12:05 someone if someone was a bit short let’s
12:06 say on an overall cash injection and uh
12:09 you know and they needed they wanted
12:11 that real estate we could in with the
12:13 SBA program is the only program I know
12:15 of that that some lenders will offer
12:17 100% financing so you can fully lever up
12:20 the the property acquisition and then
12:21 get creative on the uh the underlying
12:24 business asset purchase you know
12:25 non-real estate side okay and then so
12:29 question it’s pretty amazing yeah me
13:32 here you know here’s the thing you know
13:33 being in this space the thing that’s so
13:35 attractive about when you know I was
13:38 focused just on on doing loans right
13:40 every deal is different you know and you
13:43 know the reason why I partnered with
13:44 Darren and his group is you know these
13:47 guys are like studying at 247 and not
13:50 only do they have the 7A then they have
13:52 the backup they have the line of credit
13:54 they have so you could take a deal and
13:56 and and massage it a couple different
13:58 ways and how we’ve worked together for
13:01 so many years it’s like hey if there’s
13:03 five ways to do this what would be the
13:04 five ways and you pick the one that that
13:06 that makes the most it’s all about
13:08 structuring right and just like working
13:10 a a deal period right if from buying
13:11 from seller we have a deal right now
13:13 we’re going back and forth with the
13:14 seller and everybody’s trying to get the
13:16 things they care about and giving up the
13:17 things they don’t to get a deal done but
13:19 it’s all about structuring there’s a
13:20 million way structure and it’s about
13:22 structuring something that everybody
13:23 could walk away happy with yeah and to
13:24 that point I think Casey and I have both
13:27 uh in a referral capacity and a uh and a
13:29 direct borrower capacity of 12 Plus
14:32 Loans at this point together and each
14:34 one was uniquely structured and each
14:36 conversation started um as you know what
14:39 structure might work best given these
14:41 variables and and and that’s what I love
14:43 about about most commercial lending
14:45 products that we offer is we can really
14:47 tailor them to the situation versus just
14:49 giving a standard program out to folks
14:51 and saying you know take it or leave it
14:52 this this either works or it doesn’t we
14:54 really can add some creativity to it
14:56 which which keeps me interested in in
14:58 you know doing this every day so I got
14:60 two more questions for you because I
14:01 kind of gig out all this stuff a little
14:02 bit right of course first one you know
14:04 you mentioned obviously the you know the
14:06 originator can fund it right and you the
14:09 SBA is gonna approve it do they share in
14:12 Risk right is there you know because a
14:14 lot of times in the commercial real
14:15 estate side you know again we do a lot
14:17 of Fanny and Freddy products and there
14:19 is a sharing of risk there and so I’m
14:21 wondering what it looks like with the
14:22 SBA piece yeah so so the SBA typically
14:25 and I’ll just cover the programs that
14:27 that we’re familiar with um as as as
14:29 noted exact expert on the guarantee
15:31 portion but um the SBA will guarantee
15:33 between 75 to 90% of of the loan um the
15:37 the way to get that increased guarantee
15:39 which often will further incentivize A
15:41 lender to make maybe what would be a
15:43 difficult loan is if a client for
15:45 example is exporting and there’s
15:46 different categories that you can use to
15:48 get up to 90% guarantee but the um the
15:50 institution that’s providing the loan
15:52 gets effectively at at least a 75%
15:54 guarantee on that money from the SBA and
15:57 so if a a loan defaults right for those
15:59 listeners that means that the lender is
15:00 going to take on it sounds like 25 to
15:03 maybe 10% of the the loss and then isbo
15:06 take on the rest of it well if you if
15:07 you want to really go down the rabbit
15:08 hole because it is an interesting U
15:10 Market um they the way that a lot of the
15:13 private institutions operate is they
15:15 actually sell off um portions of these
15:17 loans they sell off the guaranteed and
15:18 unguaranteed portions um they a lot of
15:21 them will still continue to service the
15:22 loan but there’s a big economic
15:24 Advantage for them selling off the loans
15:26 again this the reason I bring it up for
15:28 for the for the listeners is non
15:30 non-bank institutions and and these the
16:32 the the 14 or 17 um SBA uh non-bank SBA
16:36 lenders that have that Authority they’re
16:38 highly incentivized to make these loans
16:40 they are able to remove a lot of the
16:41 risk they’re able to capitalize on the
16:43 sale of the loans so um it’s just an
16:45 interesting Dynamic that we’ve gone to
16:47 experience we don’t get we don’t
16:48 participate in any of that Marketplace
16:50 um but most of the capital providers
16:52 that we affiliate with uh do engage in
16:54 some sort of securitization and sale of
16:56 these loans yeah and I’ll tell you you
16:58 know a lot of the times I’ve talked to
16:59 people especially that are looking to
16:00 buy business and they’ve gone to their
16:02 local SBA bank right and that’s what you
16:05 mean by the bank SBA right so you’ve
16:07 gone over to Regions Bank or you’ve gone
16:09 over to somewhere sat down with them
16:11 you’ve said hey here’s my plan that bank
16:13 is got a lot more skin per se risk per
16:17 se because they’re holding some of it on
16:19 the balance sheet they’re they’re
16:20 getting an SBA guarantee but they’re not
16:22 selling this paper out of the market and
16:25 then correct is that is that that’s
16:26 that’s 100% correct as far as as our
16:29 experience um and and I hate I don’t
17:31 want to throw uh all the banks under
17:33 under the bus because there are some
17:35 good bank SBA lenders but you’re 100%
17:37 correct in in the in all of the bank
17:39 relationships that we have because we do
17:41 we do also have Bank SBA relationships
17:44 um they do not sell off that portions
17:45 they are not only do they have more uh
17:48 at risk um but the other Dynamic that
17:51 comes into play when working with a bank
17:52 which is why we got into the non-bank
17:54 world um is that they also have Bank
17:57 credit policy that that gets um underd
17:59 and at the same time is also complying
17:01 with um the SBA what they call sop or
17:04 standard operating procedure so when you
17:06 start layering in bank credit policy
17:08 with the SBA policy underwriting can get
17:11 pretty complex and again Acquisitions
17:13 especially um often have a Time Horizon
17:16 um they they might have some quirks that
17:18 that you have to work out and when you
17:20 start adding different layers of
17:21 approvals whether it has to go to the
17:23 SBA for approval or or through the bank
17:25 credit approval process um oftentimes we
17:28 all know this um deals die because of
18:30 time and and and that’s where I think
18:33 the banks uh generally fall short and so
18:35 then when you look at these non-bank
18:37 groups right just to kind of simplify
18:40 they are doing the closing they’re doing
18:42 all of these things to get the deal done
18:45 but then they’re taking that paper once
18:47 it closes 30 days later right and my
18:50 paper is the loan documents yep and then
18:52 they they’re probably let it marinate a
18:54 little bit right they they bundle this
18:56 together with maybe 10 20 maybe maybe
18:59 100 different loans and then they’re
18:01 selling this and they get a spread right
18:04 they get a spread between however the
18:07 interest rate Falls however that that
18:09 that that spread in the interest rate
18:11 and then they sell that they make their
18:13 money there and then on the other side
18:16 they also make their money servicing it
18:18 so that that what they sold off doesn’t
18:21 have to deal with all of the issues of
18:23 servicing it and if for something
18:25 something happens and this the servicing
18:26 then it goes right over to SBA like so
18:28 if there’s a challenge or a default or a
19:30 workout it then goes right directly to
19:32 SBA and SBA handles it and so those
19:34 those Banks th those institutions they
19:38 really can originate and close a lot
19:40 faster and they can do more deals right
19:43 exactly and and I will say the one the
19:45 one very positive aspect because we’re
19:47 we’re we’re getting into some detail
19:49 which I think is helpful to know and as
19:50 you mentioned like geeking out knowing
19:52 these like different areas I I enjoy it
19:54 as well the one thing that is helpful is
19:55 that um all the lenders that we work
19:57 with for example they do continue to
19:59 service the loan because the last thing
19:00 you want to do is go through a process
19:02 with a group and then all of a sudden
19:03 you know we we’ve all gotten those
19:05 letters in the mail if you’ve done a
19:06 mortgage Year all of a sudden your loan
19:07 is now being serviced with someone else
19:09 and you you sort of lose um the
19:11 relationships involved and so for us
19:13 it’s a good thing because we do maintain
19:15 relationships with with the lenders and
19:17 the lenders continue to service the
19:18 account so um you know barring a um a
19:21 massive issue a lot of the day-to-day
19:24 issues are are taken care of um at at
19:26 the lender level so if you need to
19:28 substitute collateral if you need to um
20:31 ask for a deferment if you need to do um
20:33 you know what I would consider just
20:35 things that pop up in the normal course
20:37 of business you can continue to do that
20:38 with the lender that originated and
20:40 closed your loan you’re not just
20:41 suddenly working in most cases with with
20:43 a new party yeah so so to move on from
20:45 the SBA side right to kind of recap for
20:47 people right it’s loans up to 5 million
20:49 there is a personal guarantee they’ll do
20:52 good they’ll lend on Good Will and non-
20:53 assets as well right it’s really tied to
20:55 the purchase price and can be appraise
20:57 for that and you know it’s a fairly
20:59 there is this level of a kind of risk
20:01 sharing between the lender and the SBA
20:03 so there’s kind of you know you got to
20:05 pick the right originator right that’s
20:07 kind of have the right incentives um and
20:09 anything other any other big recap I
20:12 want to move on to the other types of
20:14 loads and how to you know what people
20:15 need to think about that Dar doesn’t fit
20:17 that and Darren and I have actually done
20:18 a deal with was is based on performa so
20:20 there are certain lenders that they have
20:22 access to and people they know that will
20:24 consider hey the thing is okay today but
20:27 look at the performa and there’s some
20:29 future expectation which is which is
21:31 also a lot of flexibility you you hit on
21:34 exactly the additional point I was I was
21:35 going to add to Ferris comment which is
21:37 that um the different lenders take
21:39 different views so some will will do uh
21:42 proor transactions some will do pure air
21:45 what we would call an airball
21:46 transaction so for the audience an
21:48 airball transaction is if there’s no
21:50 real collateral underlying the loan you
21:52 can still get up to $5 million let’s say
21:54 you’re buying a Services business uh you
21:56 can still borrow up to $5 million now
21:59 certain certain Banks and non-banks have
21:01 collateral policies which they will say
21:03 will only take a uh up to $2 million
21:06 let’s say of unsecured uh exposure um
21:09 but there are banks that are and
21:11 non-banks are willing to do up to $5
21:12 million of of what they would consider
21:14 unsecured exposure so it’s really
21:16 important and that’s where we’ve spent
21:18 the last eight eight years developing
21:20 our our Network and our relationships
21:22 more importantly it’s really important
21:24 to understand who does what and how they
21:26 do it um in order to make sure that
21:27 we’re we’re providing a good service to
21:30 our clients and making sure our clients
22:31 are with the right lender and that’s the
22:33 value of obviously using a mortgage
22:34 broker right exactly not all not all
22:36 Originators or lenders are the same so
22:39 no when you I mean listen I was in the
22:40 game for over 20 years still still still
22:42 like to do it and still like to do deals
22:45 um and when you find people that operate
22:48 with integrity and their intention is to
22:50 take care of the client man you go with
22:53 them you run with them you know and
22:54 that’s kind of where Darren and I met
22:55 and that’s why we stayed together for so
22:57 long absolutely Casey doesn’t doesn’t
22:59 even know this but uh yesterday we
22:01 closed a transaction that uh he gave me
22:04 a a sort of a name in the number maybe
22:07 three or four no maybe even longer maybe
22:09 up to six months ago and uh and I I
22:11 won’t say the name for privacy purposes
22:13 on the call but um that that’s the type
22:15 of you know Integrity we like we like to
22:17 have we we were very careful with our
22:19 referral relationships we actually get a
22:21 lot of transactions from other lenders
22:24 other um folks that um not only are
22:26 Consultants advisers Brokers but a lot
22:28 of lend ERS will come to us with their
22:30 clients as well they maybe offer only
23:32 revolving lines like we do and their
23:34 client needs to acquire a business so um
23:36 that’s been how we’ve been able to grow
23:38 our business is through uh through trust
23:40 and integrity and figured this would be
23:42 a good time to tell Casey that we’ve
23:43 closed another deal together all right
23:45 nice let’s put it on the board awesome
23:47 so one thing and I know you wanted you
23:48 jump into the next later but I’m gonna
23:51 I’m gonna just kind of so so all right
23:52 so Darren you have SBA SBA was the
23:55 product before we wrap it up where are
23:57 the challenges right now with SBA like
23:59 what is the biggest issues with SBA
23:01 because it has been that business has
23:02 slowed down from what from from what
23:04 we’ve seen is it the interest rates what
23:06 what is it that has caused that and then
23:08 we’ll move on yeah I I think the the
23:10 high rate environment has really um put
23:12 a damper on things to to say the least
23:14 um the one of the issues is that um most
23:17 lenders and again there are abilities to
23:19 look at things on a proforma basis most
23:21 lenders are using some degree of
23:22 historical cash flow analysis so they’re
23:24 taking a look at the last three years of
23:27 of tax return information in sort of
23:30 predicating if the business can support
24:31 the loan payments that are going to be
24:33 made in the future um it’s not a it’s
24:36 not a perfect model and unfortunately
24:38 you’re adding a much higher monthly
24:40 payment now due to the interest rate
24:42 environment which severely stresses a
24:44 lot of transactions now we’re still
24:46 seeing a lot of I I would say categories
24:48 like commercial real estate Acquisitions
24:50 and and those items those have really
24:52 those categories have have come down but
24:54 business Acquisitions have been pretty
24:55 stable um you know despite a very
24:58 challeng in environment so I think
24:00 people are still looking for creative
24:01 ways to monetize um the sale of their
24:04 business and and creative buyers are
24:06 looking at for good opportunities out
24:07 there still good so that maybe shifting
24:09 gears right let’s just move up the the
24:11 pay stack so let’s say now I got a $25
24:13 million business I want to buy and I’m
24:14 buying it for $25 million let’s say you
24:17 know it has a little bit of assets let’s
24:18 say it has $3 million $4 million of
24:20 assets it’s got $25 million of Revenue
24:22 on as well how would you suggest
24:24 financing that let’s say no real estate
24:25 just kind of keep it simple yeah so um
24:28 so we asked ourselves that question um
24:29 after doing the SBA uh loans for for
25:32 about six years and and and and really
25:34 making a a nice uh indent in in that
25:37 Marketplace we we started getting
25:39 requests that were um outside of that
25:41 scope and and uh one of our um our our
25:44 team members who Casey’s gotone to meet
25:46 as well Bill uh set out to create a
25:48 middle Market Initiative for us um so
25:50 that we could have access to the to
25:53 answer the question of what do you do if
25:55 it’s a $10 million an up request 10 to
25:57 $100 million and so so um that market
25:60 that we that we experience is primarily
25:02 served uh by the private credit market
25:04 and private credit um you know some
25:06 folks might be familiar with the black
25:08 rocks and the areas of the world but
25:09 there’s hundreds and hundreds of small
25:11 independent um private credit funds that
25:15 you know if if you think the SBA side is
25:17 customizable this adds a whole new
25:19 degree of customization to to a
25:22 transaction there’s some private credit
25:24 groups that only focus in specific
25:26 Industries there’s some that um will
25:28 work on a uh an exact multiple of EA
26:31 there there’s all sorts of ways uh to
26:34 determine who’s the best fit there and
26:36 so uh Bill and and and some of our other
26:38 team members have spent the better part
26:40 of the last two years developing that
26:42 Middle Market Initiative for us which is
26:44 now um our you know become our our
26:47 secondary core Focus so SBA lending on
26:49 the advisory side is core Focus number
26:51 one and Middle Market lending um I I
26:54 believe will will uh outpace that um in
26:57 the over the next 10 years and and just
26:59 to jump into some of that private credit
26:01 conversation so what I what I’ve seen
26:03 some of the the groups that are out
26:04 there in private credit uh they they
26:06 have a debt and Equity feature in in the
26:08 companies that I’ve seen typically these
26:10 groups have raised you know hundreds of
26:12 millions of dollars for Lending purposes
26:16 right they can offer some Equity I don’t
26:18 I know that some of your products don’t
26:19 offer the equity but on the debt side
26:21 they either a like to have a uh like a
26:25 an equity kicker some of the ones I’ve
26:27 seen right they come in they want an
26:29 equity kicker um they’re going to have a
27:31 little bit more kind of a review of
27:34 really the business side of it but on
27:35 the other side of it it it can be
27:37 non-recourse right you’re talking about
27:39 now I’m not having to worry about who’s
27:42 going to personally guarantee or go it’s
27:44 really going to be based off the
27:45 strength of those those assets right
27:48 exactly and and so from a structural
27:51 perspective um the you you get a lot of
27:53 unique opportunities within um the
27:55 private credit space so structurally a
27:57 big one um no no personal guarantees in
27:60 in in in many in most cases um where
27:02 they’re looking at the underlying
27:04 business and the underlying what you
27:05 call in that space sponsor um in in
27:09 order to sort of make the credit
27:10 decision and what they get as a tradeoff
27:13 is they do capitalize in some of the
27:15 upside with um with warrants and and
27:17 other tools of of that nature uh to your
27:20 point Casey we we don’t uh participate
27:22 on the equity side at all um some of the
27:24 folks that we that we work with um on
27:27 the private credit side will have Equity
27:29 component um but we really stick to the
28:31 um private uh credit debt side um in
28:34 order to provide the most value so
28:36 structurally oftentimes you’re also able
28:38 to um create um where the SBA program
28:41 just as a comparison is you know
28:43 straight line amortization so you have
28:44 the the uh the same payment um over over
28:47 the period over the term assuming that
28:49 that rate stay the same um the in on the
28:52 private credit side you can often time
28:53 have oftentimes have an interest only
28:55 component um you can have uh no payments
28:58 for period of time um you can start
28:00 advertising Loan in your two or three it
28:02 really that’s like fully bespoke um
28:05 underwriting and lending where you’re
28:07 able to look exactly at what the goals
28:09 are and underwrite to those goals I so
28:12 maybe for people like what do terms look
28:14 like on some of those private credit
28:15 loans to kind of go straight down just
28:17 the key metrics yeah I I think there’s
28:20 um I I can give you some very broad
28:22 Strokes parameters of of where we play
28:24 um so you know without using a a
28:26 benchmark index I’ll just give you sort
28:28 of of an overall rate structure that we
28:30 see it’s generally somewhere between 9
29:32 to 14% um and then there’ll be some type
29:35 of uh kicker involved uh in there as
29:37 well um and usually one or two points uh
29:41 from a or based one 100 or 20000 basis
29:45 points um in terms of closing fees um
29:48 and again some sort of Warrant um
29:50 component uh in there so they can
29:52 participate in the upside a term term
29:55 length is typically three to five years
29:57 is is what we see um again the
29:59 amortization of that loan or or how the
29:02 the payoff is structured is fully
29:04 customizable for for each and every case
29:06 that that is a true bspoke product okay
29:09 and then so any kind of LTV or DCR
29:11 constraints that people need to be aware
29:13 of are they kind of force on um no not
29:15 not necessarily it really it really
29:17 depends on on the um underlying uh on
29:20 the underlying transaction there there
29:21 can be um the there can be turnarounds
29:24 that are required using these vehicles
29:26 as well that might not have any um uh
29:28 that might not have any cash flow to
29:30 service debt so it it it really depends
30:32 um that’s where it’s key to go back to
30:34 sort of what is the um the funds
30:36 underlying Focus are they focus on um
30:39 you know High uh highrisk turnaround or
30:41 they focus on um growth Capital um they
30:44 there really is a variety of different
30:45 players involved um in that sort of
30:48 smaller lower Middle Market space and
30:50 that and that’s the area that we tried
30:51 to occupy and Darren how are the
30:53 warrants talk to me how that works so
30:56 listen what is a warrant let’s start
30:57 there selfishly I want to know yeah a
30:00 warrant you know in simplistic terms
30:03 allows the lender to to capitalize on
30:05 the upside you you essentially get an
30:06 opportunity to to own the shares at a
30:09 set price um in the future and uh and
30:12 and where this becomes really valuable
30:14 is you really be able you’re really able
30:15 to buy into what we what we’re calling
30:18 the sponsor’s vision so often times when
30:20 we’re working with a client um the
30:23 client will have not just one Target in
30:25 mind but they’ll look to roll up or
30:27 acquire multiple uh that’s just a slang
30:30 word for for acquiring multiple entities
31:32 um you know different businesses and so
31:36 if you’re looking at um someone who
31:38 might be acquiring let’s say uh five to
31:40 six laundromats each one of those
31:42 laundromats might only you know sell at
31:45 at a three multiple but when that um
31:48 sponsor sells uh you know the group of
31:50 whatever it ends up being six to 10
31:52 laundr mats down the road they might
31:54 command an 11 times multiple for for
31:56 that for that same um that same
31:58 underlying business so it’s really it it
31:01 becomes really key when you’re when
31:02 you’re looking at what someone’s vision
31:04 is um and you’re structuring a loans it
31:07 adds a real upside potential for the uh
31:09 for the lender Prett cool cool and maybe
31:11 last question before we kind of move on
31:13 to the rocket round what are some of the
31:15 biggest mistakes you see people make
31:17 whenever they come to you with the deal
31:18 they want to buy that’s a it’s a really
31:20 good question I think um one one ask
31:22 great questions for the record yeah fair
31:25 fair um one of the things I I see people
31:27 I I I think people sort of sometimes
31:29 rush to try to um acquire and get hooked
32:32 into a specific business that they might
32:35 see a flyer for without fully vetting it
32:37 through I think it’s important even
32:39 though there might be great
32:40 opportunities out there I think it’s
32:42 important to really do your own homework
32:44 before you even contact someone like me
32:46 um we do not mind helping I I I have
32:49 gone through with Casey we’ve gone
32:51 through um dozens of of candidates and
32:54 and Acquisitions that maybe didn’t
32:55 materialize for one reason or another
32:57 but in all those cases there’s there’s
32:58 the level of homework done where where I
32:01 see that people really start to fall
32:03 short is they they rush to try to
32:05 acquire a business um they might even
32:07 have the cash to do so um and but they
32:09 really don’t understand what they’re
32:10 getting into they haven’t done the
32:11 appropriate planning or forecasting
32:13 while we can help supplement a lot of
32:15 that data with our tools and our
32:17 expertise you have to as a business
32:19 owner running the business want you have
32:21 to understand the Dynamics yourself so I
32:24 see that’s that’s the most common U uh
32:27 mistake that I see people make you know
32:28 Darren one of the things I’ve taken from
33:30 you know the years of doing this and uh
33:32 we’re hitting home on a few of the
33:33 projects is really also doing a cash
33:35 flow analysis I I think that we so easy
33:38 in the analysis do an income statement
33:40 balance sheet we do all the performas
33:42 there but then we don’t really look at
33:44 the the lumpiness of cash flow for
33:46 certain businesses and I know we’ve been
33:48 going through an exercise on cash flow
33:50 and it’s been and it’s not easy to model
33:52 cash flow right you’ve really got to get
33:53 into that but with when you start adding
33:55 in you know large payments um that are
33:58 due at the every single month uh you
33:00 start adding in that seller seller note
33:03 um if you take a receivable line of
33:04 credit or anything like that you start
33:06 looking and you go man you know there’s
33:08 tremendous amount of Debt Service what
33:09 does my cash flow really look like at
33:11 the end of the day because right EA adds
33:13 adds back interest expense and so that’s
33:16 not really money that you get to walk
33:17 away from at the end of the day huge
33:19 things that kind of like in our analysis
33:21 we’re starting to even get better at is
33:22 really home anding in is EBA may be a
33:25 threshold for the acquisition it may be
33:27 a threshold for the but even it doesn’t
33:29 necessarily mean you’re putting that
33:30 money in your pockets right and so
34:31 digging into cashow I’d argue I I’d
34:34 argue cash flow analysis is much more
34:36 important than the historical eidar or
34:38 um or cash flow analysis so or
34:41 historical cash flow analysis the future
34:43 cash flow forcasting up uh is what is
34:46 what I was referencing is is more
34:47 important and making sure that you again
34:49 have have the right framework and to be
34:51 able to do that that that again goes to
34:53 the last question of mistakes I see
34:55 people make if you’re if you’re not
34:57 engaging in a thoughtful process while
34:59 you’re um acquiring the business and
34:02 engaging in the right cash flow planning
34:04 you could be getting yourself into even
34:05 if the loan could be approved because
34:07 you’ve got strong personal collateral or
34:09 strong uh injection you could be setting
34:11 yourself up for failure right away by
34:13 not either having the right people
34:14 around you or the right forecasting done
34:16 on your own fantastic well Darren we’re
34:18 going to jump into the rocket round um
34:20 first off man thank you so much for uh
34:22 joining us today I mean dude it’s been I
34:24 mean it’s just a touch of what you do
34:27 and uh there’s so much more we’ll come
34:29 definitely have you back so let me jump
35:30 in and just ask you your first question
35:32 here so what do you like to do in your
35:33 free time man that that word doesn’t
35:35 exist uh as much with a four-year-old
35:38 and three-year-old but during that that
35:40 limited free time now um golf I uh I my
35:44 my other uh goal in life is to get on
35:46 the the corn fairy tour now that I’m uh
35:49 I’m an 18 handicap so you know on my I’m
35:52 on my way there um but every requirement
35:54 of
35:55 any yeah exactly EX deal deals do get
35:59 done in the golf course surprisingly but
35:00 no in that is my that’s become my my
35:03 hobby and uh and my passion um when when
35:06 I have free time all right cool next
35:08 question most memorable moment in your
35:10 business Journey you know it was
35:11 actually fairly recent um we uh we were
35:14 I I was I’m a University of Florida
35:16 graduate um both for my masters in
35:18 undergrad gogators and uh we were
35:21 awarded what’s known as the gator 100 so
35:23 we were one of the 100 fastest growing
35:26 uh Gator Le businesses um in in 2023 so
36:31 I think for for me just graduating from
36:33 the school and now being recognized as
36:34 number one public uh University in the
36:37 country that that’s been my most
36:39 memorable uh moment congratulations man
36:42 that’s awesome thank you all right last
36:44 question so what’s your favorite tool or
36:45 resource I I hate to sound cliche but
36:48 but we really are using it um uh you
36:50 know tremendously um AI technology um we
36:54 we are um making a big push for AI
36:57 driven tools we recently put an AI chat
36:59 bot on our website to help folks
36:01 understand if you go to a commercial
36:02 Finance partners website um you can
36:04 interact with our our chatbot and
36:06 understand some of the rules and
36:07 regulations regarding SBA it’s
36:09 specifically designed to answer SBA
36:11 related questions and we’ve applied it
36:13 in so many different areas um we now you
36:16 know speaking about forecasting and
36:17 helping our clients out um we’ll run
36:20 modeling through um through o Open AI uh
36:24 in in order to sort of validate certain
36:25 things we’ll we’ll do some historical
36:27 analysis
36:28 uh using it I I see the future um and I
37:31 just wrote an article about this
37:32 recently but I I see the future in the
37:34 next 5 years from now um you you’ll be
37:37 doing you’ll be able to do most
37:39 underwriting with a click of a button if
37:40 you have access to to the data point so
37:43 I think there’s uh we want to be early
37:45 adopters to it and um even though you’re
37:47 hearing the buzzword of AI and and and
37:49 people playing around with chat GPT I
37:51 think it’s going to completely uh turn
37:53 over the lending uh origination and
37:56 underwriting space fantastic
37:58 perfect well Darren thank you for all
37:00 the information you shared on the show I
37:02 mean total wealth and knowledge how can
37:04 people get a hold of you um would love
37:06 to get a hold of anyone who has any
37:07 follow-up questions um our business is
37:09 uh commercial Finance Partners we’re
37:11 located in Boer rone Florida uh my email
37:15 is D Palestine at commercial Finance
37:18 Partners all one word very lengthy but
37:21 commercial Finance partners uh.com and
37:23 our website is commercialfinance
37:25 partners.com and you can learn a lot
37:27 about the these different products
37:28 through our website or or contacting us
38:31 or or one of our team members through
38:32 through that website perfect we’ll have
38:34 those on the show notes for listeners
38:35 perfect and we’ll be talking to you
38:37 really we’ll be talking to you in about
38:38 48 Hours once our Loi signed to talk
38:40 about our our current deal fantastic
38:43 guys thank you very much for having me
38:45 and uh look forward to it thanks Darren
38:47 thanks Darren thank you for listening to
38:49 the m&a Launchpad podcast if you’ve
38:51 enjoyed today’s podcast and would like
38:52 to support us please leave us a rating
38:54 and a review after you listen I’m Casey
38:55 mchu and I look forward to talking with
38:57 you next week
