E205: Raising Capital for Acquisitions: Funding Sources to Finance Your Dream Deal w/ Parnell Speed

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Parnell Speed and we're going to talk about all things capital and raising money for your acquisitions. Thank you for being here today, Parnell.

[00:00:09] Parnell Speed: Oh, it's a pleasure to be here, Ronald. Thank you so much for having me.

[00:00:12] Ronald Skelton: I always start off with the same joke, man. It's like, Hey, you were born and now you ended up on a show about mergers and acquisitions. how in the hell did you end up on this show, man? 

[00:00:20] Parnell Speed: What a, What a meandering story. So my background, my corporate background is engineering. And after spending probably 17 or so years in that space, after a couple of rounds of layoffs, it's like, I want to do something different. Got into the real estate game. Did dabbled in that, I would say.

And a few years ago, uh, discovered acquisitions or I met a, um, working at, working at a nonprofit, I met an actual M and A attorney. And I was like, well, what do M& A attorneys do? And start asking questions. And, next thing I know, I had an opportunity to go through a training program, that allowed me to learn about M and A.

And what actually got me into M and a was the, got excited about doing roll ups.That was the thing that I really wanted to do, but I wanted to really want to learn the game, that sort of thing. But back up a little bit in that, during that time that I was laid off, I started seeing how difficult it was for people to get access to capital.

Well, I'm sorry, how difficult it was for me to get access to capital and started learning about that. And then I helped myself and a few people and they're like, you gotta make this a business. Okay. This was kind of like right before COVID.

And, so around 2019 or so is when I started. And I've just been helping people ever since, you know, get access to, because there are a lot of, there are a lot of sharks out there in this space.

Right? So, I wanted to be one of those, one of those good guys, if you will, that really kind of coaches people along and say, Hey, stay away from this kind of money because, or this is the best type of money for your particular situation. And so I wanted to carry that into the acquisition space as well, you know, and helping people understand there's lots of money out there for you to do a deal, but what's the right money for you? In your particular situation.

[00:02:20] Ronald Skelton: So I've been spending a lot of time recently, recently about raising capital, doing private placement memorandums, talking to people who have successfully interviewed people who have successfully raised capital. I know the space a little bit like you, I have a real estate background. So I raised private,you know, I, I introduced myself to a lot of private investors in that space, and I can raise private capital in small chunks. In hundreds of thousands of dollars at a time.

So small compared to what we do, you know, what we do and need now. But I'm really curious about this space and all the different avenues there are. When I first got into the space, I even met a guywho was really good at doing loan processing and stuff. And, uh, convincing of me and him working together.

He went out and figured out how to do a, what do they call them? Rule development loans from, so you'd be surprised at what's considered a rule. Like in our town in Tulsa, like Tulsa wouldn't be, but the little town over next to it, which was growing like mad. Also was considered rural development.

Well, there's businesses there, there's stuff there. So as long as it could have real estate attached to it, you could use these USDA real, rural development loans. And they're really, really affordable rates and in considerable amounts of money, they would loan you. So, we were looking at maybe doing assisted living facilities, riles, and that type of stuff for that.

Talk about some of the different loan processes and loanavailability or you call it products that are out there that you're familiar with.

[00:03:51] Parnell Speed: Sure. Well, obviously everybody knows about the king, which is the SBA, right?It's the best money, or not the, or the cheapest money, but it's the hardest to get, right? Uh, there's that. And then you have all of the alternative types of funding whichwe can, uh, talk about, which is, asset based financing.

You've got revenue based financing. You've got,you've got, um, contract financing. You've got factoring. You've got, I'm missing some stuff right now, but,you got a host of, there's lots of different things. Well, you got owner finance. That's the other king, right? Owner financing, right?

If you can do a deal where you're getting a little owner financing in there, I've even seen people do deals where they've gotten almost 100 percent owner financing. So that's the king of, outside of getting that cheap SBA funding. So there's just so many different ways you can do a deal. To where, you can get access.

One of the biggest things I learned from my training program out of, is that you're only limited by your creativity. And I believe that to be true when it comes to also getting access to capital is, you're only limited by your creativity in terms of finding the type of money that you need to do your deal.

Because we, we, and the other big one is private money, right? Is getting investors to do the deal with you, rather than you trying to qualify for funding all on your own. 

[00:05:09] Ronald Skelton: I was going to say, I took the same course you did. I've taken a couple of courses and I've interviewed all the gurus out there. All the, all the guys. Most of them anyway. I still interview them. I got a few of them coming back up again. Uh, that said, one of the things I learned in that process was, like in the real estate world, you have to be careful of the thing called pooling, right?

So you can get yourself run awry with the SEC. If you take a little bit of money from this guy and a little bit of money from that guy, cause now you've created a security, right? So there's some rules around that. But in this, and there's still rules around that inside of this space, but I never thought about. 

One of the guys in the, that training space cause a deal pie, but basically you can raise the money for a acquisition of a business through multiple sources without running a muck of the SEC. So you could, you could look at all the equipment sitting on the floor and go, you know what, there's 6 million dollars of equipment.

Somebody will give me, let's just be overly generous, a 60 percent loan on that, right? Maybe even a little bit more than that, but you know, so, okay, now I can get, I get that much money, okay. Now I've got 3 million accounts receivable. I can get a little bit of a loan on that.

And then, you know, I've got, 25 million are not 25 million, I'll say 5 million in recurring revenue on contract. Somebody will give me a little bit for that. Now I can bring in an investor and I needed X number of dollars, I'm two million short, right? That now I have to just convince the owner on a major purchase to finance one of it and I'll bring an outside investor in for one. And you still only have technically one individual that's not an institution invest in you. So you didn't pull funds like the SEC because they're only worried about you betraying or doing something wrong to an individual investors. 

[00:06:58] Parnell Speed: Yeah,

[00:06:59] Ronald Skelton: I never even thought of that through until I went to the course about you can mix and match these funding sources to get to the target. 

[00:07:05] Parnell Speed: Yeah, yeah, absolutely. Yeah. Yeah. And, uh,the industry term that is capital stacking. If you want, if for people who want to sound like they know what they're talking about, right, and stacking different types of capital so that you can get that and take that deal down. And it's just, uh, but again, you're only limited by your creativity and when it comes to that.

[00:07:23] Ronald Skelton: I always thought this, you know, raising money through a private placement memorandum was as huge complex issue. It's cost money. 25, $30,000 probably is the entry fee for that and it goes up from there. But it's, it's pretty much a business plan, a private placement memorandum, which is a fancier version of a business plan. A single one to two page filing with the SEC.

And then regularly I think it's either quarterly or annually reporting to them. It's not as complex as I thought it was. After interviewing a few people, I was thinking it's kind of akin to going public where you got to like fill out a thousand forms with them and get background checks and all this weird stuff.

It's not nearly as complex. Let's talk about the process. What do you, second to SBA loans because we've had that on the show a lot. And you have, if somebody needs an SBA loan, they can come to you. You have people on your team that can help with that too, as part of their, as part of their capital stack.

On the items outside of that and the items that are primarily non personal guarantee items, because I don't think if you do an SBA loan, I don't think they're happy if you've got multiple personal guarantee loans off to the side of it. So it's either or, right?

[00:08:33] Parnell Speed: Yep. Yeah. Cause they, they, uh, I can't say, I don't want to say about that. But yeah,they make sure you heavily PG the loan, right. Uh, with collateral and things like that. Yes.

[00:08:44] Ronald Skelton: They're not going to leave much PG laying around for somebody else to use anyway.

[00:08:48] Parnell Speed: Yeah. Every PG they can find up from you, they are going to make sure they can, and encumber it to the deal. Yeah, absolutely.

[00:08:56] Ronald Skelton: Now, so that said, let's talk about what are the requirements for some of the other, I don't know, let's just jump into one. A lot of companies that you're buying are brick and mortar. A lot of the companies, the people listening to this that are buying, are brick and mortar. And they have equipment, they have assets, they might have like forklifts and heavy machinery and manufacturing equipment and stuff.

What does that look like? What is the loan process? What is a timeline? Walk me through, you know, I'm buying a company that has $2 million worth of physical assets sitting on the floor.What do I need to, to do to get a loan against that?

[00:09:34] Parnell Speed: Sure. Yeah. So they, one of the main things you need to do is you need to assess that equipment. So you got to get a list from the seller to that equipment with all the right information on it so that you can then have that list evaluated. To determine what is actually worth. And then, of course, based on that, how much can you get for it, right?

How much can you borrow against it? Right. And then how are you going to do that? Whether you're going to do a sales lease back or whatever. And that timeframe is, is usually pretty quick, compared to our, compared to the SBA, right. You might be looking at, you know, 30, 45 days, typically, uh, doing something like that. Same on a, on a, on cop. If you want to do like contract financing or something like that, you're probably, the value, the, uh, due diligence process is probably about, 30 days. Probably less. But generally around, two weeks to 30 days. As long as, that's after everything they need is into the underwriter, right?

Let's see, what else?

[00:10:39] Ronald Skelton: What kind of things would they need though? I mean, they get a sample of the contracts?

[00:10:43] Parnell Speed: Yeah, they need a copy of the contract. And all the details around the contract so that, that satisfies the underwriter. And then,they evaluate it to determine, Hey,it's really worth what's, what the face value of that contract is. And this is based on that. We'll give you this LTV, on that particular contract, right. And it varies, in terms of what the LTV is on that particular contract. The highest I've seen recently is about 65, 70%. That's just me personally. I'm not, there may be people who can do better or worse, but that's about what I have seen, in that space. And then on the equipment side, probably between 50.

And 50 and up, I'd say 50 and up, right?50 percent and up on that. Depending on who you talk to because there are a lot of different lenders out there who do that.

[00:11:38] Ronald Skelton: I want to touch on one thing real quick though, cause, uh, If you're listening to this and you think, I'm going to use this to fund a business. You got to find something that's extremely profitable because you're taking a business that's been around for 15, 20 years, who hasn't had the burden of debt. And now you're going to be making monthly payments. And I don't know what interest rates you're seeing on the factory and for, the, uh, accounts receivable and equipment. When I looked at it, when I last time I looked at it deeply, was before the interest rate shot up. And they were still charging considerable out.

I have a buddy from mine from that used to be in the, he still is a Rotarian. I had kids and didn't have enough time to stay part of being a, part of Rotary International. But, uh, he's still a Rotarian, but he does that. He does, equipment lease, you know, sale leasebacks and loans against equipment and that type of stuff.

But the rates are extremely high depending on the age of the equipment and the company itself and the company's credit profile comes into place. Some like, their history and that type of stuff. But I would say the best rate he could get you is 18 percent. And it went for 21, 22 is credit card rates.

[00:12:46] Parnell Speed: Yeah. Yeah. Yeah. Yeah. And you have to account for that, right. In your, uh, in your deals, we be able to handle that debt service. And that's, that's a really critical point, uh, for people who are looking to do an acquisition that you, yes, you want to do what you can to get the act, take the acquisition.

Now there's so many things you have to be forward thinking on to be successful after you have it in your, after you take it over, right. And one of those is being able to handle that debt service. So, so important.

[00:13:14] Ronald Skelton: A lot of people look at these businesses and they're like, Oh, the businesses, a lot of businesses out there this way. I just talked to a guy, uh, his business is doing all right. When I asked him what his profit margin was and you know, it sounded impressive. He's like, Oh, I'm doing $800, 000 a year. I asked him what his profit margin was.

He said, eight. 8%. I was like eight, 8%? And he's like, Oh yeah, 8%. And I'm thinking, 8 percent on 800, 000 is not very much. $64, 000 a year?that's

[00:13:43] Parnell Speed: Grand. Yeah, for sure. 70 or so.

[00:13:45] Ronald Skelton: So he's cranking out eight hundred thousand dollars a year. He's making his profit now. He probably pays himself a salary. That's okay. But his profit is sixty four thousand a year. To buy his company, debt service, you know if you needed to raise eight hundred thousand dollars it'd be really hard to look at you know, your debt service on eight hundred thousand dollars at eighteen percent would probably be eat up every bit of that, right?

So, that's why I said you got to find companies that actually are extremely profitable that they can handle this and then, you'll eat it for the first two or three years until you get that debt paid off. That's when you really start to make serious money, but you just got to make sure that there's some room for the cushion.

The other thing I would say before we get too far, I'm going to ask you about a bunch of more loan products is, understand the businesses cycle. Almost every businesses has have cashflow cycles like, uh, hot seasons, cold seasons. A lot of them are extremely anything B2C could be extremely,fluctuating, maybe during, between Thanksgiving and Christmas.

So if you, if you make a product that would typically be given away as a gift or something like that, then your prices are going, I mean, your sales are going to be, two thirds of your sales are going to be at the end of the year. So, a lot of people don't get that and understand that they buy this business in January and cover it with debt, yeah, the business made three million dollars last year, but you're not going to get two of it until the end of the year. Now you get, you still got to pay those loan payments, all the way throughout the year. So, uh, just understand both, what you're getting into when you're looking at these products and don't think that this is super easy.

I don't want to, I don't, I don't believe in get rich quick and I don't believe in trying to portray anything that's super easy, but it is very doable. So let's talk about the, uh, the other products that are out there. We did talk about, uh, asset based loans. We talked about contract that they would review the contracts and stuff. What else is available? 

[00:15:29] Parnell Speed: Oh, man. So you, well, you've got what's called, uh, non recourse funding. I don't know if that's,there's lots of different versions of that. But essentially, the way it works for those people who don't know is that your project funds alone, essentially. And that takes out the PG, the personal guarantee. Which is what people really want to avoid as much as possible when they're doing these deals, right?

And there are sources out there to where you can get that, that non recourse, but they're kind of hard to find. And then there are versions of that program that are out there that I recently have gotten access to, to where you can get some really sizable loans from those programs.

And I'm looking at bringing 1 on board now, where it will go up to about 99Million dollars. And we're still working on the finishing touches of that, but, uh, so you can do it. You can do that, you can get those loans and be able to take down those deals without having to be, and it's a lot easier.

And the process is only about 90 days. Without all the, uh, PG and collateralized as you would do with the SBA.

[00:16:41] Ronald Skelton: So one of the things that a lot of people miss in the banking world is particular banks have particular sweet spots. Things that they do regularly. So if you go to your local bank, for instance, I live in the Redwood Forest in Northern California. There's just not a lot of manufacturing around here.

So if I went to a local credit union and went to every, every local bank and, or a regional bank in this area and said, Hey, I'm buying a, you know, a $2 million manufacturing business here in Sonoma County. Most likely there may be one, we'd have to find the one that's comfortable doing that because most of them, yeah, they'll advertise, they do business loans and stuff, but what they are loaning on is what they're comfortable with because that's what's available to them.

So it's the, here it's elder care because this is the vineyard area. I'm surrounded in wine country, so a lot of people retire up here, right? And it's restaurants and bars and, B2C type of businesses, retail restaurants and bars. If you were going to open one of those, yeah, half a dozen of those, uh, regional banks and stuff would be able to have some product to help you do it.

Do these non recourse sources you have, do they, the reason I told you the whole story was do these, do they have sweet spots? Do they have certain industries and stuff that they prefer? Often you won't know that until you look at like whether Alaskan loans that, you know, they made, you'll say, wait a second.

They say they're, they'll loan to anything but the last 10 loans they made were to industrial manufacturing. 

[00:18:07] Parnell Speed: Yeah, that's absolutely true. Is that that every funding source has their sweet spots, right? Whether, like you said, whether it's a local, regional or national bank, even in some cases.Even if you go internationally, right there, they have their sweet spots of things that they like to, to fund. 

Most people, most, most lenders stay away from, uh, the adult entertainment industry, for example. That's an easy one. Right? But, primarily, when you get into, um, uh, real acquisitions, there are sweet spots that they have. Like, for example, like you mentioned manufacturing, for example. You can even get even more nuanced than that.

You can get to where, Hey, we don't, we're only, looking for manufacturing in, say the automotive space, right? Because they, they, they are from Michigan, right?

[00:18:58] Ronald Skelton: Right. Or they just know that space inside and out. They've had good success with it. They wanna do more. It's just natural human. People forget all the time that all these businesses are run by human beings. Human beings actually have psychological biases. And they have two or three good wins inside of something they'll gravitate towards what they know. 

They'll gravitate towards what they want out of the last three or four places. So, how do you, like, for these non recourse loans and stuff, what does the process look like? What are they evaluating? Are they evaluating the business the same way an SBA loan would do? Where they're, they see the financials of the business, they're looking at the merits of the business, or do they look at the individual that's wanting to do the loan?

[00:19:39] Parnell Speed: So the program that I am, I can't speak for all of them, but the program that I'm working with, it is even, it is far simpler, than what you would do with the SBA. So the way we're, this program is being structured that you simply submit a one page executive summary on your project.

You sign, of course, sign an NDA, and then, um, we get you on a call with all the folks,so then you can answer, asking and have your question answered about. Essentially it's a dual vetting process. And so,there is a, and you simply have to be able to put down a deposit. Uh, refundable deposit would be clear. A refundable deposit for the program. So let's say that if your goal is you're looking to raise 5 million, uh, you will put down, 10 percent of it, which is 500, 000. And,

What do they call them? Surety bonds? I'm going to butcher the name. Is it a bonded? Absolutely. That's how the, that's how it's secured, right? Rather than you being secure, securing it by your credit or any type of personal collateral. That's how the program is, how the program works. And so then, they do all their financial engineering on the backend. And then 90 days later, you get your $5 million plus your $500, 000 back.

And that is, so much easier than what you're going to go through with the SBAto get $5 million.Or any, really any, any, any brick and mortar bank that you're going to walk into and try to get $5 million. So, um, and your project is what,or qualify. That's what I'm looking for, sorry. 

Is what qualifies for the funding, right? Not so much you, the individual and your credit and what assets you have personally. 

[00:21:24] Ronald Skelton: Do they look at the operator? I mean, if you're doing an acquisition, because it's different. if I own the company, I've been running for 20 years and I go in there and try to, you know, or get some funding, there's a track record there. How do they evaluate the capabilities of the operator if it's an acquisition for these type of loans?

[00:21:40] Parnell Speed: Sure. We have, uh, we have a team of evaluators that, that's what they do. That's all they do. And they will, they will bet all of that, right. And in that, yeah, you, you, we need to know what you're talking about. Obviously you do. You need to be skilled at, in that arena. If you're going to take over that business and take it to wherever it needs to go in order to be able to pay back the loan.

But, it is less of a, it's more of a skill scrutiny versus a asset scrutiny. That makes sense?

[00:22:14] Ronald Skelton: Yeah, but the SBA wants to know you have some background in it, but they're more interested in what you can guarantee the loan with.

[00:22:19] Parnell Speed: Exactly. Exactly. Right. And whereas we're, we're, Hey, can you really take over this business and take it to the next level? We're not so much concerned about you having all of the collateral to take care of this loan should things go sideways. No, can you really run this business the way it needs to be run to cover this debt. And based on that, that's how you get funded.

[00:22:42] Ronald Skelton: Somebody's listening and they're fairly new. They say they've only had W 2 jobs all their life. They're wanting to go down this path. Would it be better for them to go out and find a JV partner that's got some operational experience and some track record to get this type of loan or does it matter?

[00:22:57] Parnell Speed: It does, if they are, if they are starting from much of the, they've never done this before and they, um, you know, I don't know, let's say that they were in an administrative role. Yeah, and that's, that's been their focus their entire career. Right? And they're looking to do something, they're looking to start go buy a business that is very different from that.

Ideally yeah, you'd want to go and find someone who has expert, expertise in that space to partner with.To get qualified for this funding. That would be the best way to do it. That way you are set up much, you're much more better set up for success in doing what you're looking to do.

[00:23:36] Ronald Skelton: So I know in the SBA and a lot of other loan processes, and even some states have rules around percentage of ownership. So I, it's 20% or mo, more in most these cases. So if somebody say if, say you have a JV partner. If somebody has 20% of stuff, they have to be brought in veted in, in a lot of these loan products.

[00:23:54] Parnell Speed: Is that true in what you're working with too? If somebody's a, there's a threshold where they become a significant partner. Yeah. And it, and it varies, but yeah, it's usually around somewhere between 10 and 20%,where they would be, have to be vetted as well. What else I should say about that? But that's, that's pretty much the case. Yeah.

[00:24:12] Ronald Skelton: Was a yes or no question. It wasn't, you know, like, yeah, yeah. They still look at that. If somebody's,owns a significant portion and it sounds like by loan products, significant portion, portion is defined differently. 10, 20%. Um, like I know that I'm a partial owner on a few, few things that projects that are out there.

But, I don't want to do any personal guarantees or anything. So I come in and advisor role and I stay underneath that 20 percent ownership realm so that when they need to raise capital, if they decided to do an SBA loan, they don't have to, I don't have to sign any personal guarantees or anything. I'm going to, I'm going to stay out of that, out of that picture. So I was just curious if the, if that held true the realm. 

Let's rank these things in financial viability. Like easy, let's do it first by ease to get, like, what's the fastest way to get money. And then we'll redo the same question on who has the best rates. Like the SBA is probably going to beat everybody on rates.

But SBA aside, let's start with, you know, I've got a business here. We need to close in 120 days, that's pushing it. I've already done my due diligence. I think we're ready. And all of a sudden my funding source backed out. I need to raise money. Which source would you point them to first? 

[00:25:19] Parnell Speed: If they're in a situations, especially 120 days out, I would definitely try either, I would steer them toward either a non recourse program, like the one that we have. Or go toward private money. That would probably be the fastest way to get it done. And then you could refi out of that later or whatever.

Those would probably be the top two for me. Just thinking off the top of my head. Trying to think, is there anything else that I would add to that? Those are probably the top two.

[00:25:50] Ronald Skelton: A lot of people don't get that, that, um,if you've got a single investor, you can, the same process people go through and they go out and pitch family offices and wealthy individuals to raise money into a private placement memorandum or whatever. You can do the same thing and not have to go through SEC if it's a single source.

So you can go to a family office and go, Hey, I'm looking to buy this company. They call them independent sponsor. And it's a form of independent sponsorship. Like would you sponsor the purpose? And they get both a debt and an equity, uh, position and usually the equity reduces after the debt's paid in full. So, I mean, you can structure the deal any way that you want to creatively do it.

When you said private investor, it spurred up this conversation of what would that look like? It isn't your Uncle Joe's going to loan you $5 million, right? In the real estate game, private investor means anybody's got money can help me get this deal done. And this space, you're still going to want an incred, you're going to need an accredited investor.

You know, with some deep pockets that, the number you're asking for isn't going to hurt them one way or the other. It's just, they, they need a decent return on it. And they're going to charge you, most of these guys, be honest, I'm surprised at how low the interest rate can be for some of the private equity guys and family offices and stuff.

[00:27:04] Parnell Speed: Yeah.

[00:27:05] Ronald Skelton: They'll go lower than some of these institutional lending places will.

[00:27:09] Parnell Speed: Yeah. So, some of the things that I have, I have seen most of them are usually around eight to 10 percent. Sometimes well, that's, but that's, they're okay with that. Right. And, uh, I think that's awesome.

[00:27:20] Ronald Skelton: That's what I seen here recently. A guy got, that was just a lot, $15 million from a private, a private family office. And, the way it was work, working is they were buying a company, they got for a $15 million acquisition price. They got a really good deal cause they're paying three and a half X. They did it on a five year note with, with the, they got five years to pay it back.

And then that family office retains a seven and a half percent profit share. So they got a long term income out of it. So, you know, it was a no brainer for the guy cause he didn't have any other ideas. That was just what he came up with. But,he pays the loan, but pays the debt back. And then the debt, debt converted to a minority interest in it.

So the guy, the family office gets long term income from it. And they love the idea. And here's a guy who bought a business, he, he knew that, he knew the industry. He had worked in a competing company. Tried to buy that competing company from its boss. And, the boss was like, it was ready to tire.

It wasn't ready to tire. And to complete the story, the competitor heard that they was, he was trying to do it and he goes, I'll sell you mine. Right, you know you raise the money I'll sell you mine and then the next thing, I'm trying to get him on the show. I didn't say the name or anything because he hasn't agreed to be on the show because of NDA requirements and other stuff that he and he just completed this in December, January time frame this year.

So it's pretty early. He's still, he's got to, he's got, it's closed. But it's one of those, it doesn't upset anybody cause he still needs the old owners around and stuff. He's don't want to talk about it too much. But, uh, yeah, they're out there. The deals are out there. So I just wanted to cover that a little bit that when you say private equity, or private investor, it's not an individual. It's usually like a family office or, somebody out there who has raised capital to play.

There's even some private equity firms out there that are raised money now for people like us for acquisitions. And, uh, it's a numbers game to find the right one.

[00:29:17] Parnell Speed: Yeah, absolutely. And if you don't have a lot of those relationships, then you could get with a, afunder like myself or someone else that has those relationships. And then you're,you're dealing with one source.And that way that can get you started faster rather than you have it, especially if you're not an extrovert.Before you're going to get out there and not, and essentially knock on doors with some of these family offices and things like that.

And raise the capital that way. Yeah, absolutely, man. And I think it's just so much opportunity out there. And I think one of the other things that, I want to say about that when we start talking about private investors is that, I don't think people really understand how much money is really out there.

[00:29:57] Ronald Skelton: I got my hands on, I laugh because I got my hands on a list. I'm trying to get, I might make another round of this. I tried to get some family offices on the show. I think I've had two. I've had two and they did, they were really kind of sheepishly or what they would talk about on the show.

But, I cold call probably close to a thousand. I dialed probably a close to a thousand numbers, probably talked to 150 of them. I actually got, cause a lot of it just goes to voicemail. But you know, I got a list from one of the gurus that says like, here's all the private investors in the United States or a family office in the United States.

And I hunted down their neck on phone number from various sources. I don't think the phone numbers are on the list, but they were easy enough to find. And, uh, I just start calling them. It's like, Hey, uh,I run a podcast about buying and selling companies. Do you mind if I ask you a few questions?

I eventually would like to get you on the podcast, but right now I just want to, I'm curious. And, some of the lessons I learned from them were, most of them have more capital though, to deploy than I would have imagined to start with. More often than not, I was told that I, my audience and me, that's the reason they wouldn't come on the show too. My audience and what I was looking for was way too small for anything they're interested in, right?

They're not interested in this SBA loan $5 million thing. I was told quite often that they don't deploy less than 50 million. Or 25 million. I think some of them said 25, most of them were like, it takes the same amount of work for them to do a $50 million deals that it does to do a two or $5 million deal. The same amount of paperwork, same amount to them, the same amount of risk if they're sitting on a big enoughoffice.

And for anybody listening to this, don't know what a family office is, once you hit a certain wealth, usually over a hundred million dollars, you'll hire an investment team that will manage the family trust, the family money. So family offices, usually, hereditary funds from multiple generations of family and, you know, in excess to a hundred million dollars.

And they have people that are staffed. Sometimes it is a family member, but very often not, it's a financial advisor level guy whose whole job is to deploy the capital, the safest and best route. That's why they'll give you loans for six or eight percent. They're not looking for huge returns. They're looking for safe returns.

They're looking for, you know, that business has been around for 30 years. It's going to be around for 30 more. Y'all loan money against it. You'll run it. You got to be careful. Some of them will put clauses in there that, you know, they have a potential they can replace you as like they could, tell you to step down as a CEO and bring in a different guy.

Does it mean they can take your ownership away? Did it like all of us in the contract, you got to really read these contracts inside and out.

[00:32:24] Parnell Speed: Yeah, absolutely. And I would echo exactly what you're saying about, the types of dollars they like to deploy. Right? In fact, my non recourse program, it is an incubator program for people who want to go up to 100 million plus. That's where they really make their money, right?

And this, this, uh, program of five to 99 million is an incubator program. So, it's designed to help you level up into that, if that's where you looking to go. All right. But that's where those folks who, that's where they have those relationships with those folks really want to deploy that 50, a hundred, 200 plus million dollars.

The largest deal I've seen so far is 2 billion. I wasn't involved in that, but, it would have been nice. And that, that, that blows a lot of people out of the water when you start talking to those kinds of numbers, right. But yeah, for sure. When you talk, when you have really have a serious conversation with those family offices, things like that, those are the type of numbers you're talking about.

So you got to really know what you're doing if you're going to be able to deploy that type of funding and they, they want to see safe deals that they can put their money into and just get a nice return to continue to grow that family legacy. 

[00:33:30] Ronald Skelton: Yeah, these family office guys, the manager of a family offices will not lose his job if he gets a business. I talked to one guy, he, he just did a $50 million loan at 3%. And I was like, why would you ever do that? He goes, ironclad business. It'll never go away. It's been around for generations. The CEO has been in there for 15 years, got 30 years before he retires.

He's a young CEO. He's growing like mad and it's safe money. He goes, I'll never lose my job by making three, four or 5 percent on the money. I'll lose my job if I lose money. 

As long as I won't lose money on it, you know, that's the one thing. Like long as I believe in the company, the other thing they've got to be careful with is you said earlier, like adult entertainment and stuff.

They have to not discredit or do, uh, what's the word I'm looking for? They don't, they have to not embarrass the family office, the family name. So they, they're not going to do something if they find out that, you're a gross polluter or you're, you know, you drain chemicals into, a national waterway or something like that.

There's things like that that are both, uh, social. There's things that are economic and stuff that are being red flags for them. They won't touch because they don't want to make the family look bad. So.

[00:34:35] Parnell Speed: 100%. Absolutely. They do not want to be in the news or anything like that. Absolutely. Yeah, they just want to be there well, quietly.

[00:34:43] Ronald Skelton: When I did those calls trying to get them on the show, I often thought, man, somebody could make a lot of money just sitting there creating a CRM, a database of all the different ones out there. Whether they're trying to deploy, what are their sweet spot, what, because they want to help. Hey, they don't pay finders fees too. That would be, that would be a role for somebody.

It's not for me because I just don't know the loan business that well, but somebody like you or something could get some serious cash from just reaching out to all the family offices and go, hey, if I helped you deploy cash, what would that look like? What would you want to invest in? What would you pay me as a finder's fee?

And what would be the criteria to get you to say yes? Because I know people in this space.

[00:35:19] Parnell Speed: Yeah, that definitely is a goal of mine. But I want to, I want to hire a team. I want to hire a team to,to do that legwork. To make that happen, because that that would be a very, very valuable tool, uh, coming into for people who are in this space when we talk about M and a. Because that's probably 80 percent of the work is doing the legwork of finding these, these family offices and other organizations that will land.

Right. Cause a lot of people, especially they're coming in this brand new, they don't even know where to start. Uh, unless you're going to go pay some guru, for, um, however much money they charge to teach you where to start. 

[00:35:59] Ronald Skelton: The, uh, two or three people I talked to recently, they did private placement memorandums, and they raised, like, I just talked to one of Carl Allen's guys who raised $235 million. That was from institutional or private, I don't know, private equity guys or whatever. Family office type of guy. But, uh, you know, he walked in, gave a pitch, guy love the idea of what they're doing, and said, well, how much do you need?

Kind of got set back. And he, I think he told him, he was like, well, one-fifty. $150 million. And like a guy laughed at him. He was like, yeah, it's not going to happen. Calls him back in a day or two and says, I'll do 110 or 120 or whatever the number was. He says he raised, they say he's raised 235 million, but it isn't like two and two institutional investors that did it.

Right. And it's all debt. So it's a debt structure. So he's not giving away equity in that position. They need to deploy it. He has a hell of a story to tell. They like, they're backing his story. That's another thing is like, you have to have something that they want to get behind. 

[00:36:53] Parnell Speed: Absolutely. Especially if you can, if you can raise some money with just debt, right. And not have to give up any equity. That's awesome. That's a great place to be in.

[00:37:00] Ronald Skelton: So let's talk about, how do people reach out to you? How to, how do they, what's the process to start working towards rate? When should they start the process? Let's start with that. When should they start the process of knowing where the funds is coming from?

[00:37:13] Parnell Speed: Sorry. Asked that one more time. I'm sorry.

[00:37:15] Ronald Skelton: Where, when should they start the process of knowing where they're getting the money for a deal? Like they went through a Roland Frasier, a Jeremy Harbour. They went through an ETA program at the local university, Stanford or Cambridge. All these schools now have these ETA, entrepreneurship through acquisition. They came out of the program.

Maybe they don't want to raise a search fund through the traditional way. Maybe they, maybe they didn't finish the college or whatever, for reason they're not going to use the in house college based search fund model. But they, they need to work, at what point should they kind of start looking at the different like sources of where the money's coming from?

[00:37:51] Parnell Speed: In my opinion, yesterday.

[00:37:54] Ronald Skelton: Yeah.

[00:37:55] Parnell Speed: That's, that's the short answer, right? Yeah, because you, you want to,obviously when you do it, when you do an acquisition, right. The goal is to make money, right? Well, one of the things that's most important about that is, how you take it down? That's, that impacts your profitability, right?

So you want to start that process and start learning what was possible for this particular deal as quickly as possible. Even before you get to the point of signing an LOI. You don't, and I have had people come to me when they've signed the LOI. And our due diligence period is 45 days. Um, okay? Make it hard for me. Why don't you?

[00:38:33] Ronald Skelton: Yeah. And the other side of it is they don't understand they just negotiated something that's not fundable. Right?

[00:38:38] Parnell Speed: Absolutely. Oh gosh. Yes, absolutely. 100%. It's like this deal doesn't make any sense. How, I can't, there's nothing for you to do here. You gotta, if you're not savvy in that space, you definitely want to, uh, if you can get someone on your team or an advisor or something like that, who can help you because how is the money, the type of money,the rates and all that sort of stuff, all that matters in terms of how profitable your deal is going to be.

And so, so important because on the other end, cause one of the things that, uh, that a lot of people don't think about, and we can talk about this more if you want, is that is the funding for the growth aspect of the deal.

[00:39:21] Ronald Skelton: Right. Right. So, before we get to, let's do that in just a second here. Before we get to that, there's something, there's a question burning in my head. What is your typical terms for a non recourse loan? Is it, what I mean by that is, what's an average interest rate and what's the average length of the term of the loan? Like, is it 15 years, five years of the two years? What's the loan?

[00:39:41] Parnell Speed: I have, yeah, what I have seen is what's, it's usually very typical of what,like a business term loans, for example, are usually five or seven years.Typically. And you, the ones that I have seen, those are usually follow along with that. The longest I have seen is 10 years. In fact, we have one that will go 10 years and that 10 year term is at 6 percent. In some cases, you can even do interest only in that period if you choose to.

[00:40:06] Ronald Skelton: I've seen some of these commercial, I'm leaning on my real estate experience and this might be different in this space. But some of the commercial loans I seen that it could be like a, 10 year loan, but they have a three year review period. Means that every three years throughout the loan, they're going to come in and look at the financials and they can call the loan due.

I actually know of a gentleman right now who, uh,15 years ago, but he came to me one day and he's like, Hey, they're going to take my business away if I don't come up with X number of dollars. And he owned a bunch of real, the reason he came to me is I bought real estate up like you wouldn't believe.

And he, he had a notebook. He goes, here's 47 houses I own. I need to raise 300, 000, you know, like in the next 30 days. Show me which houses you would buy for 300, 000. And, cause he owned all of his properties were free and clear. So he goes, just look through them and see, you know, and, I was a little overzealous cause his houses were in rough zones and rough condition.

So he never agreed to the number of houses. I basically wanted them all, but it wasn't going to happen.And then I cut that, I cut it back down to about 10 or so. And this is Oklahoma where it's not uncommon to get houses in those areas for 10 or 20 grand, 30 grand. So basically I came up with, Hey, I'll take these 12.

And he still said no. But he found another way. But the reason he was in trouble is the economy had changed on him a little bit. And they did one of his renew his evals, like every, I think every three years. His commercial loan had to be reevaluated. Is that something that happens to some of these other commercial products?

They're going to look at your financials and your business. They're going to do a health check on the business every so often to make sure that you're still on track?

[00:41:39] Parnell Speed: Yeah, it definitely can. Absolutely. And it, obviously it varies from, from lender to lender, but yeah, absolutely. They're, they want to look at that. But you then you, of course you have those, those vendors as well who, Hey, as long as you're making a note payment on time, we're good. Now, if you miss one, that, that might trigger that.

[00:41:56] Ronald Skelton: Right.

[00:41:57] Parnell Speed: They don't want that. Might trigger that, right? You don't want to get in that, get into that situation, but absolutely. When you start looking at those folks who want to make sure that their, their investment is is doing what it's supposed to be doing. Yeah. They want to make sure you're, you're doing, holding up your end of the bargain, if you will, in making these, making this deal earn me my ROI.

[00:42:17] Ronald Skelton: You brought up an important part. Let's talk about it real quick. When you raise capital to purchase a company, you need to do more than just raise to do the acquisition itself. Right. You've, when you acquire something,day one, you pay the seller off, but there's operational costs.

There's costs to do certain growth avenues and stuff like that. Especially when you just took on debt, the fastest way to make it eat, do some easing on you is you grow the company, right? You buy a company doing $5 million a year and, a million dollars in EBITDA. And now you've got debt coverage that's eaten that $1 million a year up.

Fastest way to ease that is to let's grow it to 1. 5 million and now we're a little more comfortable. Growth are very often takes capital. What is your recommendation on raising enough money to fund the growth?

[00:43:02] Parnell Speed: Well, I, well, first I would say you definitely have to have that plan going in.And what I mean by that is, okay, if I'm at 1 million right now, what do I need to do to grow it to that 1. 5 where I will be comfortable? 

And then, whether that's marketing or whatever, what then now, what is that going to cost realistically? And you know, that number, right? So that, when you, so you have a plan for that and you have a number for it. And then obviously you execute that the right way.Cause some people just abandon their plan. That's a whole other conversation. So you know that going in, right? That's part of your, that's part of your acquisition strategy is that,and you're, and you know that when you're looking for capital as well.

So you let, you're letting your, your lenders know, look, this is what it's going to cost to acquire it. And this is what's going to cost to grow it. And if you can get that all of that funding in one place, right? That would be ideal. Right. But if, if not, then you can, you can capital stack to where you can also get that growth funding.

But ideally you want to have that going in before you even sign the LOI. You know what it's going to take to grow that company and what it's going to cost you. That's my thoughts on that.

[00:44:11] Ronald Skelton: It's interesting. If you plan ahead of time, you build that into your capital stack, right? You just know that, uh, yeah, the guy wants a million dollars for the company.It's got dated equipment. I'm going to need some money to refresh some equipment. It's got, no marketing. I'm going to need a, you know, X number of dollars to, to institute a decent marketing plan and put some ads out there.

And then, it's got outdated this and that, and I'm going to replace that. That's, that should be part of the overall capital stack, the money you're raising ahead of time. I see too many people like, just try to get to the number that the seller wants and not understand what's your plan afterwards.

And then the, and it's a lot harder to raise the money afterwards. You own this thing. Now you're a new owner on day one. Don't think you're going to run to a bank on day one and go, Hey, I just bought this company and I need some new equipment because you bought a company.

[00:45:01] Parnell Speed: Another great point. Another great point. It's like it's a brand new company, right? When it changes ownership, you're at zero. And so, and I, I've even had to help clients with that is,and the funding that's available at that point is a lot of, lot of very expensive money when it comes to you being,

[00:45:17] Ronald Skelton: Green and the equipment asset. All this stuff we can do a little bit of hand, the things you can do beforehand, you can, a lot of those you can do afterwards. But, you just lost your leverage point because you don't have to take the money. You don't have to buy the company. You walk in there and go, I'm going to shut down if I don't get some money in my hands.

They're going to do what they need to do to get it. They're going to take that risk on you most likely, but they're going to charge you for it.

[00:45:40] Parnell Speed: Absolutely. Hundred percent. Hundred percent. 

[00:45:43] Ronald Skelton: It's nothing like the, uh, it's nothing like a lot of people think, you know, like, okay, I, you know, let's equate it to something everybody deals with in a day.

If you go out and buy a car and you're like, I buy this car and then I want to do a bunch of mods to it. And you go right back to the bank the next day you bought the car to a different bank. Hey, I just bought a car yesterday for 50 grand. I'd like to add $15, 000 of the parts on there. Would you loan me $15, 000 to loan like that?

They're going to go, that's, the car is the collateral for the last guy. What do I have, you know.And I don't get that, right.

[00:46:10] Parnell Speed: Yeah, that's an awesome analogy. Absolutely. That's an awesome analogy. Yep.

[00:46:14] Ronald Skelton: So you got to plan ahead on these things. You gotta be ready. What is, what do we need to do to get ahold of you? What's the best way to sit down and go, Hey, Parnell, I'm looking to acquire this type of company in the next two years. Help me walk through this. Do you have any, like, checklist that people can have or anything like that? Or they can just reach out and chat with you and start building that relationship with you to know where they need to be to get funded?

[00:46:38] Parnell Speed: Yes. There's, there's a lot of who, um, but before you even come to me, let's go down that list. One, ideally, you'd have some,an acquisition where they've been using a reliable financial software. Uh, which means that they have also some solid financial reports on the company. Ideally, you'd be looking at, uh, you want to be look somewhere between 3 to 5 years for the financial.

If you can. I know a lot of cases, you probably only get 2, right? And that's, that's fine. But ideally, you don't want to get be able to get 3 to 5, because then you kind of really can gauge the health of the company. Right? And we'll talk about financials for those people who don't know, we're talking about income statements, balance sheets, cash flow statements. And then ideally, you want to get those on an accrual basis rather than the cash basis. And that's, that's an accounting thing for the people who don't know, you want to get do it. Get those financial on an accrual county basis if you can. Make sure the books balance. Make sure the, the equity actually equals assets minus liabilities.

And ideally if you can, uh, have those financials reviewed, if not audited. Those are some of the things that it would be good to have, coming to me when you started looking for funding, because that makes you more fundable. It makes your, your project more fundable. Right.

[00:47:58] Ronald Skelton: So you're saying a quality of earnings report is actually makes it easier for you to get funded?

In a lot of cases, yes. Most people don't pull the trigger on that unless it's a much bigger acquisition though, right? Because they can be 15 to $30,000 to get a Q, a quality of earnings, a QOE. 

[00:48:13] Parnell Speed: Yes. Unless you can have an evaluator that can pull that together for you that you can have on your team to give them a little bit of equity. You may not have to, you may not have to pay that up front. I've seen that happen. Those can be expensive. And then after that, then you simply set an appointment with me.

And we'll go through it, go through your deal and see, and then we'll look at what's the best type of funding for you. And we'll go after we go get it.

[00:48:36] Ronald Skelton: Okay. And what's the best way for people to reach out to you? Is there a LinkedIn, email address or a phone number you want people to call? What, how do you want people to reach out to you?

[00:48:46] Parnell Speed: Yeah. The best way to reach out to me is definitely on LinkedIn. My LinkedIn profile, just look up my name, Parnell Speed. And then of course you can always email me at parnellatrvhcapital. com. That's a great way to reach out to me. Yeah, let's, let's do that. 

[00:49:00] Ronald Skelton: That's cool. And then one thing we'll, we always like to end up with a key takeaway. So to end the show today, if somebody can only remember one or two things about what we talked about, about raising money to buy the company. What would you want them to remember? 

[00:49:14] Parnell Speed: Hmm. Great question. I know it may sound cliche, but it's the thing I want them to know is that it's doable. It's not as daunting as you might think. If you educate yourself, and you work with the right people.I think that's, that's it. If you're not seasoned in that yourself, right. It's to work with, with people who are going to have your best interest at heart is very doable.

[00:49:40] Ronald Skelton: Okay. I appreciate you today. Hold on for just a second afterwards and we'll call that a show.

[00:49:46] Parnell Speed: All right. Sounds good.

[00:49:48] Ronald Skelton: Awesome. Thank you.