E197: E-commerce & SaaS Acquisitions Financing: Expert Stephen Speer on Funding Your Business Dreams

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Stephen Speer and we're going to talk everything about buying and selling small businesses and the financing thereof. Stephen, thank you for being here today. I want to thank you for taking your time, sharing your knowledge with us. And this is going to be a fun conversation.

[00:00:17] Stephen Speer: Thanks for having me, Ronald. 

[00:00:18] Ronald Skelton: Cool. We're always going to start off in our origin kind of, who are you? How did you get into this space? I always joking around the famous joke that I do is, I don't know if it's famous, the same joke I do with every guy is, you were born and then you ended up on a show about mergers and acquisitions. How did he end up here?

So give us, give us a, your background, man. How did you end up on a show about mergers and acquisitions? What is it you do? And then we'll talk about the company too. Like what, what the company does.

[00:00:42] Stephen Speer: Sure, I mean, I've been in lending a very long time, as you can tell by my hair color. And,I primarily focused from the start on business acquisitions. And then, uh, and then roughly 10 years ago, I got more specialized and really did a lot of acquisition financing, within the e commerce slash SaaS space.

And the business has very much evolved to point, I mean, we've done over 500 transactions for over a billion dollars worth of financing. And we're really quite, uh, quite involved with the M& A community, and it's always fun to see people throughout the year at various events. But I enjoy what I do, and I like helping people, helping either groups or individuals acquire businesses.

[00:01:26] Ronald Skelton: Tell us a little bit about what separates you from something like the SBA lending program and stuff, or the other options that are out there.

[00:01:32] Stephen Speer: Yeah, I mean, we do SBA financing, that's a bulk of our business, but we also do business financing for, lower middle market. Transactions typically with enterprise values let's say 10 million and above. I think our biggest deal we're working on right now it's 150 million. So but we do quite a bit of SBA financing. And what sets us up apart is that we're very much specialized in doing SBA financing within the online business space. Which is, there are a lot of different nuances there.

[00:02:03] Ronald Skelton: So when you say online, are we talking, e commerce membership sites, newsletters, or just all of the above SaaS companies?

[00:02:11] Stephen Speer: Yeah. E commerce, which is kind of like saying Kleenex, it's pretty much incorporates product based businesses. A lot of them sell on, on Amazon and Shopify and Etsy and some of the others. So we do that. We also do more product or more, service based businesses like SaaS businesses where they sell their, uh, services online, typically.

A lot are ed, educational technology companies that are around. That's ever growing and ever evolving to be a larger portion of our business.

[00:02:42] Ronald Skelton: So what is, what does an ideal client look like for you guys? Is it, you know, if somebody came there, they're listening right now, they're looking at buying a company how do they know that you're the right fit?

[00:02:55] Stephen Speer: I think, it depends on also the size, but, our lower market transactions, it's, they're primarily, professional individuals looking, some, sometimes looking to get out of corporate America and, and running their own businesses. And instead of establishing their own business and having that risk of being a startup, they actually buy a business and then grow it, grow it from there.

And usually they have some sort of, either strong, indirect or strong, direct skill set to be able to accomplish that. So that's kind of the lower market,silo. Our lower middle market silo again, generally transactions from about 10 million to 250 million. Those are typically groups of individuals or two or three individuals, partners who have an established business. Who want to, perhaps a rollup strategy and buy additional businesses and grow their, their portfolio.

[00:03:49] Ronald Skelton: Do you have anybody out there who has raised funds? And what they do is, I know I've interviewed two people in the last seven days, who they've raised funds. It's a debt raise, but what they do is they, they use their funds for fast closing, and then eventually they go through like a more traditional finance company like yours and refinance those acquisitions out.

So they can free up the capital to do more quick closings. You do work with stuff like that too, or? 

[00:04:15] Stephen Speer: Those are more difficult because there is a two year waiting period and generally. So no, not typically, we don't work with those types of scenarios. And those generally are smaller acquisitions like they're buying something for, half a million dollars and then they do it that way. But on the larger deals, there's typically not a necessity to do it that way.

We short the financing for them. Sometimes there's an equity co invest piece and they acquire the business.

[00:04:45] Ronald Skelton: Yeah. One of the guys I was talking to, they buy a assisted living facilities. So a lot of times they are, you know, short of a million dollar acquisitions and stuff, but he,he has a hundred million dollar fund that he's raised. But I think I don't, I don't know what the timescale is, but I want to say that,they have the ability to roll over cash out at the end of every year.

So he refinances a lot of stuff. A lot of his stuff is real estate back to, he's buying the real estate underneath it. So a lot of times he can refinance a real estate and pay the investors back. But, I was just curious.

[00:05:13] Stephen Speer: It makes it a lot easier, especially if they're stock acquisitions. Yeah. 

[00:05:16] Ronald Skelton: Yeah. So tell me about the, the company. Tell me about kind of what you guys look for. How do people kind of pre qualify or know that they,they're themselves qualify and the deals are looking at. Where I'm kind of beating around the bush where I guess is, I hear way too many times where somebody brings a deal to a lender like yourself. And then the lender goes, Oh, you structured all this wrong.

We're going to have to restructure this to get it done. So, um, how do people prepare to, to get a loan from you guys?

[00:05:45] Stephen Speer: And that's, that's very common. And that's why we have a kind of a program that, you know, allows us to pre qualify an individual. Really early on, typically before they even start searching, and then assist them during the search and be able to vet the businesses that they, fall in love with during the search to make sure those businesses qualify for financing.

And then when they're ready to move forward with their offer, we assist them with, crafting their letter of intent or contract and making sure that the financing available in their offer mirrors each other because if they don't, back to your point, they're sitting there having to re, restructure their deal.

[00:06:24] Ronald Skelton: I hear of that a lot, actually. Pre qualification, is it something online they do? They fill out a form, then have a call with you guys or how does that work?

[00:06:31] Stephen Speer: We have them fill out two basic forms online and schedule a call with us. Then during the call, we deep dive and we really find out what they're looking for, what they're, kind of get additional color on their personal liquidity and their business acumen. And really try to, uh, kind of inform them or educate them on the process.

Many of them have never bought businesses before, so we're able to educate them. And we take very much of a on hands or hands on at, consultative approach with our clients.

[00:07:03] Ronald Skelton: I know the SBA has their own set of requirements and stuff. And then most banks and lending institutions layer something on top of it, their own criteria. What, what switches over, when we get above that $5 million acquisition price that SBA can do and you're starting to do institutional type of lending where you're doing these 10, 15, 20, even $100 million deals.

What's different in the pre qualifying process and the process in general? 

[00:07:30] Stephen Speer: Uh, it's vastly different. So there are kind of three, let's call it three buckets. There's SBA financing, which is financing up to 5 million. Then there's financing for businesses typically in kind of the one to $2 million EBITDA range that, not only have the SBA portion, but they have an additional conventional loan on top of that, which is called Pari Passu.

So there, there's that type of financing. And then the lower middle market financing are typically Ronald, for businesses of $2 million need but are higher. And that's a completely different world. And that's, that's a world that we've been, that we started playing in a few years back. And the prequalification process is vastly different because typically it's investor money that are buying these businesses, not individual, it's not based on individual personal liquidity.

It's based on investor funds. And we, you know, they provide us proof of funds, et cetera. And then as they look at businesses to acquire, we're able to vet the business and give them an idea of what type of financing. Well if we give them a green light what type of financing what the deal structure would most likely look like. So similar, but not, not quite.

A lot of differences, especially um on the, the loan facility. The loan is completely different than SBA.

[00:08:51] Ronald Skelton: The reason I, one of the reasons I was asking is I was, on a call earlier today with a gentleman who has raised $235 million and, they're doing a rollup strategy. And, I won't say what industry it is or anything. I don't want to increase cause it's, it's brilliant idea what he's doing. And I don't want to induce any, any, uh, competition for him.

But one of the things they did in their strategy is they went and got, institutional investors to back them up. So the institutional investors said that they'll finance up to 70 percent of the acquisition in this industry. And then they only have to put their money to 30%, for that. So they basically got to dip into their, their raise for 30 percent of each of the acquisition.

And I'm sure they're going to make some, you know, some portion of that. Be owner carry or, earn outs or something like that. So an acquisition is going to be a mix of their money they raise, some institutional lending and a little bit of, earn outs to hit the full amount. Do you guys work with that middle of the institutional? Do you do?

[00:09:48] Stephen Speer: We, we primarily, I mean we do have many of our deals do have earnouts and seller equity roles and seller notes, et cetera, but we don't go to the institutional level.

[00:10:01] Ronald Skelton: How do you guys work with, on these bigger deals, I'm just, my curiosity is about the team because I know at the individual level, the SBA is going to require some, familiarity with the industry, some proof that you're able to run this company, some background. When you're looking at these bigger teams, how do you create a great team that, the lenders are going to approve of the banks are going to like. I bring a team to you, you know, how do, what is a rockstar team for you guys?

[00:10:26] Stephen Speer: on the smaller deals or the larger ones?

[00:10:29] Ronald Skelton: It's going to be the larger ones, right? Usually the smaller deals are one or two guys, right? 

[00:10:33] Stephen Speer: Yeah, I mean, we do look at, direct industry experience. A bank or a lender that be a private equity or a bank, a traditional bank, et cetera. They're not going to stroke a $10 million check or $20 million check tosomebody who's never run a business before. So we look at, we look at the team and typically each team member has a certain skill set. Be it, previous SFO or CFO, previous CEO, et cetera.

And we just look at the overall team and also the amount of, uh, equity they're willing to bring to the table. And then we kind of work forward from there.

[00:11:08] Ronald Skelton: All right. So, um, what is, what are some of the tips, I like, let's start with the small deals. Cause we've got, we have kind of multiple buckets we're talking about here. On the smaller deals what would you say in your area of expertise, online, online transactions,e commerce businesses and basically anything.

A SaaS and all that. Anything that's done online, what would be your tips for vetting deals to make sure that they're lendable? 

[00:11:32] Stephen Speer: As our clients search for acquisitions or search opportunities, they provide us with the CIM. You know, the Confidential Information Memorandum and financials of the business. And obviously we already know their background because we've already talked to them and had discussions surrounding that.

And then we basically cashflow the business and look at how the business is obtaining revenue. And we move forward from there. And then we basically do a debt service analysis to make sure the business qualifies for financing and how much leverage it qualifies with. So is it a scenario where, you know, 90 percent leverage, 80 percent leverage, et cetera, and kind of determine it from there.

[00:12:13] Ronald Skelton: I know the, the SBA loans require personal guarantees and, and a bunch, you know, pledging your firstborn child and everything else, right? It's you're fully guaranteeing the loan with assets

[00:12:24] Stephen Speer: It's not that bad.

[00:12:26] Ronald Skelton: I'm teasing. But, uh, the mid tier and the, the upper ones, how do you guys secure the loans on those for these, for the institutional investors? Or the, private investors?

What are they secured against assets too, or how does that work?

[00:12:39] Stephen Speer: So I'll just start kind of with the lower ones. With SBA, like you mentioned, it requires a personal guarantee. And if there's available collateral, which is typically limited only to maybe a primary residence where they're put, they'll put a lien on the house. Those are, those are requirements there.

Our middle tier also incorporates a SBA 7A loan. So that requires, personal guarantee as well. And then our lower middle market deals where, we're providing capital from our private equity firms, those don't require, they have no recourse. They don't require a personal guarantee. Every once in a while they do, but it's very rare because, ultimately, it's a corporation buying another corporation.

So it's vastly different playing field there. So those don't require a personal guarantee.

[00:13:28] Ronald Skelton: For each of these, what are we talking about timeline? I kind of understand the timeline of a typical SBA loan, but for what is the timeline for, just for everybody knows what's the timeline to walk an SBA loan through you, with you guys, and we'll talk about the others.

[00:13:44] Stephen Speer: Yeah. So typical timeline, once we have everything from our client, is 60 days. Generally 30 days for underwriting, 30 days to close. That's pretty standard. The entire timeline is predicated on, the Canada, the expeditiousness of our clients. If they take a month to get us everything that we need from them, then you can add 30 days to that 60 days.

So now we're at 90 days. And then the lower middle market tier, generally, um, it's vastly different. Generally we're waiting on a quality of earnings report, but usually that's also all in usually 60 days about the same basically. Less paper intensive. I will say.

[00:14:24] Ronald Skelton: What are the lessons you guys learned over the years? I mean, with a billion dollars of transactions, there's some, there's definitely lessons you learned about the industry. Are you guys concerned about the cycle right now? In the economy or how does that, any of that come into play?

[00:14:38] Stephen Speer: I mean in terms of lessons.I don't know. I think bad deals only get worse. So we tend to turn those opportunities down. Bad buyers only get worse over time. So those are kind of internal lessons. If we just don't like, either the client or potential client or the business, we move on to the next. We're not into doing, uh, you know, writing bad loans or, uh, working with people that we can't get financed.

And that's led to, last two years, a hundred percent loan approval rate. Historically, we're at 98%. So if we're moving forward with, with a buyer, he's closing, unless something out of our control happens. So, and we, we're proud of that. Candidly.

[00:15:19] Ronald Skelton: That's pretty impressive. Cause that's a, that doesn't exist in most other industries. That means you're vetting the buyers and the deal fairly well before you get there. Cause, certainly the SBA doesn't have that type of closing rate on general. Like most of the brokers I talked to, the loan brokers, they won't claim that, right.

That says you're doing a lot of pre work and a lot of hand holding through the process to make sure what's being presented to the bank is really well vetted.

[00:15:43] Stephen Speer: Very much so. Yeah. I mean, that's, and that's why honestly, that just about, or I'll say most online business brokerage firms use us exclusively. And sometimes buyers go to them with financial institution already in mind and they won't accept the offer unless they work with us. Which is, it says, you know, they have the option, but they, they normally get, don't get their offer accepted unless they work with us, because we, um, we have the reputation of getting people across the finish line and unfortunately, standard banking institutions do not have a good track record.

They, on average, close 63%. Or get, they get 63% of their loans approved, which is pretty bad. I think that's a D in, in school. So that's not a very good rating.

[00:16:29] Ronald Skelton: Yeah, I run into people a lot of time who they go to their local banker because their local banker says Oh, yeah, we do SBA loans. But the local banker doesn't tell them we've never funded a, e commerce loan ever, right? If you look at their loan history, yeah, they do SBA loans. It's been, it's for mom and pop shops, plumbing, electrical service, everything that's in their little town around that bank. That's what they're used to. That's what their customers are. And that's what they're used to lending. When you come to them and say hey, I want to buy, I want to spend the full 5 million dollars for a e commerce site doing, a million dollars in transactions, and the bank looks at it, it's out of their zone, their comfort zone. And in a lot of these small banks, even though it's SBA loan, they still have to go through an internal board approval to loan, especially a $5 million thing.

So a lot of times these buyers and stuff they'll get on one of my networking meetings go, I've had two banks turn me down. I said, where did you go? Oh, I went to my local branch and I went to the one of the bigger branches down the road. I said no what I want you to do is number one, not all SBA loans are equal. Every bank has their own criteria they lay on top of it.

Find the industry that you're in, like for you guys ecommerce. Go out and find somebody that's what their last 10 loans were in this in that industry. They love that industry. They know it. They're comfortable with it. They can walk you through it. They can help you get the deal done even.

So, it sounds like you guys do that for e commerce. Is there any particular, like, if I looked at your track record, if I hunt it down, like what's the last 10 deals you guys closed? Is it all SaaS or is it primary one, is there any sweet spots where you just focus a lot of energy on? Or is it pretty broad?

[00:18:00] Stephen Speer: A mixture of SaaS and, product-based, e-commerce businesses. Yeah, I mean, that's the vast majority but what's interesting, Ronald we're doing more and more brick and mortar deals because, some of our clients are looking both, you know, brick and mortar op as online or e commerce o they're like, gosh, you'v with us with you. It's be you thus far, but I want business and we do those actually.

So even though, we're specialized because it's more difficult to do an e commerce, to provide e commerce financing. Whereas brick and mortar, we've done a ton of brick and mortar over the years. So it's, uh, it's a lot easier.

[00:18:43] Ronald Skelton: I think brick and mortar is easier. Cause a lot of, you have a lot of hard assets you can actually collateralize, right? I look for a lot of brick and mortar stuff, just being, especially once I have real estate. Cause now I've, if I could buy the real estate with it, I'm a previous real estate guy.

That's what I did before I got into this space. So it's my comfort zone. And I know if I need to help, if I need money to close or I need help later on, I can do things like sale lease back. And,I can free up a lot of cash by not owning the real estate and just leasing it from an institutional investor that'll back me.

So, uh, yeah. The e commerce, that's the one thing I've interviewed, that's why I interviewed you. And I wanted to interview some other people in the space because they're not necessarily asset back loans. Now the SBA is going to look for costs, you know, personal collateralization. But when you get beyond that, the asset is the business itself, right?

And it's history, and the employees and the ability to, prove that you, you know, been in business for years making money. Do you guys, I know one of the companies we interviewed recently, they won't touch a company that's been around for less than 18 months. Do you guys have like to acquire it, is there like a normal, is there anything like that? Any type of requirement where if you're going to buy an e commerce company, it has to have been around for X, Y, X period of time?

[00:19:56] Stephen Speer: We look at mostly, two years of tax returns, which is, that encompasses 24 months. So two full tax years, and then we're good to go. But 18 months, you're going to be hard pressed finding anybody in touch with business that hasn't been around at least two years.

[00:20:12] Ronald Skelton: know they went down to that. I was a little shocked because,personally, I don't, I don't want to touch anything that I don't get to see three years of full of full, but I'm not, I'm 52. I turned 52 today. So when this comes out, I'll be three weeks, two or three weeks older than 52. I'm not, I'm a lot less risk adverse than I was in my twenties, right?

I did a lot of startups in my twenties and thirties, and I guess I was in the military in my twenties, but in my early thirties and stuff, I did a lot of like, Hey, let's just throw some money at this and see if the, if the market likes it, right? Let's create a business. Let's do a startup.

Nowadays, I look at these saying, and that's the reason I'm in this space in the mergers and acquisition space is, I want to see something that's up, running, has a history of it. And it's not mine to build and grow. It's mine to not mess up. If I get into leave it alone and just help it do what it's always done, it's pretty safe bet.

And then maybe I can tweak and make it do a little bit more or bring in the right people and they can help it do a lot more. But, uh, I don't want it to, I don't want to pull 80 hour weeks trying to pull something out of the gutter. So, um, do you guys look at some of that stuff? You, I guess financial history, are there any type of turnarounds and stuff that you guys will back? Or does it pretty much have to be extremely stable?

[00:21:18] Stephen Speer: We don't catch falling knives. So no.

[00:21:21] Ronald Skelton: Okay. Most SBA lenders won't. I had to ask but most lenders won't right?

[00:21:25] Stephen Speer: And I admire people out there that do catch falling knives and turn the business around. But yeah, we're not in a scratch and dent business. We're mostly looking at businesses that are growing year over year.

[00:21:36] Ronald Skelton: I've met a few. I've met a few like in the UK and stuff because they have companies house and they can actually like early detect that. They can see when companies because here in the United States, we got this cool thing where you can operate in a shoestring and behind on your bills and scrap, scrap it and make it until you make it.

In Europe they can't do that. So the court can call you insolvent because you can't, if you don't have the right balance sheets, basically.

It's a national database. So even as a small business, you have to report, I think it's either quarterly or semi annually that, uh, what your finances are. And if you're insolvent, on those reportings, they can actually force you into insolvency court and shut you down.

So there's guys out there who do turn around and follow those that look for diamonds in the rough. And some of them, I've interviewed a couple of them. They are just really good at that. Again, that's not my forte, but I was curious if you guys, you know,or if you have done loans in that realm where, the team can turn it around, so you'll loan them the money.

It sounds like not, there's not many people that will. I would have been a

[00:22:32] Stephen Speer: I'm sure you can find private investors that do that where, you know, but not,standard type lenders.

[00:22:40] Ronald Skelton: Where are you guys located? So, uh, like are you guys national? You're across, you go, can you lend in all 50 states or?

[00:22:46] Stephen Speer: Yes. Yeah. We're, yeah. We have clients, our headquarters are here in Tampa, but we lend throughout the country and, yeah, we, we have no borders here.

[00:22:56] Ronald Skelton: Do you, we have, I have a lot of international listeners, Australia, the UK. I host a twice a month, we host a hangout, like a meetup where we brainstorm and helping each other like solve problems inside of the space. A lot of those guys are from the UK and stuff, and they want to buy companies in US.

Are you able to help facilitate that? I know the SBA has some rules where the LLC has to be U S based and the primary shareholder, I think actually, has to be U S based. But do you work with, uh, you know, did any of the programs you have, can they, can my UK guys come to you guys and finance an e commerce thing, or is that? 

[00:23:28] Stephen Speer: Yeah. So business is over $2 million. I will say our capital providers are a lot more selective when that is the case, but we have done businesses or have done acquisitions based, on U. S. based businesses for foreigners. Yeah,

[00:23:46] Ronald Skelton: now, buying, he's in the UK. He has a truck and has two trucking businesses in the UK that he bought and merged. And he's buying an $18 million one here. Now he's raising capital to close that. So $18 million is the total asset purchase. I mean, it's the purchase price. 

He sent me a message. He goes, who can help me raise 18 million? I was like, yeah, I do. And I sent him a couple of links to people that raise capital, but it's equity. It's investor raised. And it's a company that, that's what they, it's a company that raises capital. That said, um, talk about like the process, like, walk me through kind of what, what would he, what would a buyer,search funder or whoever you call, ETA guy, whatever you call it, the, uh, the operator, the guy buying the business. What should they expect to walk through?

What does it look like? Are they going to be on calls with you? Kind of what is the life cycle of this? I know it's going to be 60 to 90 days, but, Kind of set some expectations for the listeners of to what to expect.

[00:24:37] Stephen Speer: Our process starts well before that point. Our process normally starts when people are ready, you know, ready to go look for business. So, typically they'll go to our website or be directed straight to us. And, we send them out a couple of links, a couple of basic forms to fill out really easy. And then at the end of the last form, they click on scheduling a call and then they schedule a call typically within, typically they'll schedule a call and we'll be on the phone with them typically within 24 hours, maybe 48.

And then we just, we go over the assessment form that we have and then really do a deeper dive on what they're looking for. And ultimately, you know, educate them on our process in terms of, as they're looking for businesses to make sure that they have us vet any opportunities that they're interested in moving forward with. And then we help, help them along every step of the way and in many cases help them with the LOI because most of them haven't completed an LOI before so we help them with that. And they present their offer. Offers accepted. And then we start the loan process along with them hiring it typically a due diligence firm to do that. So, that's the process.

[00:25:48] Ronald Skelton: So you're, you're involved through the entire process. So you, they come to you, you have, some, back and forth there. I'm just recapping this so I know, know it. You get a little bit of back and forth and then they start vetting companies. They start actually do their lead generation.

They start talking to companies. And prior to an LOI, they're showing you these financials and saying, Hey, I think this is one. So, they're probably seeing five or six before they pick one and bring it to you and go, Hey, I think this is what I want to do, right. And,

[00:26:15] Stephen Speer: Oh, absolutely. I would say 10 or 12.

[00:26:17] Ronald Skelton: I'm being nice.

[00:26:19] Stephen Speer: And then we'll

[00:26:20] Ronald Skelton: Sometimes a hundred.

[00:26:22] Stephen Speer: Yeah, we have some of those clients, It's

I look, I look at a lot more businesses than I make LOIs on. So, You basically tell them unless they're, You know, unless they've had at least an initial call with the seller. Or really done a little bit more than a deep dive on the business don't bring it to us because we have had those clients Ronald that are like, here, here all these businesses I'm interested in. And we're like no. They're right down to like two. And then we, you know, we vet the business, we cash flow it. We look at the business and determine, the revenue, silos and whatever. And then with the intention of issuing a pre qualification letter just to show them sources and uses. And then they're more confident. They're been, they've been pre qualified. The business has been pre qualified and now they're ready to move forward with their LOI. And oftentimes they, they allow us to help them with that.

And then, ultimately, they hopefully get their offer accepted. And we also oftentimes help them build their acquisition team, which is going to include, the attorney, us, the lender, due diligence firm, and all the players involved in moving forward and ultimately achieving active, acquisition success.

[00:27:35] Ronald Skelton: It's awesome you guys help with that because a lot of the guys think they can take on some of these roles, they probably shouldn't be taken on. There's not a single new buyer out there that should be doing due diligence on their own. I don't care if you're a CPA, there's something about a 3rd set of eyes looking at financials, and looking at them from a lender's point of view, even.

You know a critical point of view of whether or not it's a good deal. There's a thing we jokingly inside of the industry call a deal heat. If you get excited and you're all you think that's a really attractive and you kind of overlook certain things because you just really want to get one done. You want to be, you've been doing this for six months, eight months, 12 months. And now you've got one that's interesting. You fall in love with this thing and you're gonna you know, you'll tend to overlook a lot of things. I don't believe anybody should be in doing their own due diligence.

I think we should all have a third set of eyes. Even if you're good at it. Should have somebody else look at it from a non biased, no, there's a thing inside of our own brain called cognitive biases, where we believe we want this. And all of a sudden, you know we do that. I grew up a, I'll give you a good one I grew up a painter son. My dad and I painted houses, right?

And we, he would paint one side of the house and I'd paint the other. And he'd go, okay I'm done. He goes, okay, I'm done. We'd switch right? I go look at his side and I find all these spots. I'd be like, yeah, you missed this and you missed this and I he'd be on the other side of the house. Good man, you missed this you missed this but if even if, and I got so frustrated because I had always stepped back and look and because he would tease me about it.

Like, look all these spots you missed. I was like, you know I've been working on yours. And he goes that's why we do this, right? If you work on something for a few hours and you look back, your mind actually tells you it's all done. You'll actually, you'll, even on paint. And even if you're changing colors, your mind will actually fill in the spots.

It's weird. It plays tricks on you. And then the other guy comes over and he's like, he knows you missed something and he just sees it. He's just glaring at him. And that happens with these financials. It happens with legal structures. Even if you're attorney buying businesses, have somebody else do your legal due diligence.

But I love that you guys are helping people build that team. If I'm an investor and somebody wants me to, uh, invest in a company, which I currently don't do at all, because I'm trying to buy my own. But if I were to do that and somebody said, well, I'm going to, I'm an attorney.

I'll do my own legal due diligence. I'd say, okay, we're done. Right. Just cause I know that there's that cognitive bias. When you get excited about something, you tend to want to see the best in it.

[00:29:44] Stephen Speer: If they don't, we've had clients in the past say, well, I don't want to hire an attorney. And we're like, we're out. We're not working with it. Well, why? Yeah, because you're going to be asking us legal questions and we're not attorneys. Because in the past, and you know, historically, that's exactly what they do.

They'll start asking us, well, what do you think about this? And we're like, we're out or we're tapping out. So we require our clients, well we don't, we just tell our clients, if you don't hire an attorney, we're not working with you. And it's not, In a conceded fashion. It's just we're not attorneys.

And that's, it's just amazing. And then back to in terms of like, the wrong way of going about acquiring a business. I kind of want to touch on that a little bit.We'll have clients come to us after their LOI is accepted. They don't have personal liquidity. They have no idea how they're going to buy the business and then the business doesn't qualify for financing. And most people do it that way which is amazing to me.

They don't have a clear concise way of ultimately crossing the finish line with an acquisition. Even clients that come to us and we pre qualify them. We lead them to the water, but they you know, they'll come to us with an LOI and it happened actually today. We tell all our clients, before you go forward with an LOI, even if you don't have us look it the LOI before it's accepted, have us at least vet the business to make sure it qualifies for financing.

We had a convey bad news to one of our clients who decided to go on his own and not have us about the business. And ultimately business does not qualify for financing and he's under LOI. So he's going to have to, cancel.

[00:31:16] Ronald Skelton: It was lucky for him or them. Most people make their LOIs non binding. Which I didn't understand at first, but I kind of get now, but, um,there's just something to be said for planning ahead and knowing how it done. Now there is a strategy inside of that. I know two people that do this. They go out, they know that the business is not lendable.

They know it from start, but it's a good business. It may not be lendable because of the industry it's in. Or just it's maybe too new or they just changed markets too recently. They made too many big changes recently. And that which that scares a lot of the lending institutions. But they know that and they go ahead and say they go through that. They do the LOI and they take it to a lender and they come back and go Hey, we're gonna have to renegotiate this. You're gonna have to own or carry more of this or seller finance a lot more of this. This is, nobody's gonna be able to get a lender. I've talked to three of them and it's not lendable. And I knew they knew that beforehand, right?

It's a negotiation tactic. I don't think it's fair. But a lot of times sellers don't want to hear that their business is not lendable, right? So now when a business is not lendable, they have two options. Or three options. Keep the business. For about four options. Keep the business, seller finance, the business, find a full investor who has like the full amounts or stroke a check.

And those are far and few between for mostly small businesses. Most people don't want to do that. Or they have to just shut it down. Like, you know, retiring. I'm sure there's more than that, but, it does happen. But, these guys see it as an easier conversation to go, yeah, yeah, we'll go talk to the banks. And they give you the full check. And then they know, they know what, you know, they've been in the business too long to know, that this just isn't going to happen.

Right. I had one recently where they made too many changes recently. I said, look, if I take this to any lender on the planet, they're going to tell us, no. You changed too much in the last, year. Your revenues went from three and a half million to 1 million. You're still, now it's starting to climb back up and stuff.

But when the bank starts to do the due diligence, their own background on this, they're going to see the reason it dropped so much as you made some major changes to people in the company, changes the structure on how you manage. That stuff hasn't vetted itself out yet.

You're not a stable company yet because you made these changes and now it has to restabilize. And I don't think a lender on the planet is going to touch you guys. 

[00:33:25] Stephen Speer: And those are the same people that, that spring play LOIs all over the place. We know a few of those characters. They've been, they're on our, you know, what list. And, uh, if they contact us, we don't even reply. They just like, LOI, LOI, LOI, LOI. And they never close on anything, ever. So,

[00:33:45] Ronald Skelton: It was bad when I was in the real estate. It's even worse than the real estate community. And the real estate community when the market's reasonable, it's not super hot. I know investors that would literally submit two to 300 offers sight unseen on houses a week. And then what they, and basically just did a mathematical calculation that if the house is in perfect condition, I'll offer, 75 or 80 percent of perfect condition of the house.

And then, if a seller reaches back and says, yeah, or so much percentage under the current listing price. If they say, yeah, then we, they accept the offer. Then we have our, uh, inspection period. And then we come back after the inspection and say, oh, wow, this is all the stuff we found. We have to renegotiate the price.

And they,they succeeded doing it. I mean, they were getting deals done. But man, that's irritating. Especially if you're a, like a business, like we were, who, had, 30 or 40 listings on the market all the time. I just got to where if I seen a, you know, an offer from, these four or five companies, I knew what they were up to.

And it was like, I just denied it right off the bat. I never signed one of them. Right. Cause I knew that wasn't the offer. That was the, get us under contract, make us take it off the MLS, right. Take it off the market. I'll tell you the problem with that is, and it's happening in the real estate world already.

It'll happen in the business world too,as this becomes more popular and people are scattering those LOIs, there's a thing, in the commercial world, we can sue for non performance. And, um, If you, I think that somebody's going to breach that, like, you know, they say, I tell you it's,the LOIs are non binding. But if, if you have a non compete on top of your LOI, like, like we do, if we put an LOI or something, we have like a 60 or, if I'm going to pay for due diligence, I want a certain period of non compete.

You can't, you got to take it off the market. I think there's a failure to perform clause. In commercial real estate if I put an offer on your place and then I don't turn around and close on it, I can be sued for failure to perform on the contract, for any losses that person would have had for having not taken it off the market.

And it's fairly common. I think that enough people get burned, enough business owners get burned. You're, I always joke around, you're one Senator son away from having a new law that'll change this thing. You're going to burn somebody's Son or kid or whatever and also we're going to get law, you know the same way we have interesting laws regulating real estate investment now that didn't exist 10 years ago.

It's the spray and pray. The more people go out and do these loose knit methods that uh,dirty up the market, the more rules and regulations will be put in to stop them from doing it. If they're hurting business owners, it originally, you know, that's how things get regulated.

[00:36:14] Stephen Speer: Yeah, it's unethical. It's unfair. I mean, imagine selling your business. You pull it off the market for six weeks, eight weeks, whatever that number is. And then the buyer, yeah, I'm not, I'm backing out. I think, honestly, I think LOIs are, need to go away. I think people need to go straight to contracts. Put down earnest money, just like real estate. That's my own personal feeling. 

[00:36:36] Ronald Skelton: Unfortunately, that would be great if more business owners were honest and accurate, and there was less things that popped up in due diligence. The reason LOI is there so that we can start due diligence. And I, this, I haven't seen one yet. So the story didn't change drastically, especially when a broker's involved.

I've yet to see a, a very honest, very straightforward, a hundred percent, no change broker on any deal. And I haven't heard of them yet either. So, usually you can, it's built into the market some, but you're going to find stuff during due diligence. You're going to find stuff that, uh, you know, they.

I always kind of akin it to a poker game. The first set of financials the first thing to show you is their poker face. They're bluffing, right? There's something else there. Like, they don't really have four aces underneath there or royal flush. They got a crappy little straight or something that you could beat. 

Until we get more transparency in that, I think the LOI is just a placeholder for, hey, I'm really serious. Now show me your financials. Show me some more serious paperwork. But, I can see it going away if we went, if we were like Europe and they had companies house where they federally had to report their financials on a regular basis and they had to be fairly accurate.

[00:37:42] Stephen Speer: Maybe, you know, they're like, that could go away. Yeah. Or somewhere in between, like not LOI, not contract, but somewhere like in between.

Yeah, uh, some of the deals, they go LOI and they do, what's the next one? There's a letter of intent. Then there's a, there's something else before contract. I forgot the initial. I don't know too many people that use it, but, uh, you have a letter, a letter, LOI, letter of intention, and then there's a, we always put a non compete clauses on it, but a lot of guys will step into kind of a more formal thing before they, before they do the due diligence. I'll think of it in a second here. Well, there's an indication of interest and letter of intent. And then typically it goes to asset purchase agreement or stock purchase agreement.

[00:38:28] Ronald Skelton: Yeah, I'm thinking more along the asset purchase agreement. But I forgot, I was talking to one group of people and before they enter due diligence, it becomes a lot more binding, right? That the,the seller can't back out. As some of these due diligence is, you do legal due diligence, financial due diligence, stuff like that.

You could be talking tens of thousands. You should be talking tens of thousands of dollars on a million dollar EBITDA company. It's going to, it's going to cost something.

[00:38:51] Stephen Speer: Typically it's about $30, 000. Yeah.

[00:38:55] Ronald Skelton: Yeah.

[00:38:56] Stephen Speer: If the quality of earnings reports I'm more referring to, those are 30 grand. I mean, starting. You buy a very large company, um, you know, let's say a hundred million dollars plus, it's going to be a couple of hundred grand.

[00:39:10] Ronald Skelton: Yeah. Now I'm referring to just the financial due diligence and the legal due diligence on even an SBA deal. Those are still going to be, probably 10 to 15,000 right?

[00:39:22] Stephen Speer: 10 grand for EBIT-, not only legal, but, part of 10 grand legal, 10 grand, grand, you know, standard due diligence.

[00:39:29] Ronald Skelton: Yeah.

[00:39:30] Stephen Speer: So, yeah, it could add up really quickly.

[00:39:34] Ronald Skelton: It makes you really pay attention to what you're going to go into due diligence on because, you better be pretty sure because that can add up pretty quick, right? If you have, think about, you go through four of those before you actually get to close, right? You know, you got a hundred, a hundred grand tied up.

80, 90 grand tied up into failed closings. I've seen it in the real estate world where, we have escrow, we have to fight to get the money from escrow back. Cause a lot of times it's just hard to get those checks back. So, we got to where our closing attorney. I don't, I would only, I would never give a escrow check to anybody, but our closing attorney, right.

Cause I know I could get it back from him if they failed to close. So, uh,tell people how they can get a hold of you. Tell people, like, kind of, if somebody has more questions and they're not ready, quite ready to, fill that out, what's the next step? You know, that type of stuff.

[00:40:17] Stephen Speer: Go to our website ecommercelending. com. If you have more specific questions, just email me, Stephen, and that's with a PH at ecommercelending. com.

[00:40:26] Ronald Skelton: Okay. And then, anything coming up? Do you guys, you mentioned earlier, you guys, went to some events and stuff like that. Do you guys go to events and anything coming up cool that's happening in the next few months or?

[00:40:36] Stephen Speer: Not in the next few months. Typically a lot of events are later this year. McGuire Woods, independent sponsor event is one. There's an SIG event, I think in Dallas in September as well. Prosper's coming up, in, I believe, April. We are not attending Prosper this year, but that's more of an online event.

But, um,there are a few M& A groups on LinkedIn that you could follow and they're all host. A lot of events are coming up, just we're very selective on which ones we actually go to.

[00:41:07] Ronald Skelton: We put them in our newsletter when we find them. It's one of the reasons I always ask our guests, Hey, you got, you know any cool events coming up? Cause our, we have a growth and acquisitions newsletter that we run. And at the bottom of it, we have an events calendar. So we're always looking for, Hey, what's out.

I Google around a lot too, but sometimes things just don't show up well in Google and you'll know more about it than, than, you know,somebody hasn't promoted or have the SEO, right. There'll be some cool event out there that, slips through the SEO cracks. Well, I want to thank you for being here.

Thank you for teaching us. We've asked a lot of questions. If somebody can only walk away with two or three takeaways for the day, what would you want them to walk away with?

[00:41:39] Stephen Speer: I would say get pre qualified, have your lender pre qualify the business and put together your acquisition success team before you buy a business. I mean, I think those are three takeaways there.

[00:41:51] Ronald Skelton: That'll help them get to the success. Well, thank you again for,

[00:41:53] Stephen Speer: Just have your doubts in a row and you'll, it'll happen. And lastly, have patience. You're not buying a house, you're buying a business. It takes a long time to find that right opportunity.

[00:42:03] Ronald Skelton: Awesome. Well, thank you for being here today. And we'll call that a show.

[00:42:06] Stephen Speer: Ronald, thanks for having me.

[00:42:08] Ronald Skelton: All right.