THE PROBLEM: BUSINESS ACQUISITION WITH SMALL CUSTOMER BASE AND THEREFORE CUSTOMER CONCENTRATION CONCERN
A new entrepreneur sought to purchase a long-standing machine shop with a small group of loyal customers. This created some concerns about customer concentration and the impact on the business if sales to one of these clients contracted for any reason. While the acquisition included some machinery equipment, most of the purchase was goodwill, resulting in a collateral shortfall. In addition, the buyer’s funds available for the equity injection were in IRA accounts, but the buyer was not yet old enough for a distribution without penalties.
Customer concentration concerns
Borrower’s cash was in retirement accounts
THE SOLUTION: SBA 7(A) LOAN WITH COMBINATION OF FUNDS FROM IRA ROLLOVER AND SELLER FINANCING
First Business Bank introduced the borrower to a specialist in “ROBS” (Rollover for Business Startup) structures to help the client access retirement funds for the project without penalties. This saved the borrower significant money and allowed for an acceptable equity contribution from the borrower into the project. To address the risk associated with customer concentration, the acquisition was structured with a small seller note, which reduced the bank’s required loan on the project. The guaranty provided by the SBA under the 7(a) loan allowed the bank to move forward with a ten-year loan in spite of the significant collateral shortfall.
Introduction to ROBS specialist saved the client money
Acquisition structured to overcome customer concentration risk
Ten-year 7(a) loan provided best cash flow option and overcame collateral shortfall
"This was a great example of collaboration with many resources to HELP OUR CLIENT FULFILL HIS DREAM OF BUSINESS OWNERSHIP”
— Eric Fought, SBA Market Manager, First Business Bank
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