Ep 266: Financing An Online Business Acquisition with Stephen Speer

Jaryd Krause:

How do you know if you are eligible to get financing to buy a business? Hi, I'm Jaryd Krause. I'm the host of the Buying Online Businesses podcast, and today I'm speaking with Stephen Speer, who is the founder and CEO of eCommerce Lending, where they help people get SBA loans to acquire online businesses.

In this episode, Stephen and I discuss what size businesses you can buy using financing and what size businesses you can't buy using financing. We also talk about the four-stage process to get the deal across the line when you are using financing.

We also discuss the time it actually takes to decide to get financing for a business, from being approved for financing to actually owning and acquiring the business and having the loan settled. And there are so many factors within that Stephen and I discuss and share nuances on.

We also talk about what you need to have or get done before you go away and apply to the stand-alone business, except for those who are in the business and if you do for finance to be eligible. And we also discuss how important assembling a team of professionals is when you're buying a business, and this is absolutely critical.

We also discuss what successful business buyers have in common, the ones that Stephen speaks to and sees why they're so successful, why they buy businesses, and how they are able to achieve great results compared to some people that struggle a little bit more than others.

Now there's so much value in this podcast episode. We do talk about buying a business. So if you haven't yet gotten my Due Diligence Framework, make sure you go away and get that. It's what a lot of people are raving about.

It's my Due Diligence 2.0 Framework. It's what I use, and it's what my clients use to help people make millions of dollars and save millions of dollars. You can get that too by going to buyingonlinebusinesses.com/free-resources. Now let's dive into the pod.

Do you have a website you might want to sell, either now or in the future? We have a hungry list of cashed up and trained up buyers that want to buy your content website. If you have a site making over $300 per month and want to sell it, head to buyingonlinebusinesses.co/sellyourbusiness. Or email us at [email protected], because we will likely have a buyer. The details are in the description.

Stephen, welcome back to the podcast.

Stephen Speer:

Thanks for having me back. It's been a while.

Jaryd Krause:

Yes, it has been. It's been a number of years. I'm looking forward to chatting with you because so many things have changed. We may even just discuss the craziness of the FBA market throughout this chat. But first, lending.

There aren't too many options around lending for buying an online business, and you guys have been doing it for a while now. Where I want to start is for people thinking about getting started. I know that you said you've started moving a bit upmarket now. You're helping people make large acquisitions. We mentioned that before we hit the record buttons.

But what's the minimum amount that people could sort of get financing for when they're looking at buying an online business?

Stephen Speer:

In terms of loan amount, $500,000 is the minimum. I know that at SBA, some lenders go down to $350,000, but half a million is the minimum. And our average is now $2 million, which has drastically increased since the last time we were in 2019.

It's gone from about 1.2 million in average loan size. So north of that are the deal sizes. But the average loan amount right now is about $2 million on the SBA front.

Jaryd Krause:

Cool. And so SBA, I'm suggesting, is the most common one. Is it the most common one that you go away and do? Or do you have other sorts of partners and financial institutions you work with in terms of getting loans for deals?

Stephen Speer:

So we obviously started our firm primarily by facilitating SBA financing for acquisitions, generally up to about $6 million in enterprise value.

But there's such a demand, Jaryd, for financing kind of a lower middle market, which is about roughly $10 million in enterprise value up to $50 million, especially with deal sizes getting proportionately larger; there was just a really large void.

So a year and a half ago, in May 2022, we rolled out our Capital Access program. And those are for deals ranging from about $10 million in enterprise value up to $250 million. So that's kind of our other division. It's vastly different from SBA financing.

SBA financing is really a good program for smaller acquisitions, kind of in that lower market. And because online businesses, as you know, are asset light, for all intents and purposes, it's really the only financing vehicle for those asset-light businesses.

Jaryd Krause:

Yeah. Yeah, really, it is. It is. And for people who are really starting out, there's still a barrier to getting in with financing. You really need to buy something, like you said, around the 500-ish K range acquisition size and put a portion of the percentage in financing.

So what sort of deposits are we typically looking at when those enterprises value from like one to three million? What sort of deposit are you typically looking at for those?

Stephen Speer:

In terms of deposits, buyer injection, down payment, whatever you want to call it, generally, it's 10%. There are some cases where we're able to go to 5% if there's some sort of seller contribution towards the buyer equity injection.

So you're able to use a portion of a seller note as the buyer injection. So that just came out last year. So, really, you could potentially buy a business with just 5% skin in the game, which is pretty incredible. And it's opened up a lot of doors for many acquisition entrepreneurs.

Jaryd Krause:

Absolutely. And what sort of terms are we looking at? I know that nobody listening to this is going to hold you accountable for whatever average terms you mentioned. Because markets change and finance changes in terms of interest rates and whatnot, as well as the environment and climate,. But what are the average terms that people are looking at for those sorts of acquisitions?

Stephen Speer:

So with SBA's terms, it's always a 10-year loan. It's really kind of you to have a choice of one; it's 10 years. Right now, interest rates have gone up considerably here in the States. Right now, SBA rates sit at 11 and a quarter percent, which seems like they're going to be high.

And information out there has it that the Fed is going to start cutting rates this year. So that rate should be coming up. But it has drastically increased, well, since the last time we spoke about it four years ago.

But people are still buying businesses. The good news is, Jaryd, multiples have come down a little bit, especially on the FBA side. So we're seeing a kind of counterbalance to those higher interest rates.

Jaryd Krause:

Yeah, absolutely. It's the same in Australia. Most places in the world. I know in Australia we did have an interest rate hike recently. And I know that they are saying that interest rates are going to come down as well.

And so when somebody's looking at capital deployment into an asset, if you're going to invest in property, you're going to have a higher rate than if you're investing now. And the same with business, too. So it's something that people need to consider with their portfolio and what their opportunity cost is.

Now, you mentioned that FBA multiples have come down a lot. The reason I've seen that happen is because throughout COVID, a couple of large equity firms were just acquiring bulk FBA businesses. And there were a bunch that bought some and they didn't fare so well. And since then, multiples have started to come down.

As I believe, some volume of sales for e-commerce businesses has come down from what we were seeing through COVID, and it depends on the industry and the nation. Don't hold me accountable for this, guys, but this is a bit more of an average global look. Is that why you're sort of starting to see multiples come down or have you got some other intelligence and data?

Stephen Speer:

I think with the aggregators leaving the FBA market for all intents and purposes, that's really brought multiples down. And also, back over the pandemic, there's such a frenzy.

There's just a lot of money out there—a lot of money that the government was throwing at opportunities, etc. Everybody was really flush with cash. And I think that brought the multiples up.

Obviously, the number of buyers out there brought the multiples up, especially the aggregators on the FBA side. And with the aggregators for the most part, going out of the market, we've started to see multiples come down. Also, obviously, with the higher interest rate environment, we've seen multiples come down.

Jaryd Krause:

Yes. I love that you mentioned that. And it's the same with not just e-commerce but also with media or content businesses. You see the interest rate environment. The interest rates going up mean that people have more repayments on their mortgages, like their homes, which are liabilities.

And as they increase, they may need to offload some assets or some things that they hold, like businesses and sell them at a cheaper price than maybe what they bought them at or what the market was, at least through the COVID period.

Stephen Speer:

Yeah. So we've seen that. But that definitely had an overall effect. Obviously, on SaaS businesses, we're seeing multiples still higher than obviously more product-based businesses. But those multiples are coming down.

Especially in the lower markets, the lower middle markets, we're still seeing pretty frothy multiples on SaaS businesses and digital marketing firms, etc. But in product-based businesses, we've definitely seen multiples come down.

Jaryd Krause:

Yeah. So, I mean, we're talking seven figures and under sort of deals, with multiples coming down a bit more than eight-figure acquisitions. Is that what you mean by the middle market—eight figures to get close to nine?

Stephen Speer:

Yeah. The lower middle market, consider like ten million dollars of enterprise value and higher. So the lower markets, definitely, the multiples have taken a haircut.

So multiples, just by nature, tend to be higher for SaaS businesses as well as larger acquisitions. So in the lower markets, let's just say six-million-dollar enterprise value and lower, we've definitely seen those multiples come down.

We're starting to see a downtick in the number of buyers going after those opportunities. So that's also a factor. I wouldn't say it's still a frenzy, but it's still very active. A lot of buyers are out there looking for the right opportunity.

Jaryd Krause:

Yeah. And so we've mentioned the three main business models, SaaS, e-comm and content media. What sort of financing do you do? Do you help finance all of these different types of business models or is it primarily just e-commerce?

I know that in eCommerce lending, it's the brand and the name. But what about the other sorts of structures and business models?

Stephen Speer:

Well, historically, we've done all online businesses—SaaS, e-commerce, whatever. We've done all of it. Applications are app type businesses. We've done all of it.

What we're starting to see now is that more and more of our clients, over time, are looking both at online business acquisition opportunities as well as more traditional brick and mortar. So we're starting to see a little bit more of that.

Just by word of mouth, we pride ourselves on the reputation we have in the marketplace. So we do have a high level of word-of-mouth referrals or introductions from people that we know. And some of those people are looking at both traditional businesses as well as online businesses to acquire. So we're starting to see a lot more of that.

Jaryd Krause:

Yeah, that's cool. And so, how long does the process typically take before approval, pre-approval or knowing that you're going to be able to get financing?

What does that process look like? How long does it roughly take? And maybe what do people need to have in order? And then we’ll talk about going through the acquisition and the settlement afterwards, I guess.

Stephen Speer:

So once we have everything we need for our clients, the process generally takes 60 days. Sometimes we were a little challenged in getting everything from our client, but that's beside the point. We have no control over that.

But there is a kind of process to what we call acquisition success. And that's first and foremost, we encourage buyers, even prior to starting their search, to get pre-qualified for a business.

First off, it gives them an idea of how much they're qualified for, which kind of seems like a no brainer. But sometimes we have people who have no personal liquidity and very little business acumen. They're trying to buy a $5 million business. So we kind of give them a reality check in terms of that.

Secondly, their business acumen. We definitely look at people's business acumen. So those are two of the main factors that we're able to set as a kind of marker of the size of business they should be looking at. So that's first and foremost.

And as they start their search, we've become part of their acquisition team. They come across acquisition opportunities, and they allow us to vet those opportunities to make sure those businesses are financeable. We're able to determine that.

Are they financeable at 90% leverage, 95% leverage, or 70% leverage, whatever the case may be? But it prevents our clients from putting in offers on businesses that don't qualify for financing.

So that's kind of step two. The third step in terms of, again, what we call acquisition success is to encourage people to get their acquisition success team together with their business broker, their lender, their acquisition attorney, their due diligence team, etc. And get all those pieces put together.

So once they are,. Under the letter of intent, they're able to move forward quickly and already have their entire acquisition team assembled. So those are some of the things we really encourage, again, prior to someone searching for a business.

Jaryd Krause:

Yeah, I love it. I love it. And then, once somebody's got the business and the due diligence team and the advisor go through everything, the letter of intent turns into an offer, obviously a confirmation of the offer. And then you go through your asset purchase agreement, contract of sale or whatever you want to call it, depending on what business you buy.

And then you guys go to work and get the financing approved for that type of asset. Is that right? And then, how does that sort of look?

Stephen Speer:

Yeah. Step four, once somebody has a letter of intent, they're going to run two rails. It's obviously the financing rail with us, hopefully with us. And the other one is to get going on their due diligence. So they're going to run two rails simultaneously. Otherwise, Jaryd, the process takes way too long. So that's one thing we encourage our clients to do.

Some people think, “Okay, once I'm done, once I'm done with due diligence, then I'm going to start the loan side of things.” And that's a recipe for the seller to walk away. A seller is not going to wait around 90 or 120 days for that.

So it's really imperative for buyers, all of you guys out there, to move forward on due diligence and the loan process at the same time. And if it pans out, due diligence doesn't look pretty and the business isn't what it was cracked up to be, then that's okay. We move on to the next deal.

So when we look at all the deals that we've closed, the people that follow our four-step process do have that acquisition success. And we've had other people put in letters of intent on businesses that don't qualify for financing.

We've had people not follow our directive by not assembling their acquisition team. We've had people not run two rails simultaneously. And really, they struggle quite a bit in terms of crossing the finish line. So that's why we really encourage that four-step process on our end.

Jaryd Krause:

Yeah, I love that. Thank you for sharing.

My next question I want to ask you, Stephen, is What are the most common things that hold people back from being able to get financing? Sort of before they come to you, what are some of the ducks that they need to have in a row before they say, “Hey, Stephen, I'm ready to run at this and get some finance and acquire something?

What are some of the things they might need to set up personally, with structures or whatnot to be able to set themselves up for success with you, guys?

Stephen Speer:

I think the key is really focusing on what type of businesses they're looking to acquire. We sometimes have buyers that come to us who are just springing and praying for all these different types of businesses.

I encourage all our clients to really focus on what type of business they're interested in as opposed to just seeing everything that's out there. And that generally allows them to focus on, and ultimately acquire, businesses quicker.

So that's first and foremost. Secondly, personal liquidity. Some people want to buy businesses, but they simply don't have that personal liquidity available.

And also, sometimes they do have money; it might be sitting in a retirement account and they don't realize they could actually use what we call here in the States a 401k and be able to use those funds or an IRA (individual retirement account) for their down payment or their deposit.

So there are certain ways of being able to maneuver someone who doesn't have that instant cash and be able to access retirement accounts for that acquisition. So those are some of the things that we teach our clients about.

But personal liquidity is sometimes a challenge. So they have to bring in other people, partners, to come up with the additional funds or a shortfall of funds that may be needed for an acquisition.

Jaryd Krause:

I love that you mentioned that, aside from finances and having some liquidity, I think it is an awesome and obviously massive caveat that people taking out money from their 401k or IRA depending on their age and their circumstances is going to be different for everyone.

We're not suggesting that this is for everyone. I'm not a financial advisor, but yeah, consider speaking to somebody who is a practitioner in financial advice.

I love that you also mentioned knowing what type of business you're looking for before you go away and get financing. Now, that can take time. And I suggest people do this, and they often learn that when they come in and work with me through my courses and stuff, what sort of business is right for them?

Look at a bunch of them and narrow it down to what personally fits and can help you achieve your goals—financial goals, but also time goals, as well as how much time you want to spend in the business or with the team on the business?

Stress expenses are something that most people don't talk about when you own a business. The expenditure of stress or time thinking about the business or the business workload. So it's worth people really understanding that the business is going to help me achieve what I actually want with that business model, and it's set up this way.

So then, when you do find that, you're looking at just that market and you get really honed in on what the value of that business is in that actual small market.

Whether it's just e-commerce businesses in that particular niche that have these particular marketing models or sales channels, you'll know for sure the value of it when you just look at those versus the whole atmosphere of all the different types of e-commerce businesses. Do you see that as well, Stephen?

Stephen Speer:

Excellent. Absolutely. Excellent points, yes. And also, we have some clients that may be more on the tech side and they're wanting to buy a product-based business, for example.

And they're like, “Oh, man, I never thought about the fact that I have to know supply chain. I have to order products and deal with suppliers, and I've never done that before.” And then they come to realization, like, “Stick to what I know. I should be doing this, not looking at all this other stuff.”

But there's so much information out there that's part of a little bit of a challenge. We have clients that are kind of springing and praying all over the place, trying to find the right opportunity and there's so much information that comes their way that it becomes overwhelming.

So back to your point, you sit down and write it down. Okay, here's the type of business I'm really looking for. And really kind of home in on that and have more of a targeted approach with help through your course. Have more of a targeted approach rather than just kind of springing and praying. Absolutely.

Jaryd Krause:

It's one thing to get financing, and that's a whole ball game in itself. But with the acquisition, the business you buy, you're living, working and running this business for however long. You want to make sure it's going to be right. Otherwise, it will cost you money. The due diligence throughout is absolutely critical.

So what are some of the things that you see the most successful people do that go away and purchase the business using financing with you guys? What separates them from the people who are sort of starting out?

Stephen Speer:

They're doers. They get it done. They're actively looking for businesses. We have, on average, over a hundred buyers that reach out to us. They're looking for businesses. They're at various stages of that search, etc. And very few of them are doers. They kind of kick the tires or kind of search, but kind of not. And those people never end up buying.

Whereas we have other clients—as a matter of fact, I was on the phone with one just shortly before you and I got on this podcast. He is targeted. He is committed. He's putting in hours each and every day to find the right business.

And I think that's the differentiator. Unfortunately, guys, it's really not a part-time job. If you really want to find a business, even if you have a day job for 40 hours, you have to put time into it on top of that to really get traction on your search. I mean, that's the best advice I could give. It's not a part-time endeavor. You have to put time into it to find the right opportunity.

Jaryd Krause:

I love that. I love that you say they're doers and they need commitment. All this stuff is mindset stuff that I teach.

Some people aren't born with a high achieving attitude or the attitude of a high achiever; the mindset of a high achiever comes naturally to them. But you can formulate that. And I have helped people do so by understanding what your vision is and being committed to that and certain practices.

So once you've got that, understand that it's not just “I'm just going to try this and test it and see how it goes.” No, no, no, no, no. If you want to buy a business, that's going to help set you up financially. Do it, go for it, commit to it and make it your main thing.

You can still do your part-time job on the side and all that sort of stuff. But if you're just going to try something out, like trying to buy a business, it's not something you should just test, right?

Stephen Speer:

No, not at all. And also, a lot of it takes organization and it's just setting everything up. So when you do find the right opportunity, it's going to work out. You're not done doing it in a haphazard way. So that's really important.

Another thing to bring up is that, in terms of looking at our buyers post acquisition, they don't mess with the business until they learn more about the business that they just bought. They're not firing the staff and thinking they could do it all on their own.

They're leaving things alone. In terms of what they tell me, typically, after four to six months, they're not changing anything. And they're just learning what things they can do for the business to really increase sales, bring their own skillset to the table and kind of leverage that skillset to grow the business.

But we've had a few instances where buyers buy a business and then try to change everything. They try to recreate the wheel. And in some cases, honestly, Jaryd, it has not gone right. They end up killing the business.

Although it very rarely happens, we've had at least three cases in the last five years where they did exactly that. They either fire staff or change everything, whatever, and ruin the business.

So my advice to your audience is to buy the business and then sit tight, make notations, whatever; don't change anything until you really, really learn the business, kind of on that ground floor or on a frontline basis. And then you can start making your little changes here and there.

Jaryd Krause:

I don't often see this happen. Why? Because I actually teach what you just mentioned. When you buy a business, do nothing and learn it for a period of time. And hence, I don't see too much of it. Because my field is sort of conditioned into the approach that I teach about buying businesses.

But for people listening, what is a business? It’s a system that produces a result, typically money. Why would you buy a system and then change it? It's a crazy thing to do. Why not learn the system and then optimize it slowly over time?

And typically, everything that we do in business and life that I teach is that if we're going to do something, it's kind of like you're running an experiment. And you should never just change the whole thing for a new experiment.

But just try little experiments, like testing your sales channel against another sales channel. And whichever one ends up being better, then you put more resources into that. But you run at the same time on two different rails, like you were talking about before, to experiment against each other and pressure test it versus just going to stop this and we're going to do this instead. You're breaking a system that you just purchased that's been built up over how many years and how many resources?

So I love that. I love that approach and I love that advice, Stephen. Thank you so much for coming on. It's been awesome to chat. I really appreciate your time. Where can we send people to check out more about what you guys are doing at eCommerce Lending?

Stephen Speer:

Just go to ecommercelending.com or you could email me Stephen, and that's Stephen with a PH at ecommercelending.com.

Jaryd Krause:

Awesome. I'll put links to that in the show notes as well, guys. Thank you again, Stephen, for coming on board.

Anybody who's thinking about getting financing to buy an online business or knows somebody who wants to buy an online business that could use financing to get that acquisition over the line should make sure they reach out to eCommerce Lending.

I've referred so many people to you guys over many years, Stephen, and I've heard great things. So, yeah, keep doing what you're doing. Thank you.

Stephen Speer:

Thank you for having me on, Jaryd. Appreciate it.

Jaryd Krause:

Hey, YouTube watchers, if you thought that video is good, you should check out this video here on the 2 Best Types of Websites Beginners Should Buy. Or check out my playlist on How I Made My First $100k Buying Websites and how to do due diligence. Check it out. It's an awesome playlist. You'll enjoy it.