Please share your questions and comments in the chat and we'll get to them as we go along.

Will you circulate today’s presentyation to the attendees?

Yes, will will circulate the deck to all registrants

Today's deck and recording will be shared with all the registrants later today

You are recording.

Javier buen día

Please go full screen

are searchers required to put their own funds along side equity investors? For SBA or conventional.

Nirav, this will vary from bank to bank. but often, the banks will want to see some funds from the searcher when using SBA debt. When using conventional debt, the searcher often does not contribute any equity $s

Would banks care about hybrid capital junior to the debt

Could the equity injection for an SBA loan be a 'gift' from the Seller?

Are the investors then also subject to the PG if the breach the equity threshold of ~20% or is the JV structured in an alternative way?

Or a "gift" from friends and family?

TF, if by hybrid capital you are referring to preferred equity, SBA lenders can allow this, but they don't allow mandatory distributions to investors.

Equity injection cannot be in the form of gift from the seller.

Injection can be from friends and family in the form of a gift....sba will allow that

SBA requires anyone with 20% or more "economic benefit" from the business (which includes preferred returns, if any) to provide a full PG. Often the investor equity is structured such that the investors are not required to PG

What is the minimum required equity injection?

If minority owners breach the 20% ownership/economic benefit, then the PG requirement will kick in

What is Live Oak’s philosophy on full standby seller notes?

SBA requires a minimum of 10% of the total project in equity

Separately, is preferred equity with a PIK / cumulative dividends acceptable?

Will this recording be sent out to all participants I assume?

@Jason let's get to your question in a few more slides on Equity Metrics

Recording will be sent to registrants

Jason, this can also vary bank to bank in terms of opinions on what is ok in a preferred equity structure and what is not. Basic rule of thumb is that when the preferred equity terms start to look too much like debt, the lenders will typically push back

Thanks!

Adding onto Heather's comment, we review the operating agreements

Can you use independent sponsor economics (e.g., preferred return and promote) in the self-funded, SBA context?

Jason, with regard to Standby Seller notes, we are comfortable with them depending on the circumstances. If you are talking about using a full standby seller note for 5% of the 10% equity - the best use cases for this are often highly technical businesses where buyer is a great fit and multiple is low because of the technical nature (as one example)

When getting equity how are the funds stored? For example what vehicle/entity is the money stored in and how does the bank evaluate that?

Theo, using preferred equity can work, but using promote in an SBA funded deal is problematic because there are strict rules around any ownership changes that can be made while the SBA loan is outstanding.

Ammon, funds from equity investors typically stay in their accounts (which are verified with 60 days of bank statements prior to close) until they are wired in at close.

When raising funds from investors - what requirements does the SBA lender have in terms of vetting the investor and what are they looking (ex requirement of investors to show bank statements, others?)

Following up on that. If you’re only putting in 5% of the equity check, how do you end up with 75%+ of the common? How is that negotiated?

Thanks

A, good question on vetting the investors. All SBA lenders require 60 days of bank statements prior to close. But if the investors are professional investors such as Ben or Cat, lenders may ask for a bio and list of deals they have previously invested in, and any experience with the particular industry, etc.

Adding onto Heather's comment on the 5% standby...where we see this working best for balancing risks between lender, seller and buyer, if limiting equity to 5% of project, we'll also generally see additional seller note B to balance risk. it will be very situational and we'd love to talk about any projects you're interesting in discussing.

Regarding outside equity. why not pencil a potential return/IRR% an investor would demand. Say that's 20%. Then simply back into the equity % to drive that 20% return. Assumes tight proforma projections that the principal and investor agree on.

What are you seeing these days in terms of LP rights? Pref rate. and Carry %

Brock, there are many ways to run models that can make sense, but ultimately the investor's confidence in your growth plans will be a big part of the equity raise

@leigh we'll get to that Q in a few more slides

Leigh, equity terms vary widely. We'll touch on it here.

is there any other diligence that the bank will do outside of asking for 60 days of bank statements we should inform investors of in advance?

@Brock we'll get to your observation in another couple of slides

Cat, thanks for your commentary?Is there any material on what diligence a bank performs on investors?

@Ben we'll get to your question in another few slides

Can the investors walk through an example transaction? (i.e., $1M EBITDA at 4x Multiple what does the structure look like equity vs debt and what does the searcher get it / have to put up)?

Can you talk through tax distributions - should they be included in IRR? What are the logistics of K-1s and ongoing distributions?

A - often the cap stack is being finalized very close to closing. A buyer can identify the who the lead investors are expected to be, what terms are expected, whether a board of directors will be put in place, and some background information on those investors and their prior experience in investing in SMBs

thanks

@Eric I see a lot of questions about LP interest etc. do you typically see more opcos structured as c corps or partnership / LLCs?

Can you comment on how long it can take (ballpark) for a $1M equity raise without friends and family?

With reference to personal guarantee's, how is one's personal holdings calculated should the assets be part of a trust?

Can you comment on how long it can take (ballpark) for a $1M equity raise (through to investor commitment) without friends and family?

Thank you!

Heather are they wiring the money to an LLC that will have cash on its books?

And then the bank with wire money to that LLC as well?

Replying to "@Eric I see a lot of..."I can address this.

Thanks

Do personal guarantees on SBA loans vary for each lender or is there a common baseline?

Ammon, where the funds get wired varies based on structure of the deal.

Will this chat Q&A be available for reference after this call ends?

Any individual owner that owns 20% + ownership has to personally gty. That's the SBA rule.

Cat, can you share more details of what you

Andrew, SBA loan PG's do not vary generally. Banks follow the SBA guidelines strictly (PG required for all who own 20% of more economic benefit), but on occasion a lender may also require a PG for someone owning less than that if they believe it is needed

@Heather Can you provide examples? I’m not sure how the the procedures of the acquisition actually take place

Cat, can you share more of what you'd look for or expect in governance?

Ammon, let's do this after the call. The mechanics of funding are a bit in the weeds and vary based on structures.

The Q&A will be recorded as well, I believe

Replying to "Any individual owner..."Yes what does the personal guarantee mean if the searcher's personal funds/assets are in a trust. How does SBA/bank ascertain that the searcher has enough of a PG?

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Replying to "Any individual owner..."Varies from bank to bank. Some want to see specific amount of real estate or liquidity, others underwrite primarily to the business and not the PG individuals

Sure someone has asked already and I missed it, but are the slides going to be available after call?

What type of deals generally use commercial debt vs SBA loans? Do equity investors generally focus on just one of the two or would they consider both depending on the deal?

Alberto, yes will be sending the slides to all registrants, and we will distribute a recorded of the session as well

Thanks for this to all presenters and to you Lisa - truly!

+1 to Heather on the strength of the PG. If you're working with a true cashflow lender, your lender is going to put a majority of the emphasis on the strength of the DSC and other aspects of the actual opportunity.

Luca, we see investor equity in both SBA funded and conventionally funded. NEarly all conventionally funded deals have investors, but only some SBA deals do.

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@Heather I’m asking because I’m wondering if the bank is reviewing a shell company with cash as an asset and investors are buying shares in the company?

But I appreciate you 👍

That IRR is over what period ?

Question for panelists: Any thoughts on convertible preferred? Eg preferred that converts into common upon the passage of some key de-risking event or financial metric threshold. How un/common is this in deals you see? Thank you for your time!

@Ammon let's talk in more detail after the call. And feel free to reach out to Ben or Cat or Eric directly as well

Ok!

Is there a standard investment period before exit to attain that IRR?

What tax distributions flow through to equity investors?

Should searchers contribution/investment be at the same terms as the preferred?

Is the typical expectation on preferred returns to be paid annually or only at liquidation event?

Is it correct to assume when you say investors who “understand small business investing” it’s because they understand the “punched in the face everyday” dynamics of SMB vs. simply being an accredited investors?

Jonathan, 🙂 THat is certainly part of their value. Other ways experienced SMB investors add value beyond the funding: another set of eyes during diligence, asking good questions, governance post-close, industry experience with other investments, access to their SMB network

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Great points Lisa. GTG, thanks for putting this on! JD

Don't they allow for professional experience to attain accredited investor status now?

The transition from searcher to CEO is going to be different for every transaction and every situation is different so it's great having people in your corner that have done this before. Having investors working with you that have actually been operators provides incalculable value.

Can you use 506(b) if you only do email outreach?

THANK YOU! VERY VERY Helpful session

@Jim if you hold a Series 7, 65 or 82 license you are granted accredited status-not legal advice :-)

But what about if I just put equity alongside 3 more partners. We are going to be partners. Do I still have to go thru that Reg D structure?

Does a searcher's salary for the past year or two play a big part in the underwriting process?

How are you typically seeing senior management compensated in terms of equity (if at all)?

Thank you Catherine and Ben for your answers!

As an investor, how do you think about the potential for further financing in the case that the business goes through a rough patch or wants to do other acquisitions? Do you look for protections against future dilution?

@ RAY we understand that you've likely been searching for the past year if you're doing this full-time and we might not expect to see income on your PTR

For those specific legal questions we didn't get to, I would recommend reaching out to Eric directly and also discussing with your own counsel

Have you seen a forced buyout clause where equity investors can be bought out at a pre-negotiated rate of return at term or upon achievement of some kind of milestone?

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Have you done roll-ups as a SF investment?

thank you very much for the session!

Part of the buyer plan that was mentioned before relies on the assumption that an owner-operator can clearly predict growth over 5-7 years. What if strategy was to exit in 5 years but that changes over time where owner/operator chooses to keep the business forever?

How is IRR calculated.. is it annual or is it at exit?

Panel opinion on whether searcher can be kicked out for anything other than fraud?

I have to step away but this was wonderful. Thanks very much to all the panelists and participants for the great questions!

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@lisa What’s your formula for lease adjusted leverage ratio?

Great answers based on experience, thank you!

Thank you all!

Thank you. Great presentation!

Thank you Cat, Ben, Eric, Lisa, and Heather for sharing your time and expertise—and thank you to everyone else for the great questions!

👏🏾

thank you all!

Thanks for sharing your thoughts and insights!

Appreciate the time!

Awesome guys - thanks for this

Thank you!

This was fantastic - thanks again!!!!!

Thanks to Lisa and all the panelist - terrific session!

Super informative, thanks everyone!

Great discussion, thanks!