🔑#1 - On SBA

I’m surprised that most people are not familiar with SBA loans.

The US Goverment has created two high leverage opportunities for US Citizens to build wealth relative to their means:

1 - Home Mortgages:

To buy a house, the US Goverment helps you with a fixed rate low-interest mortgage where you only need to put down 4-20% of the purchase price. It’s an incredible tool for personal wealth creation.

2 - SBA 7(a) Business Acquisition Debt (I did used progam):

SBA 7(a) allows you to buy a business with up to $5 Million of debt and only put in 5-10% of the purchase price down as cash. You also get 10 years to pay it back with monthly payments, and a reasonable interest rate.

That’s pretty cool right? With a relatively small cash investment, a personal guarantee (more below) and a good business at a good price, you can become a business owner.

First, let’s think about why the US Government wants to help people buy small businesses (SMBs). SMBs employ 50% of the US working population!

Normal banks won’t loan to SMBs because they’re too small and too risky.

But we also don’t want a small business owner to “close shop” and lay people off when it’s time to retire.

So the government invented the SBA 7(a) loan.

The government uses it to encourage lenders to lend to small businesses. They do this by guaranteeing to pay back the lender 90% of the capital if a business fails. That’s a pretty great deal for the lender! And thus encourages a lot of SBA loans to get written.

Here’s the high-level process to buy a business using SBA

1. Find a business you love, maybe it’s a family friend, or maybe you find one online.
2. Negotiate a reasonable deal with the owner
3. Sign a Letter of Intent
4. Find 3 SBA lenders and show them your LOI (use the list below)
5. Work with the SBA to close your deal…

Few important notes

1. SBA loans can take 90 days to close so make sure you prepare the business owner for this.
2. When you get an SBA loan you will be required to personally guarantee the loan. That means of the business somehow fails, the bank will go after you personally to recuperate their funds. This is risky. You have to be willing to make a calculated bet on yourself and the business. So proceed with caution.
3. In Andrew’s spreadsheet in above tweet, he uses a multiple on revenue to value the business. Don’t do that. You should buy businesses using a valuation on a multiple of cash flow. For most SMBs 2 to 4x yearly cash flow is the right valuation.

Some useful links:

Top SBA lenders by volume - Some lenders are very conservative and hard to work with. I suggest connecting with the most active lenders.

SBA Calculator - helps you plan your debt to cash flow ratio

SBA 7(a) requirements

Offer for my readers:

• if you want to see my sample LOI, reply to this email to let me know
• if you need an SBA lender, reply to this email and I’ll connect you to one I like

🔑#2 - On Hiring

I love this quote from Ogilvy.

Hiring great people is hard. It takes a lot of work.

When interviewing people for roles in the past sometimes I say to myself “this person is good enough for the role”. Don’t make the same mistake.

When you’re building a company you need to teach your team to fight this urge.

Hiring the right people is the MOST important thing you can do as you grow.

If each person hires someone a little better than them…you are guaranteed to be proud of what you built one day.

If each person hires someone a little less impressive than them…you’ll one day look around and be disappointed in the company you built.

Here’s a Twitter thread on some of my hiring strategies → strategies to hire great people.

🔑#3 - Do The Big Things Right

There are so many gems in this thread from Nick.

The most important learning for me is the importance of market and business model selection.

I learned this the hard way with my first company, StudySoup.

It was a business I started in college. Since I didn’t know any better, I made a product to help other college students.

The best students in a class posted their class notes, and others could subscribe to access those notes and study guides. Cool idea, but it was a horrible market.

College students are cheap. So even if you provide a great service, they try to find ways not to pay you.

I toiled away in this market for years trying to build a slightly better product that students wanted to pay for. Instead, I should have abandoned ship and found a better market for my efforts.

Here’s a good Warren Buffett line about my experience:

Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

Now that I know better, I spend a lot of time making sure I’m in the right industry with the right product before I start working on it.

Reply to let me know if you liked Tweet 1, 2 or 3 most. Also, you can check out last week’s newsletter here.

Have a glorious week,

~ Sieva

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