Seller Notes Deep Dive | LoL #15

00:00:00:05 - 00:00:22:10
Abby
Why not, you know, bring an alternative financial product. I find that the biggest issue is capital market dislocation. You know, especially with family offices, right. So big. You know, most family offices require return of 18%. That's a hell of a lot more than a 10% on SVA. What do you I mean, you know, so that that would be my for like actually give it some like high level thought.

00:00:22:10 - 00:00:52:03
Abby
Now I'm not suggesting for one second that that can be solved, but it's going to require a lot of acrobatics and that's fine. That's what we do. Right. But this is a more like it's change. So, you know, there is a a built in mechanism here that we feel confident to kind of roll into a step into the shoes of an existing deal that has a track record and that that's, that's where our, our, you know, desire to want to improve the market lies at the moment.

00:00:52:05 - 00:01:15:17
Shane
Welcome back to Lords of Lending where capital isn't just money, it's power, it's legacy. And it's the weapon entrepreneurs used to build their kingdoms. So I'm Shane the alchemist. I'm here with Stephanie and Brian. Stephanie the oracle, Brian the magistrate. And today we're joined by someone who is rewriting the rulebook of Main Street Finance as it exists today.

00:01:15:19 - 00:01:38:06
Shane
So if we're if we're the Lords of lending, then today we're welcoming. Let's call him the Lord of seller debt and bringing liquidity, legitimacy and leverage to one of the most overlooked weapons in the acquisition arsenal, which is the seller. Note the think of him as kind of like a Renaissance banker stepping onto the battlefield with a brand new playbook for business buyers and for business sellers.

00:01:38:08 - 00:02:03:02
Shane
So with us today is Abbey Shemesh. He's a head of acquisitions at Seller Edge Capital, and together we're about to explore how turning seller notes into a liquid marketplace could unlock billions in deals and reshape the future of Main Street M&A. All right, Brian, Steph, we're jumping into this topic today to identify pain points that exist in the market with sellers and buyers.

00:02:03:04 - 00:02:13:03
Shane
And tell me a little bit about what your thoughts are on why this is imperative. Before we kind of get into really letting Abbey unleash on us.

00:02:13:05 - 00:02:37:08
Steph
That's first and foremost, I always my initial reaction is, why didn't I think of this? Yeah, because it is genius. And I think that we need to think outside the box for typical or traditional financing from, let's call it the 40s. And 50s is the SBA program that we deal with today, right? And it is not one size fits all.

00:02:37:08 - 00:03:02:12
Steph
It does not fit all. And there are a lot of circumstances, quite frankly, still in today's market because of valuations and appraised values, that there is a gap. So the gap ends up killing the deal. And I think that a lot more people now are entertaining seller financing just because they need to get to that final amount. And we can't get there.

00:03:02:12 - 00:03:25:05
Steph
And no one has these big nothings of cash lying laying around for traditional loan to work. So seller financing is pretty genius. I think that there's huge opportunity. I would love to just uncover ways that we could maybe layer together. I'm not quite sure how that works now yet, but I think that will be something that we probably venture into over the next 12 to 24 months.

00:03:25:07 - 00:03:53:14
Brian
Yeah, and from my perspective, I'm thinking of a lot of borrowers that I've come across who, like Steph, just said, either you can't qualify or you have an operator, a manager of a business who wants to buy the business but doesn't quite have the capital to do so. A seller note would be a perfect option, but then the seller is kind of reticent to really put all of his eggs in that basket, hand it over, and not get really any money out of the deal.

00:03:53:15 - 00:04:10:23
Brian
So I, I love this topic. I was excited to get on here and talk to Abby about this. So, I'm curious to see what we can come up with to kind of put together a playbook for a seller and even a buyer. As far as, seller financing goes.

00:04:11:01 - 00:04:31:04
Shane
Q Abby Shemesh, as we said, the seller that Abby, thank you for coming on the show today. Tell us a little bit about yourself and where the seller edge capital concept kind of came from. So to help us lead into some data points of how we can help business buyers and sellers get more deals done.

00:04:31:06 - 00:04:58:05
Abby
Thank you very much. I, you know, my first of all, I thank you for, you know, inviting me on the podcast. It's, a great opportunity to kind of explore this topic, which is, as you guys had mentioned, sorely needed in this space. My journey began years, years ago, back in the late 90s, early 2000, when I kind of entered into the origination space.

00:04:58:05 - 00:05:19:20
Abby
My background, primarily, was, lied within the mortgage origination, residential, kind of, moved into commercial. I was introduced to the secondary market, believe it or not, by one of my account reps at Bear Stearns at the time. So that gives you an idea how long ago that was prior to the the Bear Stearns collapse.

00:05:19:20 - 00:05:54:05
Abby
And, Lehman before pre 2008. And I really saw value in the fact that, you know, it was, you know, just so crowded in the origination space. And I realized that the secondary market, right, not the primary market, but the secondary market had almost no competition. And we really came into that space, and, you know, brought our marketing, you know, prowess, I guess you could say, into it and really kind of, you know, ended up where we are today.

00:05:54:05 - 00:06:25:20
Abby
A Mary note, was the family office that I started, which I still operate and is, you know, front and center in that space. And during that period of time, when I had, founded a Mary note exchange, we, really saw, a tremendous, opportunity in the business woman space. And even though the business notes or seller notes were a small percentage of our revenue and our acquisition target.

00:06:25:22 - 00:06:54:11
Abby
You know, I've been operating in that space since at least 2009. And we just never really focused. You know, our primary focus was mortgages. And, about a year ago, I was contacted, by a group of, investors and entrepreneurs that kind of wanted to get the lay of the land. They wanted to, you know, kind of, they, they identified from a distance opportunity in the space.

00:06:54:11 - 00:07:20:09
Abby
And, you know, they these these were Wall Street folks. These were corporate guys. And I was kind of brought on as a consultant, if you would, and during the course of our interaction, we realized very quickly that this, you know, we weren't we had good ideas. We obviously work well together. Let's go ahead and launch. And that's where Seller Edge and the inception of Seller Edge kind of came into play.

00:07:20:11 - 00:07:50:05
Abby
And as they say, the rest is history. We've just been kind of heads down, pencils up for the past year. And, we are here now and very excited to explore this, potential of disruption, because that's really what we're looking to do is on board liquidity, provide a a straight conduit from let's just call it the Wall Street adjacent investor into, a main Street kind of product.

00:07:50:06 - 00:08:05:06
Abby
And do it in a way that kind of upends and disrupts the, the industry and allows for a potentially a new market to kind of be created, which is the way I see it and my partners see it.

00:08:05:08 - 00:08:09:00
Shane
So if I, if I was to boil it down to something real simple.

00:08:09:01 - 00:08:10:07
Abby
Yes, it's.

00:08:10:09 - 00:08:30:13
Shane
A way for seller to get their money quicker. If they write a seller note. Right? Absolutely. That the seller means you can write whatever. No, you're right. And well, maybe get into some of the details of the types of notes you guys want to buy. But the reality is, is that seller can get out, get their cash quicker, as opposed to having to live it out.

00:08:30:13 - 00:09:00:07
Shane
Now, I know there are plenty of people within the seller space, the baby boomer era, that are trying to maybe create a retirement instrument for themselves when they write that seller note, and maybe those that have considered the idea of that they're listening can. Great. I get his annuity, I'm earning interest. Maybe I want them to pay out over 5 to 10 years, but there's there's I think the out of the data that we were able to pull up this buy, sell, for instance, brought up an article, where they asked the question, do you plan to offer a seller financing when you exit your business?

00:09:00:07 - 00:09:22:12
Shane
And they asked us specifically to sellers, 22% of them said yes, 44% said no. Which is an interesting thing that we maybe can dive into. But 32% we're unsure. I think you got a large audience of people that, are not really sure what's going on, don't really understand maybe some of the strategy that comes along with that seller debt and how to position the notes.

00:09:22:12 - 00:09:35:21
Shane
Nobody's an attorney, you know what I'm saying? Like that's why that's why I got Brian. Brian can give you some feedback on that a little bit later. But the idea is, is how do I create this in in a way that keeps me protected, that I actually do get paid back by this person who's taken over my business.

00:09:35:23 - 00:09:59:19
Shane
And, and this, this offset of risk for them, I think is an incredible set up. So I'd love to get into this a little bit. We'll jump straight into some questions. The first on on the line is how does liquidity for seller notes change a seller psychology and unlock more of that supply. So unlocking that 44%, 32% that don't know what's going on or don't want to get involved.

00:09:59:21 - 00:10:04:01
Shane
So A.B., in your in your thoughts.

00:10:04:03 - 00:10:36:19
Abby
I mean, I think that it could be an earth shattering change in the paradigm of thinking, in the same way that, you know, and I don't maybe I'm not, you know, in the same way if a new SBA product came on the scene, and it was this, you know, groundbreaking, earth shattering product that kind of changes the way that people can transact and purchase that would be incorporated into the repertoire of, say, you know, business, brokers, professionals, commercial bankers.

00:10:36:21 - 00:10:57:21
Abby
And it would be assimilated very quickly. I feel it's the same kind of concept here. And it's really the onus is on us to kind of provide that reach of education. Because I know you had mentioned, you know, there's 44% that say, now I argue that the 44% that say no are also uneducated to a certain extent.

00:10:57:23 - 00:11:18:18
Abby
And that's where I think that we can actually grow that I think that that's just, low hanging fruit. Answer. You know, based on, you know, a knee jerk reaction. Oh, I don't get my money now. I don't even want to hear about it. Well, Mr. or Mrs. Business Seller, guess what? You know, we can do x, Y and Z, and that would I feel like that would capture.

00:11:18:18 - 00:11:36:18
Abby
And again I'm just speculating here but that may capture you know is ten, nine, ten, 15% of that 44 and we may we kind of may move that over to the, I don't know or the yes category. So I that's, that's my argument.

00:11:36:20 - 00:12:02:05
Shane
Now, Brian, I when we, we had communicated about we were going to have this discussion today starting when we communicated that we were going to have this discussion today. You said interesting, because I know your mind's thinking about how does this paperwork flow, like what? What is the how does this contract get set up to a point that that it's set up and, and delicious enough for Abby's group to even want to acquire it in the first place?

00:12:02:11 - 00:12:05:15
Shane
What was going through your mind when you when you heard that, Brian?

00:12:05:17 - 00:12:32:00
Brian
Well, the thing that's going through my mind is my background, as an attorney is I did some oftentimes due diligence work on selling large, real estate, pieces of real estate, big office buildings, that sort of thing. And so part of that transaction always involved. Okay, we have to go in. We have to if we're buying, we have to go in and look at all the details that go into a contract.

00:12:32:00 - 00:13:09:17
Brian
So when it comes to, piece of real estate, you have to look at the leases because the leases are essentially kind of like a junk bond, so to speak. You're you're looking at are there any potential risks that are going to be in these contracts? I mean, from a seller perspective, what if there was like 1 or 2, maybe three big simple things that a seller would want to make sure that they included or that, would make their note, better, so to speak.

00:13:09:17 - 00:13:21:01
Brian
I mean, they could maybe capture a little bit more, of a premium or something when they're selling that note. What would those be in your mind? Because that's very simple. Where my mind went.

00:13:21:03 - 00:13:49:12
Abby
Yes. Very simple. And I'm just going to flirt them out. No offset language or very little offset language in the contracts, both in the asset purchase agreement or the promissory note personal guarantee if it's an entity, obviously, if it's an individual, it's built in in number three language in the asset purchase agreement, a promissory note that allows the seller to request anywhere between 1 and 4 times a year, preferably 2 to 4 times a year.

00:13:49:14 - 00:14:12:05
Abby
Financials of a borrower. To make sure that the borrower buyers are running the business into the ground. Those are the three immediate things. And then we can talk about you had mentioned leases. That also comes into play too. It can get a little bit more nuance, but just to kind of touch on what you said about leases is if you we see a deal and it's, let's say a not a new deal, right?

00:14:12:05 - 00:14:36:19
Abby
So this has happened, you know, in real life here. So we see a deal, we see that the lease, you know, let's say the loan is a 60 month amortization, fully amortized. And it's, you know, eight months in ten months. And, but what they forgot to do or failed to do is there is a lease expiring in the next four months.

00:14:36:21 - 00:15:04:04
Abby
And we're looking at that. We're saying, okay, well, there's no let's say that there's no renewal on that lease, right? For whatever reason, there usually is. But let's just say there is an, we're going to have, thoughts about that in the underwriting process. Right? Because that can significantly interfere with our monthly, you know, with, with receipt collecting that payment is if the especially if it's a brick and mortar business, if they have nowhere to kind of set up shop.

00:15:04:06 - 00:15:23:08
Abby
You know, I'm not saying it's a dead deal, but we're definitely going to want to dig in, double click on that, maybe speak to the landlord or communicate with the current landlord. Which is tough because if there's no language in the contract compelling the buyer to do that, you know, it's it's really like, you know, and we get it done.

00:15:23:08 - 00:15:45:15
Abby
But it's tough, you know, so, inserting language that makes the off boarding or the, the off ramp, a more seamless transaction and you're not going through, you know, a gravel road, so to speak, when you're, when you're trying to do that something nice and paved and smooth and, you know that that's that's ideal. Yeah.

00:15:45:17 - 00:15:50:12
Brian
Just a quick follow up. What are our offset rates?

00:15:50:14 - 00:16:21:20
Abby
So in a nutshell, when let's just I'm just going to use very simple terms. The seller, you know, originated accounts and vendors, let's say they have, you know, outstanding vendor bills do or accounts do and the business is sold to the new buyer and the the seller either failed to or forgot to or, you know, wasn't privy to some sort of money is being owed to previous vendors.

00:16:21:22 - 00:16:43:06
Abby
The seller gets their cash, they go on their way. And then six months into the the the the ownership of the new buyer, someone comes knocking on the door and say, hey, the guy who used to own this owes me 20 grand. Well, if you have a right to offset and you have to pay that 20 grand in, in some extreme cases, you could just not.

00:16:43:06 - 00:17:09:12
Abby
Okay, I'm paying you $5,000 a month, Mr. Seller, so I'm not going to pay you for four months because I just paid 20 grand that you owed. Now, that's it. From an underwriting perspective, that's a non-performing loan. Offset or not, that is a deal killer. Plain and simple. So, you want to make sure if there's language, you have to put an offset, put an expiration on it.

00:17:09:12 - 00:17:40:19
Abby
We can only, you know, six months in, after six months, it's it's, you know, it's on you. Or if there's an offset, someone comes knocking that not only is there an expiration, but the the seller has to step up and pay. And if not and if there's an argument, legal or otherwise, then the buyer can exercise their right to, you know, miss those payments in order to point that cash to the vendor, the offset that they need to pay.

00:17:40:21 - 00:17:41:19
Brian
Interesting.

00:17:41:21 - 00:18:04:21
Abby
Yes. So that, you know, a lot of most people, I mean, people that have been in the industry for years don't aren't even aware of these, you know, they know that. So especially the business brokers, right. They know of an offset once the bit once the business is sold, they may get involved. They may get a phone call down the road, but typically not.

00:18:04:21 - 00:18:10:12
Abby
I mean, they're already, you know, working on their next four deals. Yeah, exactly.

00:18:10:14 - 00:18:21:15
Shane
You bring up an interesting point, Steph. I got a question for you. How many sellers and buyers have you encountered that have actually thought that thoroughly through?

00:18:21:17 - 00:18:28:04
Steph
I'm sure or no question. I mean, lenders have actually thought that through.

00:18:28:06 - 00:18:30:22
Abby
The nail on the head.

00:18:31:00 - 00:18:34:03
Steph
What you just flip around.

00:18:34:03 - 00:18:36:01
Shane
Some people say.

00:18:36:03 - 00:19:05:08
Steph
Yeah, I'm listening to you all talk and I can't tell if I like this or I don't like this. And I, I'm trying to find the nugget. Right. And the reason being is it's like, why would I want to buy some mediocre banks? But the banks are involved, so it's some mediocre seller buyer transaction that was poorly executed in some rural area with two mediocre attorneys, more than likely.

00:19:05:08 - 00:19:08:16
Brian
Right or or or or.

00:19:08:17 - 00:19:27:13
Steph
No attorney. I'm thinking to myself, how do I just be the first one up for that? And so how do we just provide an alternative to financing without the seller and just go straight to market?

00:19:27:15 - 00:19:48:12
Steph
Have you thought about that? I don't know, explain what the product is. Tell me. Tell me about the product. Like, what are the terms in your favor? Because if I'm UAB, I'm thinking to myself, man, I'm buying this portfolio of assets that are in Dubuque, Iowa or wherever in America that I'm going to have to manage. And oh, man, the guy is not making this payment.

00:19:48:12 - 00:20:09:13
Steph
It's it could be a servicing nightmare. You know, if because you're buying seller notes. So there's a lot of due diligence that you need to do on your own. Right? You're basically underwriting the deal. Who or do you just go straight to market? I don't know, have you thought about it? Talk me through your current product.

00:20:09:15 - 00:20:20:00
Abby
Sure. So I will I will, absolutely. I just have a question. When you say straight to market, I know it obviously. Would you mean that could mean several things. Can you elaborate a little bit on that.

00:20:20:01 - 00:20:23:21
Steph
Alternative financing for small business owners.

00:20:23:23 - 00:20:27:07
Abby
Gotcha. So right right up front.

00:20:27:09 - 00:20:30:16
Steph
So through the family office, you know.

00:20:30:18 - 00:21:14:15
Abby
Yes. And that's that I mean, you know, of course, you know, our. It. Yes. To answer your question, our thought process here is, there are thousands of these types of assets, probably tens of thousands or more of these types of assets that are just kind of collecting dust in a desk drawer. And, you know, when we, you know, from from, in my experience, you're right, there is, you know, mediocre assets or mediocre, attorneys drafting, you know, mediocre loans that don't necessarily, you know, look great, and wouldn't be, you know, the best loan product, so to speak.

00:21:14:17 - 00:21:38:12
Abby
But to be quite frank, you know, if the price is right and you have the ability to kind of provide that, you know, situation where you're providing a debt free lump sum of capital to the seller and then providing support for a buyer. We like to see value, not like to we see value in all types of assets.

00:21:38:12 - 00:22:13:13
Abby
Right. And that's that's really, you know, kind of our thought process there. So yes, right now we are purchasing existing business loans. We have an answer kind of to what your to your point of how do we further tighten up that box. Right. That to make sure that the language in the know the language in the asset purchase agreement, the language in security agreement and the personal guarantee, really, you know, knock our socks off and, you know, we have that in the works right now, which we plan on rolling out in the next six months.

00:22:13:15 - 00:22:43:01
Abby
But as far as, specialized lending products, you know, the we've I can't say that we've put too much thought into that because there is a there you have the SBA, I mean, the SBA. Let's be let's be honest, they have subsidized money, right? They get their money more or less subsidized from I mean, it's not like Fannie or Freddie where it's like the US taxpayer, but their pockets are deep and their pockets of deep because it's it's a it's a quirk.

00:22:43:06 - 00:23:08:08
Abby
Forgive me if I'm not, accurately representing this, but a quasi government. You know, entity and, that that's not saying hard, you know, impossible. But definitely there's, there's already fish in that that see. Right. We want to kind of go and see a, an area that requires, an answer that no one's solving. And we feel that's the seller node space.

00:23:08:10 - 00:23:21:17
Abby
I'm not suggesting, step for one second that what you're describing can be lucrative. I'm sure it can, especially if you guys are doing it. But I will tell you that, you know, that's our our cup of tea is the seller node space.

00:23:21:19 - 00:23:44:12
Shane
Well, I got so maybe I have some thoughts on that too. I was, I was thinking about it a lot over the weekend. And since we had talked there in Raleigh, the there's some strength in seasoning. Right. Like, so you've been in a market where there is, but you've been doing this for years, buying existing notes that have already been written, already had some level of seasoning, and you essentially go in and you're buying them at a discount.

00:23:44:12 - 00:24:03:04
Shane
So for every dollar of loan amount out there, maybe you're paying $0.80 on the dollar to, to get the notes in underneath your management. And you have some built in value from day one. So you've already got built in return. Day one, similar to how a lender in SBA space would take their loan and sell it on the secondary market and make their return.

00:24:03:04 - 00:24:23:14
Shane
They want like everyone wants that built in value. Day one. Otherwise you're just hoping and praying at the time of close that that buyer actually makes the payments. So I think that there's the two strategies here and correct me if I'm wrong, Abby, is that the you get your day one asset value. It's like buying a piece of real estate for $0.80 on the dollar, knowing that it's worth a million bucks.

00:24:23:20 - 00:24:46:17
Shane
Right. But there's also, there's also the idea that that at least that buyer has already kind of gone through some of the transition pains. Right. Like that's where the risks is, is as a buyer takes over a business, there is plenty that's going to fall apart in that first 6 to 12 months that if you can come in after that mess has already settled, and then we can show that guys made 12 months of payments, then like, yeah, I want to be in bed.

00:24:46:17 - 00:24:52:15
Shane
On that note, as opposed to just hoping and praying that the guy actually knows what the hell he's doing. So different strategy.

00:24:52:17 - 00:25:15:08
Abby
And I also want to add to, you know, you had mentioned and I've just about that's a great fleet chain. That's exactly right. For sure. But you know, you say why not, you know, bring an alternative financial product. I find that the biggest issue is capital market dislocation, you know, especially with family offices. Right. So they you know, most family offices require return of 18%.

00:25:15:14 - 00:25:31:17
Abby
That's a hell of a lot more than a 10% on an SBA. What do you I mean, you know, so that that would be my for like to actually give it some like high level thought. Now I'm not suggesting for one second that that can't be solved, but it's going to require a lot of acrobatics and that's fine.

00:25:31:17 - 00:25:58:05
Abby
That's what we do. Right. But this is a more, like, as Shane said, you know, there is a, a built in mechanism here that we feel confident to kind of roll into and step into the shoes of an existing deal that has a track record, and that that's, that's where our, our, you know, desire to want to, improve the market lies at the moment.

00:25:58:07 - 00:26:23:11
Steph
I mean, I love it, I love, you know, portfolio management is really the space when you're when you think about it is portfolio management. And you know, Shane, to your point about seasonality, it peaks. Right. So when a business the average business default happens in age 5 or 6. So there's a sweet spot there. You need to get in and almost get out as fast as you can.

00:26:23:11 - 00:26:39:01
Steph
Because after year six you know the likelihood of restaurant you know Mike's sub shop staying in business. It's a diminishing rate of return at that point. So are you providing short term debt here Abby on this.

00:26:39:03 - 00:26:45:21
Abby
Yeah. So when you say short term debt, so are you meaning our investment appetite in our horizon.

00:26:45:23 - 00:26:55:09
Steph
So that seller know when you're taking it out and you're providing the consumer or the borrower a know how, what's the term of that? Note?

00:26:55:11 - 00:27:14:20
Abby
So the term typically, I mean that that's really going to be dependent. And so there's there's two answers to that question. Within the phases of seller capital, and seller capitals, I guess if you want to say in phase one, I mean, we're, we're actually looking at all existing loans and then we're finding the best fit typically speaking.

00:27:15:01 - 00:27:33:08
Abby
And this is not just for seller edge. This is for the business. No buying world in it has been for, you know, the past 20, you know 20 years that I've been operating in it. Ideally most investors, both private and institutional, typically like to be in and out of an investment within the first 3 to 5 years.

00:27:33:10 - 00:28:05:05
Abby
Yeah, that's a perfectly aligns with what you're describing. Now, do we see, loans that have a ten year amortization or I mean, I, I got one right now that has a 240 month amortization on a business. So you want to talk about poor quality decision making, and there's multiple attorneys on that one. So, you know, so yes, we see all flavors, but 3 to 5 years ideally, you know, we may be able to grow up to six, if all the stars align.

00:28:05:07 - 00:28:10:01
Steph
Yeah. That makes sense. You want to get in and out because then then they realize our.

00:28:10:03 - 00:28:11:04
Abby
That's right.

00:28:11:06 - 00:28:40:09
Shane
So what, you just identify the type of note that you're looking for essentially. So when a seller's right in something you don't want, are you saying you don't want the amortization or the, you know, the period of payback that the monthly payment is based off of to be past six years or what? In the case where it's 240 month amortization, you figure that frontloaded interest that first three if it's a has a balloon attached to it like that seller, that payment that it's due in five years, that's pretty much all interest.

00:28:40:11 - 00:28:41:15
Abby
That's all interest.

00:28:41:17 - 00:28:45:11
Shane
Is going towards. Someone make an important sexy return on when all is said and done.

00:28:45:11 - 00:29:09:11
Abby
So yeah. And just to give you an idea, when we talk about purchasing seller notes, there's four ways that we purchase seller notes. There's two verticals. And then, within each vertical there's two. So there's two purchase options. So we can buy the entire loan which is referred to as a full purchase offer. And this is not a, unique seller that's actually been around since the 70s.

00:29:09:11 - 00:29:37:14
Abby
The Eric Carter error, when interest rates were, you know, 13, 15, 18%, whatever they were pre, you know, before my time, I'm assuming everyone's time here. And so seller finance became a huge role. And then the, the, the secondary market, the discounted note market back then would either buy a full purchase, which is all payments remaining or partial purchase, meaning a portion of the payment stream, and they would back into their equity, they would back into their risk exposure.

00:29:37:16 - 00:30:00:00
Abby
And let's say you know, so if on this 240 month, amortization, if we are to take a swing at it, we would only be able to probably take a bite sized portion of that referred to as a partial purchase. We maybe would take a look at 3 to 5 years of, of, payments. But a lot of the sellers, especially on a loan term like that, would say, you know, yeah, this is good.

00:30:00:00 - 00:30:27:20
Abby
Or, you know, some of them say, hey, this is not even close to the capital I need. And that's just something we just can't transact on. Unless they modify the loans. We actually have one right now where they're in the process of modifying the loan to kind of fit a better need. So the broker's, working with the seller to work with the borrower to shorten the loan term, and, there's ways to compel the borrower to do that, and they're working on that as we speak.

00:30:27:22 - 00:30:28:18
Steph
Now. Got some.

00:30:28:20 - 00:30:50:16
Shane
I mean, there's so many ways to to carve this up, you know. That's right. The solution, because you just brought something up. Okay. I'm I'm mister seller. I have this seller note that I just sold my business, and maybe I'm only going to sell half of that. So the liquidity going back to that earlier, I still want some of it, but I need 500 grand of my million dollars today.

00:30:50:18 - 00:31:17:17
Shane
So there's a way to still exit some of it in the event that the terms were set up. Right. And I think that's the key component is creating, and creating a knowledge base for people. That's simple enough for a seller to have that from day one. So when they start considering to sell their business. And I think that's why we so we met Abby at, Broker Convention, a business the Carolina and Virginia Business Broker Association convention.

00:31:17:19 - 00:31:40:07
Shane
And it's it's a great environment because these business brokers are out there representing sellers left and right. It's imperative for these guys to understand that this tool is available, that that they're framing up the transaction for sale. And before negotiations even begin, that that seller knows under what terms it makes sense based off of whatever their long term wealth strategy is post-sale.

00:31:40:09 - 00:31:59:18
Shane
So what kind of elements, I mean, what kind of education or is there anything that you're putting out there that, that is to help? Small business seller to know what the hell to do because I'm all I can think of is, like, with all the language we banker people use and note buyers and everything else, I'm sure they're thinking, well, what what what is this?

00:31:59:23 - 00:32:05:06
Shane
What's really the end point that that gets me to an idea that says, yes, this is something I can use tomorrow.

00:32:05:08 - 00:32:08:02
Abby
So you're saying direct to seller education?

00:32:08:04 - 00:32:09:05
Shane
Exactly.

00:32:09:06 - 00:32:29:07
Abby
Gotcha. So direct to seller education is going to be a comp. It's it's going to be an awareness campaign if you would. And how that's going to be, carried out is it's going to be carried out primarily I would imagine online. I say I imagine because we're kind of still working through it. But, it would be primarily carried out online.

00:32:29:07 - 00:32:50:15
Abby
There's going to be some elements that are going to be carried out offline. It's going to depend on, you know, we have multiple strategies to use. I mean, there's a ton of different strategies we can use, but the question really is, is that, you know, I'm, I'm of the mind right now where it's more effective to educate the broker and let the broker educate the seller.

00:32:50:17 - 00:33:17:11
Abby
Just because the broker already has reach. Now, I'm very familiar with the market trends on, let's just say search engine optimization and, you know, I kind of a, a new thing that we're kind of exploring, but there are very few sellers that even know this exist. So to, to rely on them to actually have a searchable term and then have you be there to answer that query.

00:33:17:13 - 00:33:44:14
Abby
We may be waiting until the cows come home because they just don't know. So we have to be proactive and perform outreach to professionals that are already speaking to the sellers. Via, events like the one that we met at last week, maybe lunch and learns again. That's something that is a little bit more intricate and I say it because it's the most common, in a lot of spaces.

00:33:44:14 - 00:34:11:08
Abby
But, you know, we there is an education piece here. And right now that education piece is going to be geared towards brokers. It's going to be geared towards sellers, financial planners, you know, exit, strategy folks in the, in the, business, selling world, which is, some of the great conversations we had with some of the companies that were there.

00:34:11:10 - 00:34:34:18
Abby
It's going to be a plethora and a different combination of things that we're going to need to orchestrate, and that's the way we see it. And to be honest, our we've had a very good response so far. And, we know that there's a market here that requires maybe some shaping a little bit, forming and, and support.

00:34:34:20 - 00:34:43:07
Abby
But once we get that, we should be able to kind of, you know, get, you know, tons of lift.

00:34:43:09 - 00:34:44:21
Shane
I think about your.

00:34:44:22 - 00:34:45:16
Steph
I mean.

00:34:45:18 - 00:34:50:17
Shane
Ed podcast. I mean, just create it, damn it. Okay.

00:34:50:19 - 00:34:52:01
Abby
It's right a podcast.

00:34:52:03 - 00:35:15:11
Shane
That's right. I mean, because I kid you not, it fits flawlessly. And it's an angle that I don't see many people. Everyone's living on the origination side. Right. Like as it exists, lives on the buyer side. That's where the debt is. That's where the borrower. That's a long term relationship that that's that's that perpetuates. Granted, there are plenty of wealth management guys that that live on the seller side that are marketing to those guys to figure out what the heck, to help them do their do with their money.

00:35:15:11 - 00:35:37:11
Shane
And like you said, those are some of your referral partners, if you will, in orchestrating some of that. But, Brian, I'm curious your thoughts on this. And I think, again, going back to the leg out the paperwork transfer, like some of the risk, I in my mind seller edge has a templated packet of seller notes like here's an example of what we want to buy.

00:35:37:13 - 00:36:02:13
Shane
Fill in the blanks in. Is there a risk, Brian, and using that because obviously these guys aren't returning. But you can create this as this is what I want to buy. Here's your but your buy sheet. And you know I want six months after you've written that just start throwing that that leaflet out, the flip plane and every seller convention that exists and let it just land on people and, and let that let them see that, hey, I have the chance to get out of this shirt.

00:36:02:13 - 00:36:09:10
Shane
Just I just need to frame up my paperwork so that they actually want to buy the note. So where does that go wrong if they do that? Brian.

00:36:09:12 - 00:36:27:23
Brian
Well, I think it goes back to some of the things we talked about at the beginning. Right. Some of those, the offsite, right, personal guarantee audit rates, those are some of those key factors you're looking at in transactions. And then I also think the size of the transaction dictates some of the risk that you're going to see.

00:36:27:23 - 00:36:47:14
Brian
I mean, on those smaller deals, you're going to have mom and pops that have no idea what a lot of this stuff is. And so there actually might be some, like you were seeing Abby, some ability to go back and say, hey, seller, if you want to sell this, we need the buyer to be on board to modify that.

00:36:47:14 - 00:36:53:06
Brian
No, we if not, yeah, we can. I don't know if we have a deal. I think.

00:36:53:11 - 00:36:54:03
Abby
It's a.

00:36:54:05 - 00:37:16:17
Brian
It seems like the larger transactions probably necessitate a little bit more hand-holding. From a legal standpoint, like you're going to have to have someone in there looking at things because obviously you don't want to take a big loss. But to some degree, I think that you could mitigate that risk by just having some sort of templated, format in what you're looking for.

00:37:16:17 - 00:37:39:18
Brian
Hey, we need to see these six things in a in in your seller note. If you have them, great. Boom. Let's go. And then that's going to make up a small portion of the transaction that you do. And then from there you kind of decide, okay, how much of these other ones that don't have that don't fit that cookie cutter box, do we want to play with.

00:37:39:19 - 00:37:40:14
Brian


00:37:40:16 - 00:38:01:23
Abby
Yes. And then that is in the works, the templated package, that is in the works that we are currently rolling out. And, you know, that's that's so as I mentioned previously, these were buying existing, a lot of people asking, hey, do we, do we need to get your docs and then create the loan and then wait six months and then you buy it.

00:38:02:01 - 00:38:27:16
Abby
And the answer is no, we can buy what's out there now. But as we continue our upward trend, we're going to start dialing that in. And like I said, the process is already begun. Where, we'll, we'll get legal on board and, and, you know, provide that. But you are correct. I would say in the larger transactions, I mean, we've seen some really interesting stuff that we couldn't transact on for whatever reason.

00:38:27:18 - 00:38:55:02
Abby
One comes to mind, it was a satellite company. Satellite company that they were they were, Joe commander from the Space Force was the CEO. He's brought on and and, it was a $17 million first. And, it did pay down quickly. So. And it was, you know, very low interest. So that was also tough, too, because that, you know, the delta for the discount becomes much greater when you have a 3.5% interest rate.

00:38:55:02 - 00:39:15:08
Abby
Your, you know, your target yield is is well above that. So, you know, but there are very interesting and complicated businesses that are probably, north of the 10 million range, maybe even not maybe slightly south, but in that range that you're going to find a lot of moving parts, and it's not going to be a one size fits all.

00:39:15:08 - 00:39:39:03
Abby
But, we do find that there's going to be a lot of, value add to the, you know, the very least, you know, the $100,000 range on pay principal balance, up to the million for sure. I would say even up to the two and a half or 3 million for sure. I do know SBA operates, and that's the space in which SBA operates.

00:39:39:03 - 00:39:59:18
Abby
Is that 500,000 to 5 million? But that doesn't mean I mean, a lot of the loans that we're seeing are also in that range. And for whatever reason or another, they didn't use SBA because they wanted velocity on the timeline or the borrowers, you know, couldn't come up with, the 10% or they didn't want the 10% interest or whatever it was.

00:39:59:20 - 00:40:19:22
Abby
You know, we see a lot of them with 20, 25% down in a 5% rate. And, you know, I, I hear this story constantly where it's, hey, we wanted to get the deal done quickly. The, I don't mind seller financing. You know, I don't necessarily need the money. The down payment was enough. But now I need the money.

00:40:19:22 - 00:40:23:09
Abby
That's why I'm talking to you. That was a year ago. And now I need the money.

00:40:23:11 - 00:40:41:17
Steph
Yeah. I would say if I could just jump in real quick, I would say to wrap this up in a nice bow, I want to think about what synergies exist between your firm and our firm. And the synergies are, of course, any SBA business in our way. Right. But I can't tell you how many times you know me personally.

00:40:41:17 - 00:41:03:23
Steph
I've been in the niche vertical business. Right. So I am in specialized industries and I go in there and own that niche industry. And my referral partners are accountants, attorneys, business brokers, all the guys that you probably are going to want to target also because they're the ones structuring the deal, helping the seller get out, having the buyer get in SBA is a great alternative.

00:41:03:23 - 00:41:22:13
Steph
If you have time and energy and working with a trusted partner like us that can get you across the finish line. Believe it or not, there are a lot of SBA lenders in this country that fumble for months, and they'll fumble that ball for months and drag everyone through the mud. And guess what? At the end, the seller and buyer like, forget it.

00:41:22:15 - 00:41:42:23
Steph
We just want this transaction to happen. We're going to do sell a financing by Bank of America. We don't want your help anymore. All right. See you later. And and what their their thought process is. Let's just do seller financing and then we'll continue this year long off with the bank and refinance that note. Well it still doesn't make the process easier.

00:41:42:23 - 00:42:05:17
Steph
All of a sudden. They don't just like, you know, rub the Buddha and the process is is fun. It's still terrible. So they're they are looking for ways out. And that's why we can flip a lot to you because that's that deal that I lost because they weren't seller finance. They don't want to do with the bank anymore because they realize, you know what, we're just going to hang on as long as we could possibly hang on and just pay the seller.

00:42:05:17 - 00:42:22:05
Steph
But the seller wants out. I mean, these baby boomers, they want out, right? So that we're going to flip a lot of business to you and hopefully you can flip a lot of business to us on the front end with the SBA loans that don't fit your model, but that you're stumbling across because we're calling on the same people now.

00:42:22:07 - 00:42:40:22
Abby
That's true. I yeah, could agree more. And I you know, first thing is really the low hanging fruit comes to mind is refi takeouts. You know, we have borrowers that are balloons coming up. Now. We hand you a borrower that has, you know, 52 months of pay, sees it, you know, pay history. You know, that's a service pay.

00:42:40:23 - 00:43:06:00
Abby
You know, now, you know, I mean, I don't want to pretend to know because I'm not an SBA commercial lender. But, you know, when you guys are underwriting these things, right? So you have you're looking at, you know, cash flow of the business. You're probably looking at borrower or guarantor credit score, how they pay their bills. But if there's a actual if the if you have pay history on the actual business that you're going to be financing, I would imagine that would be very powerful.

00:43:06:02 - 00:43:28:08
Shane
Oh yeah. Yeah. In fact, you're required to have two years of pay history of a seller note before we can even touch it. So even if you came in and bought a note six months after it was originated on seller side, we couldn't touch it for another 18 months. We need to see 24 months of payments because the original debt that we'd be paying off, even though it's you now, as the owner of that note was the seller seller finance note.

00:43:28:10 - 00:43:59:10
Shane
So that seasoning still needs to happen. And obviously that helps some somewhat of the balance decrease and everything else. But once that two year period has has crossed, from when that origination happened, enter SBA. Right. So which also creates an interesting opportunity for yourself. So now if you know you've got an exit on the Taylor end of that in 18 months, you can write your acquisition terms of that seller note in a way that allows you to know that your investor is going to get this much return by the end of that period so that you start priming the pumps.

00:43:59:10 - 00:44:13:18
Shane
I mean, you've already working with that buyer. You've created a relationship for them. You also get their mind set on the idea that they had this nice, pretty SBA exit and has a ten year term. And we just frame it up. You can literally log it in the calendar. I know this guy is coming up three months ahead of time.

00:44:13:20 - 00:44:31:01
Shane
We start helping him put together the paperwork, hand him off and the SBA guys execute so that you have your exit right on the back end of it. Granted, maybe you want the return, but I can imagine for those notes that have the three, five, 6% return like interest rates, maybe that's not the most sexy to keep on in your, your assets under management.

00:44:31:03 - 00:44:47:10
Shane
You want instead that that execution to get the the balance reduction return already like on your table. I think that's that's your exit. That's that's a pretty role that I think we can fit into. That's kind of what you're like.

00:44:47:12 - 00:44:48:09
Shane
Yes.

00:44:48:11 - 00:44:51:12
Steph
Like touching your hands in front of your mouth. Shane.

00:44:51:14 - 00:44:53:18
Shane
My answer if you haven't heard anything I've said because I've been doing this.

00:44:53:19 - 00:44:54:18
Steph
All all of if.

00:44:54:18 - 00:44:57:16
Abby
You come and.

00:44:57:18 - 00:45:02:01
Shane
I do, this is my thinking, my thinking thing. You know what I mean?

00:45:02:03 - 00:45:06:18
Abby
Absolutely. Like this.

00:45:06:20 - 00:45:10:08
Steph
Last bit. What was your last bit? What was the question?

00:45:10:10 - 00:45:18:14
Shane
I don't even remember. You just derailed the whole mustache and beard thing. But we're going to go off. No staying in, by the way, we're not cutting any of this.

00:45:18:16 - 00:45:20:20
Abby
But,

00:45:20:22 - 00:45:39:05
Shane
Okay, so if you're listening to this and you're a buyer or seller or broker, you just heard a roadmap to closing more deals. And that used to be, I would say, the ones that used to be a little bit more impossible. So seller's Edge isn't really it's not a theory. It's it's a live weapon in the acquisition game that you are all playing in and that we're all playing in.

00:45:39:07 - 00:46:01:07
Shane
So, sellers, you got to stop thinking that you have to be the bank forever on these notes. The buyers on this stop letting deals die just because you can't bridge at least that 20% gap. And for any brokers, this is your magic wand to resurrect dead deals and increase more of those close rates. Those sellers that couldn't quite figure out a way to strike the deal off what was offered to them.

00:46:01:09 - 00:46:20:03
Shane
So the age of dusty seller notes is over in the marketplace for liquidity has arrived. And if you're not paying attention, you're going to miss the renaissance of Main Street that Abby and his team are putting together for us. So, Abbey, thank you for stepping into the chamber with us today. And to our listeners, remember your business, your capital, your legacy.

00:46:20:05 - 00:46:22:09
Shane
Don't just play the game, master it.