Carl Allen provides a step-by-step guide to underwriting SBA deals quickly to assess if a deal is viable before submitting. He begins with the basics: gathering the last three years of financials, including revenue, gross profit, and adjusted EBITDA, to set a foundation for analysis. By inputting these nine figures into his model, he calculates the business’s average valuation.

Allen explains that he uses industry multiples, in this case, 3.5x for an agricultural business, to estimate the enterprise value. The model adjusts for debt and real estate to determine the stock’s value, resulting in a total cost of about $4.8 million. This figure includes all fees, working capital needs, and SBA guarantee fees.

The next step is to assess the SBA loan. With an 8.75% interest rate on a 13-year term, the monthly loan cost comes out to roughly $46,883. Annually, the debt service totals over $562,000, which Allen considers very favorable, as it matches the cash flow potential of the business.

Allen then calculates the debt service coverage ratio (DSCR) using the adjusted EBITDA, which is divided by the loan amount to arrive at a ratio of 2.3x. This DSCR indicates robust cash flow, with Allen noting that anything above 1.5x is strong enough for SBA approval, with his preference for deals above 1.5x.

Finally, he advises using the model to determine equity requirements and watching his related video on forecasting investor returns. This additional resource can help structure deals so that the equity needed is minimal, enabling investors to come on board and make the purchase with minimal personal capital.

Full Transcript:

Hey guys, Carl Allen. I wanna do a quick video for you today on my YouTube channel. I wanna show you how to really quickly underwrite an SBA deal to make sure that it’s gonna work before you go ahead and you submit it. Right? So let’s, let’s go through some basics. So you need the last three years of financials.

There’s a much more detailed run through of, the the this business in some of the other videos, so definitely make sure you watch those forecasting, videos. But, I’m just gonna summarize it. So this is a business. Doesn’t matter what type of business it is. This this could be your deal.

Last three years of revenues in. So three point three, three point nine and change, three point nine and change. Model calculates growth, put in the gross profit numbers, and then put in the adjusted EBITDA numbers. If you don’t know what adjusted EBITDA means, go watch the video on that, and I will explain it. So you put those numbers in. So there’s nine numbers you gotta put in to the model. What the model then does calculates an average valuation for you.

We, you know, we went to deal stream deal stats. We we looked at the multiple, this type of business. This is in the agricultural space about three point five times. The model then calculates the value of the business, the enterprise value, then makes all the debt and real estate adjustments to then calculate the value of the stock, the equity in the business that you’re going to buy. So this deal is gonna cost about four point five mil.

And then with fees and additional working capital that we’re gonna need and all the SBA guarantee fees, etcetera, this is gonna be about four point eight million dollars and change. And then the model calculates this on a thirteen year term because there’s real estate involved. So five percent equity down, ninety percent SBA loan, five percent seller notes. So what you might wanna then do is you need to go off and look at what is the cost of that SBA loan.

So I’ve included a little link here. And, again, after this video, you can download this model and you can play with it. So we’ll take that link in a minute. But what we’re gonna do first of all is we’re just gonna copy that number, and then we’re gonna plug it in to this external model here.

So we’re gonna go to this external model, and this is the, the SBA loan calculator. And then all we do is we just paste the number into the model. Interest rates today are about eight point seven five percent. That’s a thirteen year term.

So that’s gonna be the monthly cost of the SBA loan, the interest and the principal. So it’s gonna be forty six thousand eight hundred and eighty three dollars per month, and it’s gonna have an annual total debt service of just over five hundred and sixty two thousand dollars, which is really, really good. Really, really good. And then if we go to this, I put in ten percent.

You could put this down at eight point seven five percent if you wanted to, and then you get roughly the same number. They they do it in a very, very slightly different way. We do it in a more cumbersome way in the model. But net net, we’ve got very, very similar numbers.

And then what we can do is we can calculate what the debt service cover ratio is gonna be. Right? So the debt service cover ratio is the current adjusted EBITDA, which is one point three two three million divided by the SBA loan, which in this case is five seven four five five nine. And it’s a two point three x debt service cover ratio, which is absolutely fantastic.

Right? Anything north of one and a half, you are absolutely good to go. The SBA these days are looking more around kind of a one point three. But, you know, personally, if I’m underwriting a deal, I wanna see at least a one point five million debt service cover issue.

And the DSCR is basically how much cash flow does this business generate, just the EBITDA divided by the amount of debt service that’s required to do the deal. So what’s all the cash coming in, and then what’s divided by what’s all the cash coming out. So DSCR is absolutely fantastic. Let’s have this into the model for you in real time so that you can have this.

So there you go. Formatting this. Not my strongest suit, but I’ll do it for you anyway because I love you guys. Right?

I’m gonna make sure that this is all pretty for you. And then that’s your model. So you can plug your deals into here, calculate the multiples, calculate the value, the SBA or the, the bank that you’re working with or the SBA loan broker will tell you whether it’s a two and a half percent, five percent, or a ten percent down That allows you to calculate how much equity you’re gonna need. And then definitely watch my other video on how to forecast returns for equity investors so that you can get them to invest in your deal so you can buy it with none of your own money.

So hope you found that useful, guys. I will see you soon on the next video. Until then, bye for now.