$12M Machining Deal, SBA Capped. Here's How We Got It Done Anyway.
The SBA ceiling should have killed this one. Instead, a layered alt-capital stack and a three-year earn-out got the operator paid, the seller cashed out, and neither side left the table feeling squeezed.
The Deal At A Glance
| Category | Result |
|---|---|
| Enterprise value | $12.0M |
| Adjusted EBITDA | $2.4M |
| Multiple paid (blended incl. earn-out) | 5.0x |
| Multiple paid (base, ex earn-out) | 4.4x |
| Time from LOI to funded | 128 days |
The Structure, Tranche By Tranche
| Tranche | Amount | Terms |
|---|---|---|
| Senior SBA 7(a) | $5.0M | Capped at program ceiling |
| Alt capital senior secured | $4.2M | 5-year amortizing, equipment collateral test |
| Seller note | $1.3M | Standby year 1, 8% blended, 5-year term |
| Earn-out | $1.5M | 3 years, tied to gross margin ≥ 31% |
| Buyer equity | $0.5M cash + rolled operator equity | 12% rolled equity |
Why The Earn-Out Actually Worked
The seller believed the last two quarters were a signal. We believed they were a spike - a one-time defense contract inflating the mix. Rather than argue the multiple, we moved fifteen hundred thousand dollars into an earn-out tied to gross margin holding above thirty-one percent for three years. If the trend is real, the seller earns every dollar. If it reverts, the buyer never overpaid.
The mechanics matter. Gross margin, not revenue. Measured on a rolling twelve, not a snapshot. Paid annually, not at the end. Tied to an audited number, not a management estimate. That structure removed every re-trade lever a seller might reach for later.
"The seller number is the floor. The SBA number is the ceiling. Structure is the room in between."
The Alt Capital Piece
Above the SBA cap, we sourced a five-year amortizing senior secured facility from a specialty lender that already understood the machining vertical. The rate landed just north of SBA, but the covenant package was cleaner and the collateral test was based on equipment appraisal, not blended enterprise value. That distinction saved roughly forty basis points in effective cost of capital versus a mezz layer.
- ◆Equipment appraisal - third party, in-person, twelve CNC assets valued at $4.9M orderly liquidation.
- ◆Covenant package - fixed charge coverage ≥ 1.20x, tested quarterly, cured with rolling four quarters.
- ◆No cross-default with the SBA note - negotiated at term sheet.
The Rolled Equity Play
The operating shop manager rolled twelve percent equity and took a board seat. That is the retention lever the buyer wanted - the person who actually runs the floor is now an owner. It also cleaned up the succession narrative for the union rep, which mattered on Day 1.
Day 1 And Beyond
- ◆Twelve CNC assets titled and re-insured under the new entity on close.
- ◆Top three customer POs assigned within seventy-two hours, no production interruption.
- ◆ISO 9001 audit calendar walked. No re-certification triggered by change of control.
- ◆AS9100 aerospace certification transferred, notification filed with the registrar.
- ◆Operator kept twelve percent rolled equity and a board seat.
- ◆Union contract acknowledged without amendment; the shop manager was the messenger.
The Lender's Follow-Up That Almost Slipped
The alt-capital lender came back at credit committee with a request for a mid-cycle inventory count. That is not standard, and it would have pushed the close by three weeks. We ran the count ourselves in seventy-two hours with the shop manager, produced a signed inventory certificate, and submitted it before the lender's next Monday committee. The close held its date.
The Lesson
When the SBA number is the ceiling and the seller number is the floor, structure is the room in between. Alt capital, seller notes, rolled equity, and earn-outs are not workarounds. They are the deal.
Need a structure above the SBA cap?
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