Full transcript10 chapters · 8,360 words
00:00What Live Oak’s service contractor team actually lends on
Dillon Caraway: Most contractors think the bank is the last call they make when things get hard. But ones who are actually winning are using financing as a growth strategy, and that’s a completely different conversation.
Tyler Martin: Welcome to Profit and Grit with Tyler, where blue-collar owners and insiders spill the real story behind their hustle, building businesses that thrive through sweat and smarts. We’ll dig into their journeys from scaling chaos to growing the bottom line with lessons and grit that pay off big.
Tyler Martin: Here’s your host, the Blue Collar CFO, Tyler Martin. Private equity has been buying up HVAC, plumbing, electrical, and other service companies for years. But most owners don’t realize they have more options than they think. Welcoming back to the show today is Dylan Carraway from Live Oak Bank.
Tyler Martin: Dylan works with trade owners who are looking to fund acquisitions, buy buildings, access working capital, or prepare for succession. In this conversation, we get into how financing can become a growth strategy instead of a last resort, what it takes to buy another company without giving up control, when owning
Tyler Martin: your building actually makes sense, and why banks care more about your bottom line than your revenue. By the end of this episode, you’re going to have a better understanding of how to think about financing, acquisitions, and big growth decisions before you make the next move. Let’s
Tyler Martin: dive in with Dylan now. Hey, Dylan, welcome to the Profit and Grit Show. How are you doing, man?
Dillon Caraway: Tyler, doing well, man. How about yourself? Thanks for having me on.
Tyler Martin: Dude, I always get pumped up. This is part two. You know, we were just talking about this. April of 25, you were episode number nine. You were kind enough to come on, bet on me early in the podcast journey. We had an awesome conversation and now you’re back. And I’d love for you to just give
Tyler Martin: like a little opening of what you do to share with the audience what you’re doing these days
Dillon Caraway: and have an awesome part two of this conversation. Yeah. Thanks, Tyler. I’m honored to be back, kind of looking back over some of the guests you’ve had over the 12 months. I’m truly honored to be back. But yeah, as a quick refresher, I’m a senior loan officer for a company called Live Oak
Dillon Caraway: Bank. We are the number one SBA 7A lender in terms of dollar volume for the most recent year in the country. Our bank is headquartered in Eastern North Carolina, but we lend nationwide. And what really makes us unique is we specialize by industry. I know in our last episode, we really
Dillon Caraway: dove in the history of that. But essentially, I work on our service contractor team, which primarily focuses on HVAC, plumbing, and electrical companies. And we’re starting to see a lot more interest in the roofing industry, the garage door service industry, foundation repair, and pool
Dillon Caraway: services. It’s really cool to see these different subsectors start to grow. But I would say the bulk of our portfolio is going to be HVAC, plumbing, and electrical. And in my opinion, I have one of the best jobs in the world. I really get to work with some of the most successful, but the most
Dillon Caraway: humble people within this industry and help them fund the growth of their business and the
03:17From $10K lines of credit to $30M acquisition loans
Tyler Martin: transitions of their business. And then just before we go on to the next topic, I’d love to just also understand when we talk funding, we’re talking what? Credit lines, equipment, acquisitions. Where do you guys cover? What’s that range of different types of services?
Dillon Caraway: Yeah, great question. So the smallest loan my team has ever closed is $10,000 and the largest has been $30 million. So a really wide range of how we can help your business. And I always bucket it in like two separate sections. First bucket is going to be the growth side.
Dillon Caraway: So think acquisitions. If you’re an existing owner and you want to buy your local competitor, we have a really great loan product for that through the SBA. Think commercial real estate. If you’re leasing your building or you own your existing building and you need more room,
Dillon Caraway: we help facilitate purchases of existing buildings, purchases of land and ground up construction. We can do real estate or leasehold improvements. Working capital, that’s been one of our most popular products over the last two years. And we’ve invested a lot of resources into that.
Dillon Caraway: But think investing in the organic growth of your business. So marketing, advertising, training, hiring, all of the above. We can help with that. Lines of credit. I think every trades business should have a line of credit. A lot of HVAC businesses, especially depending on where you’re located, have some level of
Dillon Caraway: seasonality. So having a line of credit that you can draw on during the shoulder season can be really important to help manage cash flow cycles. And then also refinancing debt. You know, think credit card debt or short-term high-interest debt, we can typically help out with that.
Dillon Caraway: One recent change that the SBA made is we do not have the ability to refinance NCA debt anymore, which is like Merchant Cash Advance is what it stands for. And so it’s really important that when a small business is taking out any type of working capital or any type of loans, that they truly read the fine print, understand what type of loan they are getting, how that is going to be paid back, so on and so forth.
05:26Why banks lend on bottom line profit, not revenue
Tyler Martin: Yeah. What do you wish trades owners knew about how a bank thinks that might change how they run a business? Like, is there anything that stands out to you? Hey, I wish these trades owners would know this. This is how we think about things.
Tyler Martin: and it might alter the way they run their business?
Dillon Caraway: That’s a really great question. I think so many contractors and really business owners get so hung up on, this is how much my business does in revenue. So I can get approved for this amount or I can sell my business for this amount.
Dillon Caraway: But what banks actually lend on and what buyers actually evaluate is the bottom line net profit. We kind of look at adjusted EBITDA and that’s what a lot of buyers look at as well. But think net income plus interest appreciation, amortization expenses, and any one-time expenses that an existing business owner can have.
Dillon Caraway: If a owner is selling their business, then we can sometimes add personal expenses back to the bottom line. So I think my one recommendation would be really focus on that bottom line profitability, because that’s what unlocks your ability to obtain financing through Live Oak and a lot of other SBA lenders
Dillon Caraway: because we’re cash flow-based lenders, not collateral-based lenders. Obviously, we evaluate collateral, and oftentimes it is associated in a part of the loan structure. But we do have the unique ability to approve multimillion-dollar loans based on the business’s ability to service that debt via the cash flow.
Dillon Caraway: So paying attention to that bottom line. and two and three, I know you asked for one, but clean financials and file your taxes.
Tyler Martin: Talking to my heart when you say clean financials, I get it. Hey, so I want to just talk about private equity and maybe just flipping the script here a little bit. So we know private equity obviously is very strong in this space, has been for many years.
Tyler Martin: I think sometimes as trade owners, we forget that we can kind of be our own private equity to some degree using a bank’s assistance
07:28Being your own PE and buying a competitor with SBA money
Tyler Martin: and actually buy companies. What does that look like that lends through you guys? Like when does a trade owner do that? When does a contractor do that where they have their own business and they want to maybe have another location or, you know, for whatever reason they locally want to expand and they’re
Tyler Martin: thinking about acquiring a business? What does that look like when working with you guys?
Dillon Caraway: Yeah, really great question. And I think, you know, private equity is good for a lot of folks, but some folks really don’t want to dilute their ownership and give up control of their business because, you know, but then they lose the ability to make key decisions.
Dillon Caraway: So through the SBA program, through Live Oak Bank, contractors have the ability to go out and acquire other businesses in a same geographic region, think two to three hours, same industry classification. So like heating and air, buying a heating and air company, plumbing, buying plumbing, or plumbing, buying heating and air,
Dillon Caraway: things along that line. And of similar size, so to speak, they can utilize their existing business as a co-borrower on loans to go out and acquire additional businesses with very flexible down payment options. Oftentimes that can be 100% financed through the bank because again, we would add their existing business
Dillon Caraway: as a co-borrower on the loan and essentially use the equity from that existing business for the new loan and the new business. And I get a lot of questions like, hey, Dylan, I wanna go buy this business. Can I have more than one SBA loan
Dillon Caraway: or can I do this one or two times? Like, how does that actually work? or they think since they got an SBA loan back in 2020 when COVID happened that it will not allow them to get additional funding, which is not true. Essentially, SBA puts a cap on a business
Dillon Caraway: owner of $5 million. So you can go out and acquire a million-dollar business here, million-dollar business there. Obviously, we want our business owners to be strategic because we don’t just want to fund five acquisitions all at once because that’s so many moving pieces, we want to make sure that the bank is managing risk appropriately, but most
Dillon Caraway: importantly, that that business owner is managing their risk appropriately because there’s real people on the other sides of these transactions. And we want to make sure that when we’re making them a loan, we have full confidence that they’re able to service that debt and pay us back.
Dillon Caraway: But the SBA loan and expansion program through Live Oak is such a great way for owners to go out and grow their market share, get additional employees, customer list. I mean, the list goes on, benefits of acquisitions.
Tyler Martin: What does that look like though? Like, I own a business, I own a plumbing business. You had made a comment about like a plumbing, you would expect to buy a plumbing. If I wanted to introduce another trade to this
10:09Adding a second trade and the licensing plan you need
Tyler Martin: and I wanted to like get an HVAC, is that something you guys would allow or if I wanted to add another trade to my business, is that possible? And what’s it look like from a practical standpoint? in terms of working with you guys?
Tyler Martin: Like, what would you want from me?
Dillon Caraway: Yeah, most certainly. I mean, I think managing a plumbing company is probably somewhat similar to managing a heating and air company. I’ve never managed a business, either of those industries, but I would have to think they’re somewhat similar. I think what’s really important to us
Dillon Caraway: is understanding the licensing requirements for that specific area, because you might be a really good plumber and well-experienced and fully licensed, but if you’re going to buy a heating and air company, you may not meet your city or your state’s prerequisites to get qualified for licensing.
Dillon Caraway: So trying to really think through that to make sure you have a solid licensing plan. If you are expanding into another trade, you’re kind of thinking through those things. But we see it as a great opportunity. Oftentimes, you can cross-sell to existing customer lists.
Dillon Caraway: Plumbing, there’s not quite as much seasonality, to my knowledge, as there is in certain areas for heating and air. So it can kind of help offset that. And I think for me as a homeowner, if I trust my plumbing company and they don’t offer HVAC or electrical, I wish they did.
Dillon Caraway: Just because you already have that established relationship, one point of contact, you’re not having several different companies come into your house. So we really love when owners expand into different subsectors.
Tyler Martin: Very cool. So if I come to you and I say, hey, Dylan, I’ve got this amazing opportunity. It’s 15 miles from me. It gives me another trade. what does that look like from, in terms of what you’re going to need from me, what that’s going to look like here? I want to buy this company. Like,
Tyler Martin: do you guys actually essentially do due diligence on the company that I’m buying? Or do I come to you and say, Hey, here’s all the due diligence I’ve done. What’s that look like?
Dillon Caraway: Yeah. A little bit of both. You know, we want to make sure you’re doing your homework and you’re not putting, you know, all of it on the bank because we want you to be confident in that opportunity. We want you to come to us with the business transition plan on how and why
Dillon Caraway: you think it’s going to be successful. But also, we’re going to take a look at, first and foremost, your existing business. We’ll take a look at historical financials, any existing debt that your current business has, to make sure that your existing business is healthy from a financial
Dillon Caraway: standpoint. Then we will look at the business you’re looking to acquire and run that same analysis. We’ll take a look at historical financials, what the potential purchase price of that business may be to make sure that that business is producing enough adjusted EBITDA or
Dillon Caraway: free cash flow to service the monthly loan payments. And then, you know, we also kind of look at the personal side to make sure that, you know, you have a good personal credit score and, you know, you’re managing your personal finances appropriately. So we kind of look at all three
Dillon Caraway: different areas. We start with your existing business, target business, personal, they all
Tyler Martin: kind of feed into one another. Got it. Now, I believe you could, in theory, finance an acquisition 100% of an individual or a business, an individual can. Is that true? And is there any situation
13:21How 100% financing works and keeping cash reserves
Dillon Caraway: where that would actually make sense? Yeah, I think it makes sense in a lot of scenarios. And again, you know, it’s the SBA expansion program. So buying a company in the same industry classification that you’re currently in, I think electrical and HVAC have different ones. So I
Dillon Caraway: I don’t think that would potentially qualify, but I know heating and air and plumbing do. But yeah, I think it makes a ton of sense. And you probably know this better than I do with the world that you live in. But keeping cash on the balance sheet is super important for small business owners.
Dillon Caraway: I think having that safety net is super important in case something arises that may not be expected or run into a slower month. Having cash reserves is super important. So if you have the ability to go and acquire a business without having to use all of the cash off your business balance sheet, we see that as a huge win.
Dillon Caraway: And oftentimes, if there’s no real estate included, it’s going to be a 10-year term and a 10-year amortization, which there is no prepayment penalty for these SBA loans. So say you buy that business and you double revenue, double profits, and you’re like, man, I would love to pay this thing off early.
Dillon Caraway: There’s actually no penalty to do so. So we like owners having a healthy cash reserve. Obviously, they’re welcome to put cash down. We like that as a bank. It shows their commitment into the project. But we also want to make sure that they’re managing those cash reserves appropriately.
Tyler Martin: So Dylan, if you were going to do 100% financing, what type of cash reserves, how many months of coverage would you typically expect to see or reserves on a balance sheet that would say, oh yeah, I’ll do, a bank potentially would do 100% financing?
Dillon Caraway: Yeah, I think it depends on a few different factors, like the size of the business and a few other things. But in our loan packages, we want to make sure the business is well capitalized anyway. So oftentimes we can’t include permanent working capital and a line of credit
Dillon Caraway: in our loan package. Because if you’re a $1 million business, you’re buying a $1 million business and you got 100K of cash reserves on your balance sheet, that may or may not be enough for the $2 million operation as a whole. So we want to make sure in our loan package, when you buy
Dillon Caraway: that company that you’re well capitalized to meet payroll in month one, purchase equipment, pay your suppliers, things of that nature. So we do take a look at the working capital reserves and making sure we’re providing that in our loan budgets and oftentimes equipping them with a line
Tyler Martin: of credit as well. Very cool. Okay. I wanted to move on to the next thing. In terms of buying a building, we see a lot of contractors will work out of the same location for many years. When does it make sense to work with you guys and potentially go out and buy a building as opposed to, is there
16:10When owning your building beats a 20-year cheap lease
Tyler Martin: a scenario where renting actually is probably the best choice given the situation? Yeah. And
Dillon Caraway: that’s the thing about us is we’re brutally honest when we’re working with business owners. I’ve reviewed some financials and real estate opportunities where this contractor has been in the same lease negotiation for the last 20 years. Their rent or lease payment has never increased.
Dillon Caraway: And they look at buying that building and their mortgage would actually be double of what their leases. And while, you know, there’s so many benefits to owning real estate that would impact their cash flow. So we just had that open and honest conversation because again, we want to
Dillon Caraway: make sure we’re setting these contractors up for success. But I think there is so many advantages to owning your real estate. You know, there’s interest in depreciation advantages for tax purposes, but more importantly, you have freedom over your facility. So, you know, if you’re not
Dillon Caraway: running that risk of your landlord selling your building and you having to relocate in the middle of busy season in the summertime if you’re a heating and air company. And another major advantage is you get to build long-term equity. So you’re building that equity for yourself versus
Dillon Caraway: somebody else. So it adds another layer of retirement when you go to sell your business. We see a lot of owners keep the building to keep that monthly income from the new tenant coming in, or they can sell that building and get the check for that
Dillon Caraway: versus their landlord getting that check. So yeah, I think it depends on kind of where you’re at with your business. Does it make sense to tone your building if you’re just starting out? Maybe, maybe it doesn’t. But it’s a great tool to help support growth
Dillon Caraway: and build long-term wealth.
Tyler Martin: What about like new construction? If someone came to you and said, hey, I’m kind of contemplating between building my own building as opposed to acquiring one. Do you guys get involved? would you be part of a new construction loan or are you more on the side of just acquiring a
Dillon Caraway: building that’s already been made? Yeah, great question. So we can finance land and ground up construction for companies. We can finance buildings that need a lot of work and provide funds for renovations, or we can finance turnkey buildings where they’re move-in ready. Yeah, I think it depends on kind of where you’re at, where you’re located, because sometimes in
Dillon Caraway: certain geographic regions, there’s not a lot of good commercial real estate that’s available or priced appropriately, but they’re able to find land and build a particular square footage and type of building that really fits their business needs versus what’s in the market. So I think it’s
Dillon Caraway: important to weigh all options when you’re thinking about one, leasing versus owning. And then also when you go to take that leap of faith into owning, does it make sense to buy that land, do ground up construction? Does it make sense to buy something that’s moving ready?
Dillon Caraway: Do you want to search for kind of a opportunity where you can find a building with, you know, for a good deal and then invest in, into some renovations to, to really improve, you know,
Tyler Martin: that particular space. Anything you can give us in terms of if, you know, there’s some people in the audience, maybe they’re five years away from when they’re thinking about buying a building or maybe potentially building a building, any, any things they should be doing or any things they
Dillon Caraway: should be thinking about? It really goes back to what we were discussing earlier is managing income and profitability. And then also on the personal side, making sure your personal credit’s good. You’re managing your personal finances appropriately. But again, that cash flow that the business produces unlocks your ability to get pre-qualified and qualified for financing.
Dillon Caraway: So I would encourage if you’re looking at purchasing a building, whether it’s one year or five years away, going through that process of having us review the financials to give you a kind of a rough prequel number, I think is really important because I work with some contractors
Dillon Caraway: that think they could only get qualified for a $500,000 building. So they haven’t been searching for these $1 million buildings when actually they can get approved up to like 1.5. And then vice versa, I have contractors that think they can get approved for 1.5, but they can only get approved
Dillon Caraway: for 500. So yeah, I think kind of gauging, you know, what you can actually afford in terms of like loan payments is really important because, you know, maybe you really do need a million dollar business to support your growth goals, but you’re not quite there yet. So we can help educate,
Dillon Caraway: hey, this is where your revenue and profit is now. This is what the debt payments would look like. We would kind of need to see revenue and, you know, income increase to this amount for you to be able to get pre-qualified for that. And sometimes that can take a lot of time to make
Dillon Caraway: those changes and see that growth actually occur. So I think reaching out as early as possible is
Tyler Martin: always super helpful. How do you feel, and I know this is going to be different for different parts of the country, but is today’s time April 2026, let’s say it’s probably going to be good for the next couple of months. Is this the right time to be looking at buildings, would you say, or
Dillon Caraway: what’s the general feedback if you have any for us? I think it varies for all contractors. I mean, And some, it might be the right opportunity. Some, it might not. I think everybody likes to talk about interest rates. But rates kind of are what they are.
Dillon Caraway: We thought they were going to have a few more rate decreases by now. But we’ve also seen rates go down a lot in the last year and a half. Does that mean we didn’t have anybody buying real estate a year and a half ago and rates
Dillon Caraway: were a little bit higher? No, we still had a lot of activity. But I think naturally, you do see interest in acquiring real estate increase when rates decrease just because the cost of capital is cheaper. But again, I think it just goes back to
Dillon Caraway: what are your goals for your business? What can your business support? Where do you want to be in five to 10 years is more so important than just thinking about, oh, interest rates may be 7% today. They might be 6% next year. I’m going to wait. For me personally, I did that when I was
Dillon Caraway: buying a house. I was like, man, I really don’t want to get in a 6% mortgage rate. But then I was so happy looking back that I actually went ahead and bought a house because you see your property value increase and rates really haven’t gone down like they were supposed to. So you would have just
Dillon Caraway: been sitting there waiting for something that may or may not happen. So I think it just varies.
Tyler Martin: Is there any theme, and this is both whether it be purchasing a building or maybe acquiring a business, is there any theme that you see that causes deals to fall apart?
Dillon Caraway: I will say more so on acquisitions and going through that exercise.
22:40Trends, work mix and customer concentration that kill deals
Dillon Caraway: Some of the things that can cause deals to fall apart are really get uncovered during due diligence. So two things that are, I’ll say three things that are really important to us are trends, work mix, and then customer concentration. So I’ll start with trends.
Dillon Caraway: Banks like to see stable, reoccurring revenue and net income, stable cash flow. So if you see a business has been kind of flat year over year, and then you see it skyrocket in the year that the seller wants to sell their business, is that a one-off year where the business just had a really good year? Is that sustainable?
Dillon Caraway: So we like stable, reoccurring revenue, which kind of leads into our work mix conversation. We really like residential commercial service repair, add-on replacement, or change-out type businesses. So again, stable, reoccurring revenue, typically not gonna be like large project-based jobs or new construction jobs.
Dillon Caraway: And then kind of third will be customer concentration. So we wanna make sure that all your eggs aren’t in one basket. If you’re looking to purchase that company and they have 50% of revenue coming from one customer, what happens if you lose that customer post-close
Dillon Caraway: in the transition, half your revenue’s cut overnight. So just trying to think through all those things can be really important when,
Tyler Martin: you know, at least we’re evaluating opportunities. Yeah. Okay. And just on that same note, when it comes to like, when you evaluate deals and maybe a deal’s falling apart, are there, so the common theme is maybe not having like good bookkeeping, maybe, well,
Tyler Martin: I shouldn’t say it that way, not having the due diligence wasn’t thorough enough or something that causes something to leak out at the end. It sounds like that’s kind of the path. So I guess what I’m trying to do, and sorry for I’m jumping around, I guess the fix to the problem is just
Tyler Martin: just deeper due diligence on certain things so that you don’t get surprises at the end. Am I summarizing that correctly?
Dillon Caraway: You are. And we like to uncover those items as early as possible and to deliver that news to our customers early as possible. We never want to over-promise and under-deliver. I don’t want to say, hey, I think this is a great deal when I know that there’s these concerns
Dillon Caraway: just because I want to be respectful of my time, my customer’s time, and then also their resources. So even if it’s bad news, we like to deliver that as early as possible. So I hope that helped answer your question.
Tyler Martin: No, that’s good. That’s good. My question wasn’t the greatest. Hey, I want to go into the next segment. This is my favorite segment. It’s probably where my mind was at. I call it the number. And the reason I call it the number is I really want to get down
Tyler Martin: maybe on one or two numbers that are really important. And I think for a bank, this is like such a great topic. And the number that I pulled out
25:27Debt service coverage ratio and the vehicle write-off trap
Tyler Martin: was DSCR. Can you tell us what that is, what that acronym stands for? And then let’s talk about it
Dillon Caraway: a little bit. Yeah, it stands for debt service coverage ratio. My group at the bank, we really like to see 1.25 times or higher. And that essentially means that the business is generating $1.25 of free cash flow for every dollar of debt that it has. And we could spend hours talking
Dillon Caraway: about debt service coverage and what goes into it. I really think from a high level, is three components. You got the adjusted EBITDA or free cash flow or seller’s discretionary earnings. There’s so many different terms for it. You have what’s called officer’s compensation or
Dillon Caraway: required officer’s compensation, which is the amount that the owner has to draw from that business to support their personal lifestyle. And then you also have either existing and proposed debt or just proposed debt if it’s a first-time acquisition. So those are the key components.
Dillon Caraway: You got, again, adjusted EBITDA or SDE or free cash flow. You have what an owner has to draw from the business. And there’s probably different financial institutions may calculate that part differently as in required officer’s compensation. And then you have that existing and proposed debt
Dillon Caraway: component of debt service coverage. So all three of those are key components.
Tyler Martin: Got it. So going back to that debt service coverage ratio, that’s driven by how much your payments are, correct? I mean, that’s what drives us. The higher your payments are, that ratio would keep coming down. Is that a true statement?
Dillon Caraway: If free cash flow or SDE or adjusted EBITDA did not change, but you could have that debt service climb. But as long as your adjusted EBITDA or SDE or free cash flow is climbing at the same rate, then that debt service coverage can kind of remain constant.
Dillon Caraway: As long as your personal need is not changing, that you have to draw from the business. But say, for example, you know, your adjusted EBITDA doesn’t change, your existing or proposed business debt doesn’t change, but your personal lifestyle increases and what you need to draw from that business increases, that can cause debt service coverage to decrease.
Dillon Caraway: So there’s so many different factors that can kind of influence, you know, whether you’re getting an increase in debt service coverage or a decrease in debt service coverage. So that’s why when we are looking at these opportunities, we want to look at existing business, the business that they’re looking to acquire, along with the personal financials to make sure that everything kind of fits in all together.
Tyler Martin: Because what I see a lot is a business will come to me and their tax preparer, not to blame the tax preparer, but the taxpayer every year will be saying, hey, go out and buy three or four vehicles and you can deduct them all and they’ll be all great.
Tyler Martin: I’ll finance them. And they’re doing that every year, not necessarily even needing the vehicles, but because they get a tax deduction, they’ll buy more and their debt keeps going up. but everything else kind of stays constant. And I mean, what I would love to do
Tyler Martin: is there a way to articulate this? Cause I believe that at some point is gonna crack their coverage ratio because they’re just gonna have so much debt that they’re basically using all their cashflow to service a lot of their debt. And they’re having to pay tax on the full amount
Tyler Martin: of their profit slash cashflow. And then like you said, for their own lifestyle, they’re having to fund it. There’s just not enough cash to go around.
Dillon Caraway: Yeah, a lot of folks can shoot themselves in the foot when going through that write-off scenario. We do see it very common and banks are comfortable with a certain level of ad backs, is what we call them. But if you’re taking cash jobs and not reporting that as income or profit, there’s no flexibility there for a bank to
Dillon Caraway: either try to prove that or add that back. In my opinion, I think if you are looking to obtain financing or thinking about selling your business, it’s very important to report everything appropriately and show the true revenue and income of your business. Because again, if a bank sees
Dillon Caraway: that the business was losing money year over year, and then the year that they want to get financing or they want to sell their business, profits tripled and revenue doubled, then we sit there and scratch our head and just be like, what’s sustainable? What’s real? So I always am a big
Dillon Caraway: fan of folks just reporting everything appropriately and true and accurate.
Tyler Martin: Right. How though, when it comes, sorry, just to go back to the debt thing, like how does a business owner know at what point other than calculating the ratio themselves, how do they know, like, is there a threshold that you would generally say, hey, in terms of
Tyler Martin: how much debt they should be taking on, like before they’ve come to you? So it’s like buying vehicles, maybe getting credit lines, is the only way they can really look at it is by computing that ratio? Or is there a rule of thumb like, hey, if you have $2 million of debt and you’re making
Tyler Martin: $6 million in sales, you’re probably going to be top heavy in your ratio? Or is there anything you look at like that that you can eyeball and you might say, hey, you’re a little top heavy in debt right now?
Dillon Caraway: Yeah, this is going to sound super simple, but don’t spend more money than you make. I think it truly comes down to that. I think business owners have a feel for when things are tight. And when things are tight, does it really make sense to go out and acquire more debt or have these super large or heavy expenses? Probably not.
Dillon Caraway: But again, I think owners have a really good feel for where their business is, whether that’s reviewing KPIs every day, looking at financials. And some folks, honestly, just monitor the cash balance they have in the bank to try to determine how the business is doing.
Dillon Caraway: But kind of like summary and high level, just don’t spend more than you make is a really good rule of thumb.
Tyler Martin: Yeah. So your gut feel. I mean, really lean into your gut feel of, hey, man, things are just tight. this is not the time to go out and get more debt, basically.
Dillon Caraway: Yeah. And also, don’t be afraid to reach out to someone like you. You’re a professional in this industry and specifically that topic where you can really evaluate their business and say, hey, this is not so great right now. These are some changes that you probably need to make to
Dillon Caraway: improve this. So reaching out to folks just like yourself, I think, is super important. We’re always happy to help do financial reviews of their business and gauge where their level would be to be able to be approved for financing. So the only dumb question is the one you don’t
Dillon Caraway: ask. So I’m a big fan of just like, hey, make the phone call and have that conversation.
Tyler Martin: Yeah. I love your advice though. I mean, because our intuition a lot of times is correct. And I can’t tell you how many times I’ve seen clients come to me that are really debt heavy and it’s sucking up a lot of their cash. And then like you said, their lifestyle is taking some of their cash
Tyler Martin: too. And it’s just at the end of the year, they’re like, I got this profit number. I have very little cash in bank. I’ve got to pay tax on that profit number. Why is this not adding up? And you kind of have to explain to them, well, hey, man, you’re spending $40,000 a month on debt service,
Tyler Martin: this principal pay down. That’s where a half million dollars is going a year, whatever that number happens to be, $500,000 a year. And it’s just, it’s a tough conversation. I like your, I think sometimes if we just stand back and just go, you know, what am I feeling right now? And
Tyler Martin: does that make sense in what I’m seeing in the numbers? I mean, you don’t need an exact, precise mathematical answer sometimes. It’s just what you’re seeing in the business and your gut feel.
Dillon Caraway: Yeah, most certainly.
Tyler Martin: Yeah, that’s good stuff. Hey, last one I want to talk about. Thanks for taking your time going
33:11Finding a successor and not taking your foot off the gas
Tyler Martin: through that section. I love talking about the numbers side. I do want to close out though, talking about the exit, whether that be succession planning, buyouts, what should we be doing? And we talked about this a little bit in the first episode, but I think it’s always healthy to cover
Tyler Martin: again. What should we be doing as owners to make sure we’re prepared for those events? And then, you know, what else do you have to say about those types of events, whether it be succession
Dillon Caraway: planning or buyouts or whatever? Yeah, great question. And something I like, I’m truly passionate about discussing with business owners. You know, oftentimes when I’m at industry events, speaking or networking or talking at contractors at a booth setup at a conference. We’re talking about succession planning, how to prepare, what do banks look at
Dillon Caraway: for the business, for the buyer. And it ties into what we were discussing earlier. Stable reoccurring revenue, work mix, customer concentration, reporting your financials accurately, filing your taxes on time, paying your taxes that you owe, all super important for sellers that are looking to sell their business. Oftentimes, it can take a while to
Dillon Caraway: identify a successor. If you want to sell your business and PE might not be the best exit option for you, do you have a key employee that might be a good fit to sell your business to? If so, how would that actually work? That’s why reaching out to a lender like Live Oak early on in the
Dillon Caraway: process can be super beneficial because we can help guide them through that process on, again, what we’re looking for in that business, what we’re looking for from that buyer, How does that loan structure typically work? What is the timing like? And again, I don’t think that conversation
Dillon Caraway: can happen soon enough because they want to sell their business for 2 million bucks, but they’re losing money every year. We have to have that real conversation with them to say, hey, we couldn’t finance $2 on this business because if you have net negative adjusted EBITDA year-over-year,
Dillon Caraway: we need to see profitability improve before we can look to extend financing on this business. Because again, while top-line revenue is important, what really unlocks your ability to obtain financing is that bottom line cash flow. So that’s what I recommend is kind of similar to the real estate question.
Dillon Caraway: Like, you know, just never hesitate to reach out, start that conversation early, identify a successor. And I think also, you know, what’s really important is what’s your goal after you sell the business? Do you want to be involved in the business still? Do you want to retire and play golf every day and go fish?
Dillon Caraway: I mean, trying to figure out some of those hard questions that you really have to reflect internally and ask yourself can take some time to get a true answer.
Tyler Martin: Yeah, we talked about this a little bit in the first one, but it’s such an important topic. You know, you do something for 30 years, 40 years, whatever the years are, and then all of a sudden you wake up one day and you no longer have a business, you sold it.
Tyler Martin: And that is just a humongous change that if you haven’t mentally prepared yourself, can just hit you like a wall.
Dillon Caraway: Yeah, I think when my dad retired, he lasted like three months and went back. He got all his house projects done. He’s like, you know, having a job and having those daily tasks is very fulfilling. And some people may think they’re truly ready for that.
Dillon Caraway: But once you sell your business, you’re not the owner of that business anymore. You’re not the decision maker. You’re not managing the employees. Once you collect that check, you kind of set sail unless you’re like rolling over substantial equity. So trying to ask those tough internal questions can be super important.
Tyler Martin: Is there anything when it comes to selling your business? I mean, obviously, we say clean books and we get that. But are there any common patterns or things that show up in financials or books that people should really pay attention to and be focused on?
Tyler Martin: Like I know you talked about one-time costs could potentially be an ad back. I’m sure some personal stuff could be ad backs. But is there anything else that jumps out that, like, hey, these are some things you should think about or be aware of in your books?
Dillon Caraway: Yes, more so, yeah, just trying to report everything and keep everything above water, I think is really important. Banks can get comfortable with a certain level of ad backs, but if it doesn’t make sense and we can’t document or justify why that is a business expense that will not be,
Dillon Caraway: or like a non-business expense that would be not reoccurring after the deal closes. So we’re not going to add that back. And that can reduce the amount that you can actually, or the buyer that, that can reduce the amount that the buyer would get approved for, for financing.
Dillon Caraway: So just reporting everything appropriately and really trying to, you know, I see a lot of owners that are going to sell their business. And it’s kind of opposite of what I’ve been talking about, you know, for the last 30 minutes is they take their foot off the gas or they just kind of get
Dillon Caraway: mentally checked out. And you can see revenue and profit start to decline. And they’re like, well, last year I did this and this is what the business can do. And a lot of buyers don’t buy based on potential. And I know banks typically don’t lend based on potential. It’s more so
Dillon Caraway: historical performance. So just keeping either stable, reoccurring revenue, whether that’s you know, gradual growth is super important.
Tyler Martin: Yeah. I think that’s one of the hardest conversations with the business owner. In their mind, like the business has so much value and it does. I mean, they built a nice team, beautiful trucks. Maybe they’re all wrapped in nice and fancy. They have a location.
Tyler Martin: But if the bottom line says you’re losing money, you’re not making money or having to put money in the business to keep it afloat. Yeah. People don’t buy the potential. They buy, you know, an investor wants some certainty in their return. And I think that’s a hard concept sometimes for sellers who are very emotionally wrapped
Tyler Martin: up into their business.
Dillon Caraway: Yeah, you don’t want to go down with a sink and ship. And, you know, if folks take their foot off the gas and really let things start to deteriorate or they start to lose some employees and they have a lot of turnover issues, you know, that
Dillon Caraway: can cause a lot of uncertainty for banks and buyers as well.
Tyler Martin: Yeah, very cool. Hey, man, anything I left out before we wrap up that I might not have asked you or anything you want to share about the bank or things that you’re doing or maybe places you’re going to speak? I’d love to know a little bit more if there’s anything.
Dillon Caraway: No, I mean, I think our event season is kind of wrapping up for the first part of the year.
Tyler Martin: You’re like happy.
Dillon Caraway: As we were discussing earlier, me and my counterpart, we probably go to roughly 30 events a year combined between the two of us. So, you know, the spring and fall is very busy in terms of trade show season. But, you know, while it’s a lot, you know, traveling and keeping up with your day job during that, we do truly love, you know, the partners in this industry as well as the contractors we get to work with.
Dillon Caraway: So it’s great seeing familiar faces and, you know, continuing to build on those relationships. I’m actually expecting me and my wife’s first child, a little girl, coming in June. So I think travel is going to be put to a halt there for a little while.
Tyler Martin: Dude, congratulations. That’s awesome.
Dillon Caraway: Yeah, thank you. Super excited. So I don’t think I’ll be getting on the road anytime soon once that happens. But if I happen to see anybody that’s listening at an event this fall, I’d love to connect and introduce myself.
Tyler Martin: Yeah, so your website, LiveOak.Bank, LiveOak.Bank, a great institution. I’ll put your LinkedIn link in the show notes. I noticed your handle is Dylan Carraway, Dylan with two L’s, Carraway. So that’s a pretty easy one to spell if anybody wants to look Dylan up.
Tyler Martin: And then I also ran into an article I’m going to put in the show notes. You had an article at ACHR News a while back. I’m going to include that in the show notes. I thought it was a cool article. And then your cell number, if you said it was okay, if people want to reach out to you,
Tyler Martin: I’ll just shoot that out really quickly. 252-671-2427, 252-671-2427. And Dylan was kind enough to also give me permission. I’ll throw that in the show notes. You’re amazing, man. I love talking with you. I love chatting with you. Hopefully we do another one next year.
Dillon Caraway: Can’t wait for Series 3, man. Thanks again, Tyler. Such a fun conversation as always.
Tyler Martin: Okay, take care. So here’s my big takeaway from this conversation with Dylan. Financing should not be something you think about when you’re in trouble. Use the right way. It can become a real growth tool. A lot of home service business owners think private equity is the only path to acquisition
Tyler Martin: or expansion. But what Dylan made clear is that strong operators can use lending strategically to buy another company, add a trade, purchase a building, or prepare for succession without giving up control of the business. But the key is this, the numbers have to support the move. Clean financials,
Tyler Martin: healthy cash flow, stable profitability, manageable debt, and a clear understanding of debt service covers ratio all matter. Because growth only works when the foundation underneath it is strong enough to handle the extra weight. And that’s exactly where the CFO mindset comes in. It’s about knowing what your business can afford, how much debt is too much, when the opportunity
Tyler Martin: makes sense, and when it’s smarter to hold back and strengthen the numbers first. If this conversation hits home, go ahead and check out cfomadeeasy.com to learn more about how I work with home service business owners, or feel free to book an intro call at cfointrocall.com.
Tyler Martin: That’s cfointrocall.com. And as always, I sure appreciate you listening, and I’ll catch you on the next episode. Take care.
Related Episodes
- The Bank That Gets Tradespeople with Dillon Caraway
- The Shift That Took This HVAC Company From $5M to $11M – Darren Yarbrough
- Your Best Tech Is About to Walk – Chris Buttenham
- Why EBITDA Disappears After You Buy a Trade Business – Ryan Williams
Tyler Martin works with owners on the numbers behind these stories: Profit & Grit CFOs. For where your business sits right now, read the $3M to $15M scaling breakdown.
