IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Eric Welch of Dogwood State Bank (https://www.dogwoodstatebank.com/):
Bringing in a Lender Early: Will it Make a Difference?
In the transactional world of selling or buying small businesses, the saying, “It takes a village” holds true! The truth is it takes a team of experts to facilitate a smooth deal for its stakeholders. Having knowledgeable Brokers (aka intermediaries), a skilled legal team, strong accountancy, and transactionally experienced lenders, will help alleviate mistakes or hurdles and help provide for a successful closing…which is the ultimate goal.
Admitting my bias as a lender but drilling down early on the lending side will only make the deal stronger as often what goes overlooked is the value of having relevant answers for probable hurdles before a deal gets off the runway. A good lender, whether party to the deal or not, should be able to step in and offer sound advice on both sides of the transaction.
When representing the sell or buy side in a deal, bringing in a transactional expert to opine on the finance variables upfront can be extremely beneficial. A seasoned lender is going to offer, not only typical lending guidance in terms of needed metrics but will help sellers and buyers become aware of their ideal profile. A seller wants to know who’s the right type of buyer, and conversely, a buyer wants to know, what’s the right type of business to buy?
A lender will also help point out considerations for a variety of conditions that could affect the transaction. It might seem obvious, but often, unintended damage can happen to a deal or a relationship when lending takes a back seat to the transaction. Deals can die for a variety of reasons; one of the most popular sayings in this SBA world is, “Time Kills Deals”. The whole point of having the lender in on the deal early is to help alleviate time issues and set expectations on what will be needed to get it through the process.
So, what does a good lender evaluate? Here are some considerations – some of many, but these rank up there with the most critical areas a Lender will help.
Determining Buyer Experience: What’s the level of experience needed for the transaction? On the sell side, the seller will want to know the type of operator/owner they are looking for; on the buy side, the purchaser needs to have the transferable skill set in running/operating the business being bought. More importantly, the lender should be able to in a short time identify gaps in this area.
Industry Strengths or Weakness: How will a lender view the industry? Is it going to be difficult to get the deal approved and closed with a normal “conventional” lender or does it need a specialized lender who is comfortable with the risk profile and knows how to underwrite that industry and/or collateral type? If it’s a franchise…because not all franchises are created equal, what’s their reputation or success rate? Are there weaknesses in the deal because of industry related collateral considerations? Does the industry require the company to be heavy in titled vehicles (aka rolling stock), is it capitally intensive when it comes to its equipment or processes? Are there environmental concerns or is there political or economic risk involved? Lenders factor in these considerations in every deal they look at, as should all stakeholders.
Historical Financials: Is the financial story clear? Are the financials trustworthy? Do they make sense, and do they corroborate the story of the business being sold? From a buyer standpoint, does the party have the proper liquidity or “horsepower” to do the deal in the first place and have they provided evidence of that? The famous saying in the world of commercial credit analysis is, “garbage in garbage out” …meaning if non-reliable financial information is turned in to be analyzed, the analysis itself will bad and non-trust worthy.
Loan Structure: The right loan structure is critical to any deal, and often finding the right combination of loan type, loan term, pricing, collateral mix, and if applicable, choosing the right government guaranteed loan program dictates how well the deal moves through the process.
To wrap it up, a good Lender, in advance of a transaction, can help put the deal on the right path to successful closing, helping reinforce considerations that will need to be made at some point in the transaction. A strong lender coupled with a strong broker only increases the odds of a successfully smooth transaction.
If you have questions relating to the content of this article, Eric Welch, a Dogwood State Bank SBA Lending Specialist, would welcome inquiries. Eric can be reached at (253) 324-8362 and ewelch@dsbnc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.