Bankers’ Objections in Business Acquisitions
A recent article from the International Business Brokers Association (IBBA) talks about the ‘Banker’s Dozen’ objections compiled from one of the top SBA lenders in the country. To have a successful and timely closing, start discussing documentation needed and addressing concerns early in the process.
Below are some of the due diligence items needed to avoid delays in getting a deal done.
Citizenship of the Buyer
- Early on determine the citizenship status of the buyer and obtain a copy of the documentation of proof.
- A buyer can secure SBA financing if they have a green card and are legal permanent U.S. residents.
Buyer’s Personal Credit Report
- A resume and Statement of Personal History questions are required for each guarantor. Knowing any issues early on give the bank time to clear through them during the underwriting. This will help avoid delays.
- If the buyer’s credit score is under 700, a written explanation should be provided.
More Equity in the Deal is Needed
- The Equity requirement for business acquisitions are changing with the release of the SBA’s new version of its Standard Operating Procedures (SOP).
- The SBA will be providing additional insight into these changes, the basic change is that the buyer must contribute at least 10% equity towards the entire transaction and there must be at least 10% equity on the post-transaction pro form balance sheet. A seller note can still be used and can provide for up to half of the required equity injection. However, the seller note must be on full standby (no payments at all) for the life of the SBA loan.
- If the buyer’s equity is coming from a gift, it will be required to have a Gift Letter with 2 months of bank statement showing the source of this gift.
Pledge of Personal Assets as Collateral
- If the business assets do not fully secure the loan, the SBA will require that any personal real property with lendable equity must be pledged as collateral. If your business plan and financial statements are strong, you might avoid putting up a lot of collateral.
Due Diligence Helps your Success Rate
In the due diligence process, we keep a spreadsheet of the items needed and completion dates to keep our client and the buyer group on task. For our lower-middle market businesses and private equity groups, there are pages of items needed for a comprehensive due diligence process which is needed for a successful deal.
Last year Terence T. Burton posted an article on LinkedIn on a due diligence and in the article he stated the purpose of a deeper, more thorough Operations Due Diligence. It was a lengthy article giving reasons for it and examples of what happened when a deep, thorough Operations due diligence is not done.
Below are the key four points he put in his article on the why you want a comprehensive Operations Due Diligence.
- To find hidden, unknown and undiscovered problems that will have a severe impact on operating and financial performance of the acquisition. A few examples he gave are:
- Obsolete inventory and equipment;
- Inventory performance and variances off the books;
- A warehouse full of new products that will never work in the field;
- Employee morale and attitudes, and broader cultural readiness to adapt and execute the necessary changes that are required to grow into a compatible and highet performing part of the larger entity.
- Identify, prioritize, and deploy the right corrective improvement efforts to create maximum operational value quickly – like in the first 60-90 days of new ownership. These represent the tactical “quick strike-high impact” opportunities for improvement. These opportunities are the known low hanging fruit to the seasoned improvement practitioner’s eye that produce rapid improvements in business and operational performance. It is important to validate these opportunities with the internal managers to gain acceptance and begin building change ownership. Many acquisitions get to this step where a 50,000 foot boilerplate plan is produced – One that looks nice but is totally exclusionary, dillusionary, and non-actionable at a tactical level.
- Develop an aligned, organization-wide improvement strategy and vision, deployment plan, and practical implementation approach.
- This effort represents the unlimited unknown opportunities for improvement that must be continuously mined, prioritized, and scoped relative to alignment with the company’s business plan;
- The other purpose is to identify innovative breakthrough improvements that competitively position the new organization way out in front of the industry norms.
The big differentiator in great acquisitions is their ability to discover, harvest, and implement the real operating breakthroughs in their industry.
- Implement the required changes thoroughly and successfully during the acquisition integration process. Execution is the key to success and this is where the majority of acquisitions fall apart. The major root cause is management’s underestimation and oversimplification of execution. This leads to the failure to take on and implement major transformation initiatives successfully, while dealing with day-to-day business. In the face of crisis, improvement is always the first casualty.
This is a small portion of his article… you can find the full Linkedin article on this page or the link above.