Deal structuring, the right way!        

by David Madison


Let’s start off by assuming that you’ve structured your transaction properly so that it meets SBA guidelines and works well for both the buyer and seller. Don’t underestimate the importance of getting this right and prioritizing the needs of the buyer and seller over those of the lender. Most lenders get it backwards, forcing a structure that favors their needs, and then the buyer and seller have to figure out how to live with those terms.


Now you need to secure a favorable loan offer from a lender who you know will approve the loan without delay and in accordance with what your clients need and what the lender has originally proposed. All too often this is where good transactions fail. How do you make sure that this doesn’t happen to your next deal?


Step #1 – Do your homework. Know your lenders and the types of loan they want at that time. Lenders come in and out of the market, and when they’ve closed a certain number of transactions or lent their quota of dollars in a given industry, they stop approving and closing loans in those buckets. The problem is that all too often their loan officers aren’t in the loop and they bring in good transactions only to see them die weeks later when they reach the credit committee.


Step #2 – Make sure to develop relationships with good lenders to whom you and your deals are important. When underwriting, credit approval, and closing capacity are limited or under stress, such as at the end of a quarter or especially at the end of the year, lenders prioritize the loans coming in from their high-volume referral sources. Your one-off loan will get worked on only after the higher priority transactions are handled.


Step #3 – When you receive a financing proposal from a lender, you must understand how likely it is that this proposal will actually turn into a loan commitment on those same terms and with a prompt closing. It all starts with the business development officer (“BDO”) at the bank. Far more often than not, the primary goal of the BDO is to do whatever they can to capture the deal and get it off the street. They’ll have a low transaction approval and closing rate, but if they can grab onto enough deals, they’ll close one every so often and get by.


If you and your buyer land in the clutches of one of these lenders, prepare for four to six weeks of promises, paperwork requests, delays, more promises, more requests, and so on in what feels like a never ending loop. If your loan is eventually approved, the approval may be for fewer dollars or with additional, unforeseen, and often onerous conditions. Or, you could end up with the worst of all possibilities – – the “SLOW NO”. Each of these outcomes will jeopardize your transaction and may very well kill it.


Something to consider – A quick “NO” is usually a lot better than a slow and tortured “YES”. Far too often that “yes” won’t really be much of a yes, as it’ll likely come with lots of added surprises, conditions and delays that’ll kill your deal anyway.


Here’s how we do it; I’ll use a real and very recent example:


Remember Step #1 above, to know your lenders, and Step #2, to develop close relationships with the right lenders to whom you are important? In the middle of August we received a call from the top BDO at one of our lenders who told us that they were looking for $500,000 – $1.5 million transactions that were ready to go and that could close and by September 30th. That was the end of their reporting year and they needed to hit their production goals. We knew that we had on our hands a highly motivated lender, one that might even be more flexible than normal to get deals in, approved, and closed.


A week later, on August 22nd a $1,000,000 transaction was referred to us (almost all goodwill and otherwise unsecured) that had been with another lender for close to six weeks. They had approved it but their way, with conditions and terms that the borrower couldn’t meet. We also learned that the buyer could save $28,000 off the purchase price if he closed by the end of September. It looked like a great potential match, but we had to make sure.


First we prepared and presented a complete loan package, one that was almost ready for underwriting. We highlighted the acceptable terms and conditions, and made it clear that our client could only accept an approval on the basis of the terms we presented. We asked the BDO to get back to us the next day and inform us if thought the deal would be a good fit for his bank and if it they could close by the end of September. We only gave him that single day because we couldn’t afford any more time in case we had to take it to another of our preferred lenders who might be able to close by September 30th.


Then Step #3 kicked in. After the BDO informed us that he liked the deal and thought it could work within their accelerated program, he presented it to the senior credit authority within the bank’s SBA lending department. That individual, who had signing authority for a loan of this size, reviewed the file and also liked the loan as presented. As long as the rest of the file lined up with what he’d seen, the loan would be approved and close quickly. It was only after each of these steps was completed that we accepted the lender’s financing proposal.


The story had a happy ending. The loan closed on September 30th, the seller was paid in full, and our borrower saved $28,000. The first three pages of the loan commitment mirrored the lender’s term sheet, and everything moved along right from the start with a transaction that was structured exactly as we had started it.


The ingredients that made all this happen were simple:


  1. We knew and trusted the lender. We knew what types of loans they were looking for, understood what motivated them and understood how they worked;
  2. We were important to that lender, and our loan got pushed to the head of the line because of our on-going relationship and the fact that our loan met their very specific need; and
  3. We presented a very complete initial loan package and made our client’s needs very clear right up front. And then we made sure that the term sheet didn’t just come from a BDO who was hoping to be able to get the deal done, but that it had also been blessed by the manager who had the authority to approve the deal.


All lender term sheets are not created equal. Make sure that the ones you obtain mean something, and that they launch a smooth and efficiently managed transaction that closes without surprises and on time. is always available for specific questions regarding this or other SBA rules.