Great Closings Right from the Start
by David Madison
This is our December end-of-the year-newsletter, a great time to revisit and summarize some of the themes we’ve discussed throughout the year. We hope that 2016 has been a successful year for you, and that you are looking forward to an even better 2017.
We’ve experienced over and over again that easy, organized, on-time closings happen when the transaction started well and stayed there every step along the way. Once things start going seriously sideways, it’s difficult if not impossible to get them back on track.
Start with a historically profitable business that meets all basic SBA lending requirements. Have a trusted financing source do a full pre-qualification, including an analysis of the business’ tax returns and financials and an overall review of the business and how it operates. Hopefully we have good players in the deal. This starts with having an open, honest, realistic and cooperative seller who understands that he or she is going to have to be a bit flexible and patient. Next we need a buyer with a good and applicable resume, a decent credit history, the necessary financial resources, and who also is realistic and cooperative. Rarely are the business, the buyer, and the seller all perfect but it sure helps to get as close as we can before we start. This is where you and your team come into play, building a sound deal structure, keeping things moving along, and bridging the gaps between ideal transaction components and the reality of what is actually there.
A properly structured Letter of Intent or Asset Purchase Agreement may be the most important document in a transaction’s life. If seller financing is part of the deal, it needs to both conform to SBA guidelines and work for the buyer and seller from a practical cash management and repayment perspective. If the parties are looking to do an earn-out to get to the final sales price, that has to be structured carefully and properly and done within the context of a conditionally forgivable seller note, one that cannot be part of the down payment/equity.
Here’s a detail that can quickly and all too often derail a loan closing – – Make sure that the buyer’s cash has been has been properly sourced and tracked right from the start, even before any escrow deposits are made. This is something that you should check on when the buyer presents his very first deposit check with the initial purchase offer.
Then it’s off to the lenders to get a financing proposal. Assemble the strongest and most complete possible initial presentation that anticipates and answers potential questions and concerns before they are even asked. If you go in strongly with your initial presentation and make a great first impression, those positive feelings will continue through the rest of your interactions with the lender and often you’ll get the benefit of the doubt when the lender has to make a discretionary call. Make sure that the business development officer (BDO) has the buy-in of the credit folks who have credit approval authority before they issue their proposal. Do not trust a lender where a BDO just put something together in an effort to get the deal off the street.
Make sure that the loan is structured properly, and that everyone knows right up front everything about the equity requirements, the collateral, and the guarantors. Do not fall prey to a lender who does things backwards, who structures the deal for their own convenience rather than the needs of the participants. Follow the SBA rules, of course, but the needs of the clients and the transaction have to take precedence. If you are working with a good financing source and get all these things right, the first few pages of the loan commitment will match the original financing proposal.
Be on the lookout for simple, innocuous things that can trip you up. For example, a simple reference in a buyer’s business plan to a “key employee” can set off a chain of events starting with the lender initiating a form 1919 requirement that will at best be uncomfortable for the poor employee at the business, and that potentially blows up the entire transaction. Do your best to be on the lookout for these types of things, and make sure that the people on your team are all checking everything to make sure that nothing like this slips through.
Speaking of the loan commitment, make sure that everyone has a thorough understanding of all its terms and conditions, even the “fine print” that looks like boilerplate. Something that seems pretty standard might in your transaction’s case be a small embedded bomb. Pay attention to the life insurance requirements, as failure to do so could delay your closing. Make sure that the buyer is working with an insurance agent who has SBA experience and who has underwriters and insurance companies who have done this many times before. We always start on obtaining the life insurance right when the loan is approved if not even earlier, and we have on our team insurance professionals who’ve arranged numerous policies for our borrowers.
Along with the commitment letter or following shortly thereafter will be the detailed closing conditions list. We always organize a conference call between the closer, the borrower and their attorney, the BDO, and the banks’ closing attorney. During that call, every single item on the closing checklist is discussed and assigned to one of the people on the call, with a due date attached to each item. This checklist should be updated no less frequently than every week, with anything lapsing being promptly addressed.
Smooth, controlled, on-time closings are possible, and we’ve identified a number of the key steps along the way. Start with a good business and solid participants, and then build your team with the right professionals. Plan ahead so that each step leads easily into the next, watch for the land mines we’ve identified as well as others you and your team know about., and you’ll be well on your way to leading your best closings ever in 2017.
Best wishes from all of us at Diamond Financial for joyous holidays and a wonderful New Year!