Bank Financing: Underwriting Expectations

In this episode, Michael Haefner and Andrew MacQuilkan sit down again with Brandon Herbison from Plains Capital to discuss the financing process for a business acquisition. Brandon walks us through the initial underwriting process, including the essential documents lenders require and the expected timelines. He also shares insights into the role of personal guarantees, financial statement flexibility, and how banks and SBA loans work together to support buyers through challenges.

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TRANSCRIPT

Welcome to Integrated Insights with ICCG. For more than 30 years, our team has

partnered with small business owners to prepare for and navigate the business

transaction process. Pull up a chair as we share stories and insights from our

experience on all sides of the M &A table. And welcome back to another episode of

Integrated Insights with ICCG. My name is Michael Hefner. I'll be your host again

today. I'm joined by Andrew McQuilkin from our office. Also joined again by Brandon

Herbison from Plains Capital Bank. Brandon, thanks for joining us again. Absolutely.

Glad to be here. Brandon's back to talk to us. Last time he was on the podcast,

we talked a lot about options for financing. Today, we're going to be digging in a

little bit more to the process and what actually happens when you decide to move

forward with a loan. So, Brandon, just to get started, when you're going toward

underwriting, what kind of information is required? What kind of timing is wrapped

around that? Just give us a general overview of the process. Yeah, absolutely. So,

typically what I like to do is say, "Let's get on the phone. Kind of talk. Just

give me an overview of who you are or meet in person." Obviously, that's becoming

that's becoming a little bit thing in the past with technology now, but let's get

together, let's talk through your background, what's kind of the motivation between

buying this business and then certainly answer any questions that are on the front

end of it. But from there, I'll typically email kind of the items, the initial

items. So what Plains Capital does, and I think it's relatively unique, But really,

I think a good idea, but we put together an initial package, we call it an

opportunity memo. And the whole goal of that is to get the 30 ,000 foot view of

the deal without pulling credit reports, any of that stuff. And let's just make sure

that we're comfortable with it on the front end of it on both sides, really make

sure the bank is comfortable from a credit standpoint. And then also make sure the

borrower is comfortable from a term standpoint that that

again not wasting any time if you know hopefully it's not a no but if it isn't no

hopefully it's after five days and not 30 45 60 days into the deal where we just

killed a lot of time so we'll get a personal financial statement on the front end

of it for you and anybody so anybody that's over 20 % owner is it's gonna be a

guarantor on these so kind of keep that in mind as we talk through a lot of this

but we'll get a personal financial statement three years of personal tax returns

We'll get a business plan with three years of projections. And then we'll also get

obviously some information about the business you're looking to buy. So a three years

company prepared financial statements, some tax returns in there as well. So again,

that kind of gets us that 30 ,000 foot view of, hey, let's make sure the cash flow

is good. What's our collateral look like? What does your personal strength look

and also experience. So we'll also get, you know, typically a resume in there as

well, that just kind of goes over, hey, here's what I've done in my career and why

I think I'll be a good business owner in this certain space. So that's our typical

process. Once we, again, the whole-- - Brandon, just to clarify, when you say those

tax returns, financial statements, all that, is that for the business or is that for

the personal? - Both, that's both. - And for the Well,

let's just, I mean, I'm gonna ask this because I know it's happened before. It's

difficult to get some of those financial statements. So what, I mean, do you guys

just say, "Well, we can't do anything without it?" Or how flexible are you with

those kind of reports? I'd say on the front end of it, we're flexible. The SBA is

gonna require it at the end of the day. But If, say you have a buyer and it's

like, man, I want to turn over my tax turn during it. Well, let's just get the

company prepared financial statements. Hopefully, they understand if they're wanting to

sell a business that they, hey, we got to see some financials, everything on it,

but we'll get the company prepared first. Again, do our high level overview package.

Say, yeah, no, this deal looks good. We've got good cash flow. Hey, the collateral

is pretty close to get to a one -to -one coverage. Got a good background experience

experience and all that stuff. Let's go and move forward to kind of what we call

really the full package of it. So we'll go ahead and pull credit reports. We'll

pull, if there's real estate involved, we'll go ahead and do an appraisal, do any

kind of the third -party report, any environmental reports, things like that, that can

all be done at the same time. But that's when, okay, hey, both sides are feeling

pretty good about this. Hopefully at that time we can maybe provide a letter to the

buyer on that and say, hey, the seller's looking pretty promising on this. Obviously,

there's still a little more underwriting to do, but it's going towards closer to the

sell, would you be comfortable releasing tax returns so we can finalize our full

package? So as we're waiting on those, so timelines that certainly touch on that is,

again, as a lot of things, it depends. There's my lawyer answer for the day. It

depends on a lot of different variables in there, so, you know, really the main

factor in is if it involves real estate or not. If it does, we get to order

appraisals and appraisal review, and that can take, you know, 30 days in itself just

to, you know, get that done. So do you even need to see financials when you have

real estate? I mean, come on now, right? I can't lose money in real estate, exactly

right.

For my special assets guy, I may chime in at some point, this may be looking at

you, and explain a few different ways on how you can go wrong there. But yeah,

so we probably turn around times. I mean, anywhere from if there's not real estate

involved, I'd say on average, again, it depends on how motivated the borrower is,

and everybody's willing to get stuff over to us. But on average, 30, 45 days to do

something if it's not real estate driven. If it is real estate, again, there's just

the appraisal and some environmental stuff that we'll get to pull. They can take

anywhere from probably 45 to 75 days to complete that.

So at the end of the day, overall, you know, not excruciating, you know,

people, sometimes if they've been exposed to it, may not have a great kind of word

of SBA loans. That three letter word turns into four letters for some people pretty

quickly with all the forms and all that. - Somehow it turns into an F SBA,

you know? Oh yeah, yeah. (laughing) - Then that's why I think it's pretty critical

to work with a, you know, obviously a preferred lender through the SBA, but for

banks that are competent in SBA lending, they're able to kind of have it all

packaged on the front end of it saying okay here's here's our checklist of items

there's some forms again with the government if you know there's some forms you just

put in a if it's not applicable you sign it and you're done you know you get the

checklist initially say oh my gosh this is going to take me a year just to gather

this stuff it's kind of with with partnership with us obviously you know certainly

ask your banker us if you know what questions may come up happy to work through it

with people but with people, but yeah. So that's kind of the typical timelines that

we'll see depending on the type of deals, so. - That's great. Yeah, and we've talked

about process in depth, the ICCG process quite a bit. And ultimately because of that

timeline, the 45 to 60 days type of thing, we're trying to make sure that that's

not the only thing we have going on at that time, right? Usually has some overlap

to due diligence and that kind of thing. So that's great. So Brandon, you mentioned

personal guarantees and that anyone that owns at least 20 % of the business needs to

have a personal guarantee. What should business owners expect when it comes to that?

What kind of requirements do they have? What does that even mean, personal guarantee?

- Absolutely. So kind of leaving out conventional loans 'cause that's more negotiable

and but for SBA lending, like I said,

we'll focus on that, just with most of the M &A going that route.

Typically, so again, anybody that's a 20 % owner or more will have to be a full

unlimited guarantor on the debt. So, typically I try to warn people that or talk to

people on that, warns may get me in trouble, but saying if you're looking to get

an outside investor in there, it's like, okay, talk to them and if they don't want

to be a guarantor on the that then keep them below 19 % or 20 % and below. So I

don't think that's structuring too much. It's just kind of part of the deal. But

then, you know, so then obviously if there's not, you know, say you have six

partners and they're all below 20%, we'll still typically look for kind of a key

man or key person to step up and be that guarantor. And I kind of really say,

I mean, obviously we'll look to the personal financial strength, but you kind of

have your different ways of how a bank will go through a foreclosure, if you will,

or default. Say, okay, hey, we noticed that there's a default.

How are we going to get out of this? At the end of the day, the bank just wants

to get paid back on it. So whether it's selling the business, selling assets within

the business to get the loan off, kind of liquidated that way from the borrower

standpoint,

Um, certainly part of the process, the, uh, next side of it's like,

okay, well, you know, man, the business just didn't worth anything anymore. Uh, I've

got some rental properties or, um, some other cash personally, I can pay the debt

off that way. Obviously that's a, you know, love as a banker that sounds great. You

know, if we can get out of a deal that way. Um, it's the collateral that other

any, any type of collateral that really determines how How strong the personal

guarantee is that what you're saying? That's exactly right. Exactly right. And remind

me of that because that'll bring up something here shortly. But so, yeah, again, the

key is, okay, hey, how do we get a payback? If all goes basically what those

personal guarantees do, even if, you know, hey, I'm not the strongest person. I'm

not a Warren Buffer or anything like that. I just can't cut a check to pay the

debt off. Okay. Well, what that does is it keeps you on the hook basically for the

bank to partner with us, let's help work this out and help get the bank paid back,

pay back the debt, instead of just, hey, here's the keys, good luck, and the bank

ended up charging off a big portion of the loan.

I'd like to pause and say there, I'd feel like that it's worth noting, because a

lot of people really, it's almost as if they think the bank is on the other side

of the table. They want to get money from you, which is true,

but the way that they get money from you is for you to succeed. The bank is there

as a resource, as a way to say, "Hey, we want to help you actually do well

because then we get more money." That's essentially what the bank is saying,

and that's a big reason of why

resource, right? That's exactly it. So that's, yeah, I mean, you see the stuff on

the news and, hey, you know, big bad banks always after people and, you know, you

see the headlines, which some of them probably are at fault and probably, you know,

doing some malicious things there. But again, yeah, just to your point, I mean, if

we, our whole goal is, you know, for you to take out the loan, pay back the loan

over time, and that's how we make money in this, we don't, we don't, we're trying

not to be in the business of, you know, selling of selling property or running

businesses, things like that. Banks are terrible at that. That's why we don't always

advance up to 100 % for your equipment. If we take it back, we're not going to be

able to sell it for what you think it's worth.

Again, that's why we rely on that guarantee is because you're the expert in that

field. If we need to go sell that piece of equipment, you already may have contacts

that you can call and say, "Hey, let's go pick up and go sell that piece of for

$100 ,000, like again, if the bank picks it up, man, we're getting $10 ,000 or

something on 20 ,000. I mean, it's just such a, you know, depending on the type of

collateral it is, but again, it is a partnership. That's our goal out of this

thing, is to work with you guys. And even if there is challenges within a business

owner's piece on an SBA loan, you know, the SBA and the bank are there to try to

work. If there's a way to improve it, where we need to defer some payments or

something like that, then that's certainly an option to the SBA. Again, it has to

make sense how we're going to get out of this. It's not just to kick this down

the road, but if we do have a new plan, hey, we're shifting our business model

this way, well, we can always modify the loan and look to try to work with people.

So I try to emphasize that with people is, hey, if things do get off the rails a

little bit, don't just throw up your hands and don't answer the makers phone call

anymore. Let's let them know on the front end of it. Obviously, being proactive on

it always helps. Let's try to work this together because neither one wants to charge

anything off.

Let's double down there a little bit more. You mentioned challenges can come up,

right? But the bank has a lot of flexibility. Talk about what some of those common

challenges are and then how the bank can help or sometimes if there's things that

it's just like, hey, the business owner has to take care of something, you know,

type of thing. Yeah. I mean, for example, I've got a couple SAP loans for an

individual or company to go buy a couple office spaces. And they recently switched

to where they were collecting from insurance companies to where they're going away

from that, just doing self -funded care, basically.

you know, that kind of had, okay, our business is shifting, you know, the cash flow

got a little bit tight for kind of a six month period as they transitioned that.

So we were able to kind of work through it with them and provide a little leeway

on some of the payments and things like that. And everything's been going well since

then. So again, there was that plan out there. Let's, how do we execute that plan?

And is it To do that, but they they engaged me on the front end. I was saying,

hey, you know, we think this is a This is really kind of hurt our business going

this this option. Let's let's go ahead and shift it to hold another kind of

different business model for them and really worked out so

Yeah, that's that's again, we try to you know, let's let's sit down at the table.

Let's get creative and See, you know, how do we need to structure this thing to

continue to make payments. - So you're saying their business performance is one of

the things that can be one of the biggest challenges. Is there any other common

challenges outside of business performance within the underwriting process? - So, yeah,

within the underwriting process, certainly, you know, again, it kind of comes back to

an experienced standpoint. On the front end of it, I always like to talk about,

hey, here's kind of the down payment expectations that you'll have. Again, hey, If

it's going to be around 15%, some people, this is the first time they're borrowing

money from a commercial side. They, hey, I borrowed 3 % or 5 % on my home, and

well, unfortunately, it's not the same as borrowing money for a primary residence.

So try to clear that one fairly early. Credit, obviously, if you've got bankruptcies,

things like that, that obviously is a big hurdle for a lot of banks, traditional

banks, I would

you know, so make sure credit scores are kind of, I think there's not really a

dead set minimum. You know, we kind of look at it again. It's like, well, there's

medical bills or something that were, were late or maybe even charged off, you know,

that, that not good on that rabbit hole, but that, that's a tough, tough industry.

So we, we, we understand it's kind of, hey, let's put our common sense on common

sense that on, you know, is it, does it make sense? really the link would on a

lot of these payments or was this a one -off situation that, you know, it may or

may not have gotten in the mailbox and, you know, it slipped through and they sent

it a year after you had the procedure or something. So, yeah, I'm sure that there

are several rabbit holes that we could have gone through in this, in this, in this

episode. Hey, you know, something you've, you've kind of focused on,

on, on the hurdles or the challenges that really arise on the buyer's side, right,

side, or that come from the buyer, are there any challenges for the approval process

just that are kind of from the seller's side?

And then, and really, I mean, maybe to sum it up, maybe add in there,

how can, at least on the seller's side, how can you really,

you know, not fix your financials, but, but really kind of prepare your for just

to, just to make it advantageous for a banker to look at. You know, what, what can

you just kind of answer those two? Absolutely. Yeah, I think that's, I think you

get the nail in the head there. It kind of goes into planning. I mean, obviously,

situations happen. I've got to sell my business, get out of it. But if, you know,

As you guys, I'm sure experience, okay, the seller's obviously want top dollar for

their business. I think it's worth X amount of dollars. And depending on what the

market is and what it looks like out there, well, maybe it is, maybe it's not.

Again, it all depends on what somebody's willing to pay for it.

But so I think sitting down with a group like yourselves and okay, hey, what does

this look like if I wanted to try to sell it, let's position it to look the most

kind of pages for a buyer to get top dollar for it. You know, one of the things

that, you know, I'd say it throws a little bit of a complication piece into it

from our side of it is whenever we may get, you know, a company of financials

above the business that's looking to be acquired. And it's like, well, okay, hey,

we're, you know, our EBITDA is great, it's half a million dollars a year or a

million dollars a year, great, okay. But then you look through it and it's like,

well, you're losing money at the bottom line here. What's going on? And it's like,

well, okay, we've got ad backs of salary. I've been paying myself half a million

dollars every year and a cell phone bill and you get a certain of it. Obviously

some of it's applicable. And then we, again, try to use common sense on, okay, hey,

this is, yeah, that seems about right. Hey, they've got the whole family employed

here, but the new buyers only got one individual and they're able to just roll that

up. Okay, great. There probably is some ad backs in there. But I would probably

recommend, again, along with your guys, expertise is okay. Let's, you know, from the

banker side, let's see how kind of true and accurate we can get the financials

without, you know, just having these, you know, maybe that's an ad back. Maybe it's

not, it just kind of gets to the gray area and makes our underwriting a little bit

cleaner, if you will, to where I can go to the credit committee and say, hey,

yeah, the cash flow is there. Here's what they've done. Not by, not by all these

crazy ad bags and things like that that may happen. Sorry, apparently our motion

detectors got a five minutes use on this thing.

- You got to move a lot more with your hands. You got to talk more with your

hands. - Exactly, but yeah, I would say, I mean, again, it just goes to planning

for a lot of that.

Getting ahead of it, talking to, even talking to bankers or some ladder, you know,

again, groups like yourself of, you know, what is this going to look like? What do

we think we can get for it? How do we position the business to be as clean as we

can be? You know, it's not as much on the, from the seller side,

but, you know, obviously the more organized they are, and hey, you know, here's the

items that we'll need from the bank standpoint that are provided. I mean, that just

kind of, It's kind of that intangible that people will bring to the table and make

us feel a little bit, you know, warmer and fuzzier about a deal that You know,

hey, that yeah, this this business owner actually knows what they're doing, you know

doing and you know But they're not having to file you know go through cabinets of

receipts and you know invoices like man That was 20 years ago Yeah, just being

being organized also certainly helps. Mm -hmm. Yeah, I think that another Another

thing that just popped my head is is that's always key for us. I mean, any buyer,

right, this ruins deals, but it also is so important for a bank when they're

looking at it, 'cause you don't want the bank to uncover something, right?

That's negative, right? And so you, I mean, to disclose up front things that are

going to be hurdles, that is gonna make it a lot easier for a bank to really, I

mean, on the approval process, if the underwriters, if the underwriters are the one

that uncovers it, then automatically stop right there. We're not doing it,

you know, and, and, and it's, and it's really if, if there's, hey, we're going to

say this upfront, okay, now we can really try to work around it and the there's a

little bit more comfortable with it, right? And so, yeah, it got to disclose up

front, right? - Absolutely, it goes from a proactive piece to a reactive piece, and

yeah, it's like, well, you know, whether it's true or not, it's like, well, what

else are they hiding from me? Or, you know, and then they go on more underwriting,

and that is, and it just builds up trust. I mean, at the end of the day, it's a

relationship deal. You know, we try to be available and answer any questions we can

or be a resource for people. And, you know, if it's just, hey, it's transactional,

we're closing this and I'll never talk to you again. You know, those are always the

deals that you kind of worry about a little bit. I mean, you get financials and

you try to do kind of, hey, you're, you're monitoring on it. But at least from a

banker's standpoint, it, you know, I can sleep a whole lot better at night knowing

like, oh, at least, you know, I've got a relationship with a bar where the hey, if

there's an issue, I can give them a call or they can call me Um, you know, give

me a heads up saying, Hey, I got this issue again. Just kind of the previous

example I used, Hey, we're changing our business model. Cash flow is going to get a

little bit tight here. Okay. Well, good. Let's, you know, we can see that on the

front end of it. We can plan for it and, and let's, let's kind of go through it

together. Instead of, Oh my God, you're late on payments now. What's going on? And

then, Oh yeah. By the way, we changed our business model and kind of had that

shock value. So absolutely. That's, that's a great tip. Well, I,

hey, Brandon, I appreciate you a lot. I can't, I can't tell you enough how much I

do appreciate just the, the resource that you are, you know, one of the things that

is rare is to find a banker that is willing to be used as a resource and just

kind of answer questions and help educate instead of being a sales guy, right?

And so, and, and, and that's, that's a, that's that's a value to us.

Anybody that we talk to that wants to buy a business, I mean, it's super helpful.

And so really, really appreciate you and what you do for sure.

Oh, absolutely. I appreciate saying that. And yeah, certainly,

I'm certainly not all knowing and all that, but thankfully, I surround myself with

some smart people around here.

There you go. Well, we didn't tell you our secret agenda of just recording this so

that we could have our clients watch it right before they start the banking process

to set expectations, right? Well, and then if they go somewhere else and all that,

it's like, man, that guy brain and just, you know, hey, let's, you know, there's

some other people around me here that we can watch. And now it's like,

so that's, that's, that's, you know, my goal, that's, that's the value add to it

all is, hey, let's, You know, let's talk through it again every deals unique You

know haven't seen it all out there for certainly, but but again, we've got resources

and things like that That's that's what boils back down to a to a good relationship

is being mutually beneficial. So Well, Brandon like Andrew said,

thank you so much for joining us again today I'm sure we'll have you back on the

podcast another time but for today. That's all the time we have

And that wraps up another episode of Integrated Insights with ICCG. Be sure to

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