WEBVTT
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In the world of business, not all deals are what they seem.
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Fortunes rise, empires crumble, all with the stroke of a pen Mergers, acquisitions, hostile takeovers.
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Welcome to Mergers, she Wrote, where we examine strategies and stories behind the biggest deals in business, because in M&A, the real risks are the ones you don't take.
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Welcome to Merger, she Wrote.
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I'm here today with my good friend, dan Foley, who is a business acquisition lending officer with Evolve Bank.
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Today you will hear us talk about the SBA lending process, potential pitfalls and the actual underwriting, and then a story about how Dan scaled a barbed wire fence and his life-changing book recommendation.
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Thanks, dan, for having me.
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Thank you, I'm happy to be here.
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Yes for making the time and being on the show.
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It was an easy morning.
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It's like nothing went wrong at all.
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Murphy's Law I'm just to be here.
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Yes, for making the time and being on the show.
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Yeah, it was an easy morning.
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It's like nothing went wrong at all.
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Murphy's Law.
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I'm just so glad to be talking to you today because so many of my clients that are buyers of businesses are just in the dark about what the SBA lending process looks like, what they should expect.
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It can be a little intimidating if you don't know what's happening.
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Yes.
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So before we get into the nitty gritty, I would love to know more about your past work history.
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How did you get into lending?
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Oh gosh, you know I started with Bank of America way back in the day and I was going to college and I just I mean it sounds terrible, but I was a young guy working at a bank that was 80% women.
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I'm like this could work, and so I just stayed with the bank and it was a path of least resistance and I turned it into a career and it worked out all right.
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But you know, I was originally studying to be a dentist, you know, and then I switched to business.
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So it just worked out pretty well.
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Oh, that's so funny yeah.
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What drew you to dentistry?
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It just seemed like, you know, it was a lot of close interaction with patients, which I really like.
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And you know, just, you know young guy thinking this, this could be cool.
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It's easy to makes good money.
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But as I got into into the banking side actually worked in sales for banking before you know, an open by phone type thing um, it worked out really well and I was good at it.
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So I started getting some promotions and making more money than a young guy normally would.
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So I'm like well, this, this is great.
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So I just kind of kept going with it and I got into sba lending in about 2005.
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Um and uh, worked a lot in medical and dental practices because I kind of knew the field a little bit, and so I made some inroads there and I eventually switched over to business acquisitions just because I found that the deals I was working with, which are just kind of regular people and not the highly, highly educated professionals, were just more enjoyable.
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There was a lot more excitement and I feed off of that, and so as I got into it more, I started to develop my own little craft within it and tried to work in a way that I would want to be treated if I was a client so that's always at the forefront and to have fun with it.
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I really love what I do.
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I'm very, very blessed to enjoy it so much and the people.
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It's great for me, just work that well.
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No, that's awesome, and I think one of the things that makes it difficult for the average business owner to then go out and look for SBA lending is there's so many options right, and so I'd love to know what makes Evolveolve Bank unique, or why would someone pick Evolve Bank?
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And obviously I feel like my answer a lot of times is like you're picking the bank or you're not necessarily picking the bank.
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Well, you know what?
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There's a lot of truth to that, but there's a lot of differences from bank to bank.
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So we tend to specialize in business acquisition.
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So we not only have an appetite for it but we know all the regs around it.
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There's a lot of SBA guidelines with regard to business acquisitions that a generalist might not pick up on or it could cause delays if they catch it later in the game.
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But we're a preferred lender, which means we can make our own loan decisions and we just go to the SBA for a loan number.
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But I've worked at the big banks and I've worked at very small banks and Evolve is kind of in the middle and I just I plan on just retiring from this bank.
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They have been so great to work with.
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So you know there were a lot of banks who will want 20% down or maybe 15% down, but they'll require that the owner does a seller carryback.
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Evolve has done every loan I've done with them in the last three years at 10% down, which is the minimum, and there's a lot of different areas where that money can come from, such as a gift or a home equity line of credit or, you know, an investor is a very common one now, where somebody brings in an investor to provide the equity injection, also called the down payment, and uh, and they, you know, maybe buy them out in a few years.
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But we've been very reasonable with how we um handle each transaction and uh, the, the, the, the work, the.
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The working environment is so great because the underwriters and the closers and the sales team all get along and all talk regularly and we like each other, which is, you know, secrets.
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A lot of bankers don't like the underwriting team and they think they're too finicky.
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We all get along really well.
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We party together, it's a wonderful environment and Evolve has actually been voted a best place to work for eight years and running, and that that actually helps with a cohesive group.
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I mean, we all like each other and it's been terrific yeah, that's awesome.
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Yeah, so you said preferred lender.
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You just go to the SBA and you get a loan number like what.
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I guess what does that mean for the, the lay person who doesn't work in banking?
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that's a great question, paloma.
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So there's three levels.
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You have the general, which you know the SBA is pretty much taking over everything and the bankers you know involved.
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Then you have a certified where they underwrite the loan but they go to the SBA for the loan decision and the preferred lenders are the lenders that do quite a few SBA loans, and so they're at that point where they can do their own underwriting and make their own loan decisions and then they just kind of check in with the SBA for a loan number.
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So that's where we fall, okay.
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I would imagine it makes it easier, it makes it easier, it's less time-consuming If you're at a bank no disrespect to the smaller banks that aren't preferred lenders but if they haven't done enough to where they are a preferred lender, it's going to be choppier and it's just.
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You know, they just don't have as much in place like a bank that's built around the SBA.
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Got it, so there might be more back and forth during the underwriting process.
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Yeah, and closing, and closing, yeah, and closing, and closing, yeah.
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So it tends to run into delays, particularly if you don't have all of that already laid out as part of your program.
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Okay, that makes sense.
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Yeah.
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And I think, going back to what you were saying about having a really good relationship with your underwriting team, I think people really probably don't quite understand, if you're outside the banking world, how having a tumultuous relationship between your bankers and your underwriting team could slow down inevitably every loan that goes through the underwriting process, right and this one does heavily go back to the banker himself.
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So I mean, even with our own bank, there's some bankers who have better relationships or worse relationships with underwriting, and a lot of it is how you treat them.
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I'm the guy that sends a five pound bag of M&Ms after a closing to the underwriter and like, hey, thank you for all your hard work.
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So they like that.
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So I think that even can afford you a little bit of grace.
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But you know the but it is much, much better than anywhere else that I've worked and that's not hyperbole, that is absolutely true.
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So the you know, when I work with the underwriting team and the client as a matter of fact, you know I try to let me start it this way I like to help the client with their business plan and their projections, and I used to do it just because you know it was enjoyable.
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I fed off of their excitement and it's like, well, how'd you find this place?
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And you know was enjoyable.
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I I fed off of their excitement and it's like, well, how did you find this place?
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And you know what does this mean to you and like, oh my gosh, I've always wanted to do this.
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I'm like, wow, that's awesome.
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So I helped them write the business plan and and I try to point out things like you know, let's not just focus on what they're doing, let's focus on what they're not doing, and then that'll help support the growth that you're going to show in your projections and and the and the strategies you you articulate in your business plan.
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And so, pardon me, as we um, as we go through that, I have found that not only does it help the customer know the business better by having them go through these exercises with regard to the growth strategy and the marketing and talking about, you know, just going through the templates and ticking off everything so that they have a really well thought out, well-written business plan.
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It helps with underwriting, obviously, because we're addressing all of their questions before they come up.
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But for the business owner, they feel a lot more satisfaction and confidence as they go through the lending process, and I found that once I started doing that, my dropout rate was considerably less and I saw a lot of customers that used to get apprehension after a big purchase agreement.
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They sign the purchase agreement, then they go home and they start thinking about like, oh my gosh, what have I done?
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Am I going to be able to do this.
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But when you help them go through the business plan, you basically say this is your strategy, this is your, your step-by-step and this is who's on your team that's going to help you.
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It just kind of melts away and they go back to being excited and and the brokers that I work with love that too, because they have fewer deals stall.
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It helps it go through underwriting more efficiently.
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And then, of course, closing.
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You know, when we have efficient underwriting, closing tends to go much more smoothly too.
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So it happens, it's been the biggest thing, the biggest change in my career, has been helping them with their business plan projections.
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I just I have hundreds of templates at this point and I've tried to share this with other lenders and they're like, oh, that's just a lot of work.
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I'm like, no, it's not, it's fun and you have a much higher approval rate.
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But you know, I don't know why it's not like a standard thing.
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I don't get it.
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I have a good friend who's a lender.
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He was chuckling because he got a business plan while we were talking.
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He's was a lender and he he was chuckling because he got a business plan while we were talking.
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He's like this thing should be written in crayon.
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I'm like, well, did you send him templates?
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If you helped him?
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He's like that's not my job.
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And um, I'm like, right, but if you have a mechanic who can rebuild a small black chevy, he's amazing at it, but and he wants to buy a shop, but you ask him to write a 12 page pro forma and his eyes glazed over.
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Don't you think you could share a little bit of your background and your expertise with him to help him get through that process?
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Wouldn't that make the entire process smoother, more successful and build a deeper relationship with your client and potentially even the seller who's going to?
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you know, have a boatload of money.
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Well, and their legacy right is being transferred over.
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That's fascinating.
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I really coming from the legal side, you know obviously being involved in drafting the purchase agreement and you know, interfacing with someone like yourself related to the underwriting process if you're representing a buyer.
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But I guess I didn't realize that even in an acquisition, the bank is still asking for a business plan because inevitably you still have to show what your plan is post-closing.
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Right, right, and you know, the underwriters are very good people, but they are analytical by nature and they want to help the clients, and our team seems to want to help more than most that I've worked with.
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That's just the culture.
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So it's always how can we work, how can we fix this?
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Not, okay, we don't want to do it so and I'm so grateful for that.
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But, yeah, you know, when you're buying a business, that's a risky changeover because you're basically saying you take 90% of the risk bank, I'll do my 10%, and you just, you know you have to believe that I'm going to keep this thing going and maybe even grow it.
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And sometimes they have a background that works well.
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Sometimes you're extrapolating from other backgrounds to try and build the background, and the business plan is meant to articulate all that.
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So, yeah, it is enjoyable, though I really I love the, the challenge of, you know, helping people get through that, that aspect of it.
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And then I.
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I personally stay through underwriting and closing too, because, a it helps to have a familiar face at that point that is is on board, and B I can also circumvent issues before it even gets back to the client to try and fix it.
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So nice.
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Yeah, so we've talked about how the beginning part has the business plan right as part of this loan process, the kind of the first thing.
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Would that be a correct way to to talk about it from a timeline perspective?
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One of the first things they're going to want to put together is a business plan.
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Yes and no.
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Okay.
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So when I, if somebody's referred to me, and they call me and we start talking about it, you know, a lot of times they have a target in mind.
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So there's a business that they're looking at, and I say, you know, let's do some due diligence.
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And you know, I'll often send them a due diligence guide just to kind of help them to know what to look for and what questions to ask.
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And you know, if they share a bit about the company, I'll even share some personal anecdotes on things to look for with that particular industry.
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So once they do a little bit of due diligence, you know, and then they get interested, they might make an offer.
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If the offer is accepted, that's typically when they'll call me back and we start the application process and, uh, so you know, I'll send them a link so they can just do the online portal.
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It's really easy.
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And then I will send them templates.
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Um, typically I can find industry specific templates from doing this for so long and they're actual business plans that I've just scrubbed for personal information.
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So I'll give them, like you know, phoebe and and rachel, you know, and joey and um, so, uh, once I put you know, I send that to them and I'm like, okay, just use this a lot of it might even be plug and play and just kind of correct some of the information or update it for your particular situation.
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It makes it so much easier if they don't feel comfortable with that also.
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But this, I have a business plan that they just answer questions and it becomes their narrative.
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And so then I say, you know, don't upload it, send it to me, let me go through, and I give them some feedback like this is great, but you want to expand on your background or you want to talk about who's handling different aspects of management, and so they really appreciate that feedback and they grow as they learn what the underwriter is going to look for.
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And you know I didn't do that years ago.
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I just took the business plan.
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I'm like, well, let's hope for the best.
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And you know I mean I would read it and if there was something glaring I'd point it out.
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But I started to point out more and more and more.
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And then it evolved into why don't I just help you with this?
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Yeah, and so well, and if the outcome is better, why not?
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Exactly, and, and it really I.
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You know, for a lot of us in sales, it's not about the sale, it's about building relationships and being of value to somebody else and feeling that and as I started to help people, I mean it was just became so much more enjoyable.
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My job, my job satisfaction just went much, much higher.
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That's awesome, yeah.
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So okay, so we've kind of talked about a little bit right, the buyer has a potential target.
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They're looking at you know, either have they, they've either put in an LOI or they're looking at.
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You know, either have they either put in an LOI or they're looking about putting in an LOI.
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They're probably already talking about lending.
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Part of that process is working with you on a business plan.
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I think one of the things that throws a lot of clients for a loop is we'll be negotiating this purchase agreement and then all of a sudden, the underwriting team has comments.
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And then all of a sudden, the underwriting team has comments and a lot of times people are so far into the negotiation process that to hear that a third party, an external third party, all of a sudden needs to change things or wants to change things Like I've seen underwriting pushback on you know how their assets are collateralized, especially if there needs to be subordination right, the bank has to be in first position Right or even on you know, non-compete.
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Sometimes the bank will say, hey, this non-compete is not long enough, the territory is not big enough, and so it's not just P's and Q's review.
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I mean, sometimes the review is and feedback is quite substantial.
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And so if you were trying to explain or at least give a heads up to a potential buyer about what that process looks like during the negotiation phase and what it looks like when underwriting gets involved.
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You know what could you share with the listeners.
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So I would first say you know a lot of with the listeners, um.
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So I would first say, you know, a lot of times the underwriting team, when they have those kind of things, they're designed actually to protect the borrower, so, um.
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So I'd say first, you know, look at it with your eyes wide open.
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Um, but as we go through them, the there's like within the purchase agreement there might be things that aren't eligible, like, uh, earnouts are a common one.
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We're not allowed to do earnouts in the SBA or anything that has a performance based, you know, financial component to it.
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So there's just, you know, we can't have, we can't have the owner stay on for 12 months or more than 12 months, you know.
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And that comes up a lot because, let's say, I'm buying an HVAC company but I don't have the register of contractors license to actually perform those services.
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So I have to rely on the seller to stay on for a while to act as a qualified person.
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Now, we're okay with that, but I always recommend that we have some sort of redundancies built into the business plan.
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Because if it's just a seller, what if you guys have a falling out?
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What if he passes away?
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What if he moves away?
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And that has happened.
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I had one last year with a qualified seller.
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Young guy passed away a month and a half after closing, completely unexpected, very sad, but it is something that banks have to deal with.
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So you know when you're talking about, you know, potentially millions of dollars.
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We have to look at this logically and so you know we try to address everything that's required and then we try to look at it also pretty reasonable.
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I don't get that many things on my deals that come back from underwriting because we try to address all those in the business plan and they tend to go pretty smoothly.
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But yeah, occasionally we do get things that come back.
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Well, and I was going to say to play devil's advocate, sometimes the bank can really be when you're negotiating against a seller right good cop, bad cop, right when maybe you really wanted you know something put in that's a little bit more aggressive on the non-compete language and maybe the seller was really reticent to agree to it and the bank comes in and says we can't underwrite this without X, y or Z inserted, and then as the buyer, you get to blame the bank.
00:19:48.997 --> 00:19:50.778
Yeah, and I'm happy to be the bad guy.
00:19:50.778 --> 00:20:10.519
I mean it's, you know, the client is the borrower, and so you know, there's been plenty of times I say blame it on me, you know, because a lot of times they'll tell me that and they're like well, I feel like I should ask for this, but I don't want to you know, raise a flag or cause any.
00:20:10.558 --> 00:20:18.585
I don't want to kill the deal Like blame it on the bank and say yeah, because you know most times it's easy, it's either an SBA requirement or it's just common sense.
00:20:19.287 --> 00:20:26.088
Yeah Well, so I want to back up just for five seconds about something you said in your story about the HVAC company.
00:20:26.309 --> 00:20:26.470
Yes.
00:20:26.615 --> 00:21:02.162
Because for people out there who are potential buyers of businesses for the very first time in Arizona and I'm sure there's similarities in other states, but as our example that we know most familiar is the Arizona Register of Contractors, and so actually I've found that when working with buyer clients, it's very uncommon for them to know that there is this thing called the ROC and there is such a thing called a qualifying party and really it's just a fancy way of saying someone is a licensed contractor with the state of Arizona.
00:21:02.804 --> 00:21:11.768
However, the problem is, if someone is the owner and they're selling, you would have to either have them stay on until you find another qualifying party.
00:21:11.768 --> 00:21:14.403
It does not transfer with the business.
00:21:14.403 --> 00:21:15.799
You can't buy it as an asset.
00:21:15.799 --> 00:21:16.763
Part of the asset sale.
00:21:16.763 --> 00:21:19.604
So I just wanted to put some light onto that.
00:21:19.875 --> 00:21:28.685
Yeah, and that's an important component because I mean somebody might come in and they know how to run a business really well, but they might not know how to service, say, you know, an AC unit.
00:21:29.515 --> 00:21:36.368
So if they don't have that licensing, you know, I, you know we get into that discussion and I say, do you know what you're getting into here?
00:21:36.368 --> 00:21:37.997
Okay, because you know.
00:21:37.997 --> 00:21:47.730
So if you have the qualified person but he can only stay on for 12 months, you know the seller then you need to have other opportunities here to satisfy that requirement.
00:21:47.730 --> 00:21:55.807
A lot of times I'll recommend that they talk to the managers that are usually with the company and see if there's any of those that they can elevate and have them take the test.
00:21:55.807 --> 00:22:01.281
They can always bring in a hired gun to be the qualified person.
00:22:01.281 --> 00:22:07.421
Sometimes people will have the seller stay on with 1% equity so they can stay on indefinitely.
00:22:07.421 --> 00:22:20.358
So there's a few ways to skin the cat and I usually you know that's usually comes up in the first conversation when they mention it's a few ways to skin the cat and I usually you know that's usually comes up in the first conversation when they when they mentioned it's a company that does require licensing, and it happens probably twice a week.
00:22:21.240 --> 00:22:21.922
I can imagine.
00:22:22.061 --> 00:22:22.261
Yeah.
00:22:23.023 --> 00:22:32.596
So talking about I think you mentioned that the transition period I think you said is, you know, 12 months is the preferable window.
00:22:32.596 --> 00:22:33.942
Am I saying that correctly?
00:22:33.942 --> 00:22:40.448
Did you say that it was preferable to have a seller be in the transition period for 12 months?
00:22:40.795 --> 00:22:41.857
Oh no, I actually.
00:22:41.857 --> 00:22:45.435
I mean, if somebody were asking me, I'd say get the seller out as quick as possible.
00:22:45.435 --> 00:22:47.382
Okay, get the training and then get them out.
00:22:47.382 --> 00:23:00.185
Because we've had a number of deals where the seller did stay involved, either as a qualified person or a 1% equity partner or a seller carryback, and we have to keep in mind the psychology behind this.
00:23:00.185 --> 00:23:13.323
This business was their baby for years, maybe decades, and sometimes we've had it where they had trouble letting go and we had a situation where too many chiefs, not enough Indians, and then there's bickering in management.
00:23:13.323 --> 00:23:23.464
I'm working with one loan right now where they're like I need to refinance a seller note because he's driving me crazy and he won't let go, and so the preference is to get them out of there.
00:23:23.464 --> 00:23:26.194
But you know, sometimes it's important to have them stick around.
00:23:26.194 --> 00:23:37.959
For the qualified person issue, it might be the cheapest way to have it done, but and then, yeah, but preference is to get them out as quick as possible.
00:23:37.999 --> 00:23:39.000
Yes, I can see that being.
00:23:39.000 --> 00:23:44.799
A huge benefit is to have an end in sight so that you pass the baton.
00:23:44.799 --> 00:23:51.902
You don't have someone because there is so much psychology attached to selling your business, your bread and butter.
00:23:51.961 --> 00:23:55.621
Plus, it's your identity a lot of times, not just psychology, it's an emotional transaction.
00:23:55.760 --> 00:23:56.344
Absolutely.
00:23:56.694 --> 00:23:57.176
It can be.
00:23:57.176 --> 00:24:00.786
You know, I've had people cry at closings, you know.
00:24:02.076 --> 00:24:02.699
I believe that.
00:24:02.699 --> 00:24:03.321
I believe that.
00:24:03.321 --> 00:24:12.397
So if someone was to start this process you know, I know lending can take a month.
00:24:12.397 --> 00:24:13.819
It can be extended.
00:24:13.819 --> 00:24:15.102
You know what take a month, it can be extended.
00:24:15.102 --> 00:24:22.810
What is a typical timeline, and I know not every loan is a one-size-fits-all approach in terms of timing, but what can someone expect as the average?
00:24:23.192 --> 00:24:28.326
It's a great question because it really I was just talking with somebody about this yesterday.
00:24:28.326 --> 00:24:38.026
The short answer is once we get into underwriting, it's typically about 60 days, sometimes 50 or 45, sometimes 70 or 75.
00:24:38.026 --> 00:24:42.866
Because you're pretty common to find something that comes up that we need to get fixed.
00:24:42.866 --> 00:24:49.528
But the biggest random question mark is before underwriting.
00:24:49.528 --> 00:25:05.888
So we have to collect certain documents right, and this time of year is probably the worst time of year to collect those, because the CPAs are so tied up and and um adjacently, the attorneys can be tied up but the so when they're collecting their documentation.
00:25:06.695 --> 00:25:09.384
Um, sometimes they get them together in a week or two.
