War Story: Don’t Be Too Eager With Your Lender
December 02, 2022
by a professional from Harvard University - Harvard Business School in Atlanta, GA, USA
Deal dies. Fiery blaze. Lender yelling. Absolute cluster F*ck.
Here’s a story from one of my clients who started his QoE far too late and lost his deal in a fiery blaze.
Top 25 SBA lender yelling at my client… at the top of his lungs!
Here is how we got there and how to avoid it:
I was working with a new client who I noticed was anxious and lacked patience. Not uncommon for a first time buyer. But this person was a special case.
I explained how the QoE bridges the gap between messy SMB financials and the glossy CIMs brokers put together.
But this client wanted to go it alone. (at this point)
Side note: The QoE provides the bank with a properly formatted set of financials to help them understand the business.
As always, I advise waiting for the QoE to send financials to your lender.
Some people listen. But…
This client just couldn’t wait.
He immediately showed the lender unadjusted info.
Tax returns showing the biz is losing money.
Downright gruesome financials prepared by a high school graduate masquerading as a CPA. (mind blown emoji)
Then only after the lender balked did he start his QoE with us
You can see where this is going…
The lender had already found several issues that needed answers.
“Your CIM shows $700k in SDE but the taxes show the biz is losing money. Can you explain?”
“The SBA must go by the tax returns, we cannot lend on a business that’s losing money!”
Client couldn’t explain it.
We hadn’t even finished our 1st draft of the QoE
Once a banker gets a hold of numbers, it’s hard for them to get those numbers out of their head.
So the low balled numbers are still being shared during the bank’s approval process.
My client’s banker is getting pressure from his colleagues.
Why are you bringing this unprofitable deal to us?
But the CIM says $700k. But the bank can’t see a path there.
We get our first QoE draft prepared. The client shares with the lender.
The lender sees our work showing how the “unprofitable” business is still paying the seller good money.
But the lender is still stuck on “unprofitable” & “negative taxes”.
We thought we might get there. But the Client had started QoE too late.
The banker had already told his colleagues that lower number, and at that point, he didn't buy that our number was more accurate.
He wouldn’t underwrite based on that lower number.
Banker gets on call with us and the pressure is high with the back and forth. Then this 25-year veteran of SBA lending yelled at my client about $100k of add-backs on a $700k SDE biz!
When the yelling started, I knew the game was over
It didn’t have to be this way.
As buyers - you know the financials and taxes are terrible.
Make it easy on your lender to approve your loan.
Start your QoE early and give your lender the QoE as a guide to understand the business.
That process works!
MAJOR LESSONS LEARNED:
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I also think it is important to have an outside expert review the deal in advance and provide advice, much like I know you do. That is something we are always more than willing to do from a lender perspective and we do not charge anything for it. Sorry, this post is being self-serving, but had your client waited for the QofE or also been working with a broker like us that was representing him in securing the financing. we never would have allowed him to move the deal forward without the proper information and QofE in this cae. We would also have been sure there were multiple lenders working the deal so that he did not end up in the position he was in. I am not saying this particular deal was ever financeable, because I do not have those details, but it certainly sounds like there was a way to get things done based on the cash flow comments you had from the QofE.
One thing you have to understand about lenders, they are not all cut from the same cloth or come to the table with the same level of experience. It is key to be working with people who know what they are doing and who know how to move deals through their Bank's approval process. You can be working with a top 25 lender, but that does not mean the loan officer you are working with is a top lender.. Every lender we work with is vetted and we have probably fired over the years more lenders than we currently work with. And quite frankly, there are a number of Banks we will not even do business with because their management and process is so bad. Again, we do not charge anything on the front end to assess a deal and provide assistance. Please let me know if we can ever assist you with a deal you are looking at. I can be reached directly at redacted
from INSEAD in Perth WA, Australia