Some buyers might think the loan term underwriter is interchangeable with undertaker. It’s the point the process where their deals go to die. Or get the Tombstone Piledriver, depending on which type of Undertaker we’re talking about. In reality, if the deal falls apart during the underwriting process, it really should have ended much earlier. There are plenty of fees and countless hours that could have been saved by a good conversation with an experienced lender. Good lenders have seen enough to know when a deal is drifting toward trouble. We spoke with @redacted‌, a senior SBA officer at Huntington Bank, about the process he uses to save ETA borrowers from losing their personal guarantees in a bad deal. The SBA process can be a fairly involved endeavor, with dramatic implications regardless if things go well or fall apart. Before signing up for one of the biggest commitments of your life, it makes sense to have someone like Sarab in your corner. Where an SBA Deal Actually Begins and Ends An SBA loan has a defined lifecycle, but the most important decisions are all clustered at the front end. Sarab typically gets involved shortly after an LOI is signed and sometimes even before. During that window, Sarab and his team can review the buyer’s personal financials, liquidity, experience, and motivation and match them up with the seller’s historical performance. Of course, it matters to find desirable cash flow, trends, and leverage, but it’s also important to understand what sort of person is stepping into the business. If that initial screening holds, the lender issues a term sheet. Once that’s signed, there’s a compounding avalanche of time, money, and expectations. Sarab described it as being “at the mercy of multiple parties that are involved… buyer’s attorney, seller’s attorney, legal counsel, brokers, you name it.” In other words, underwriting and closing should be considered confirmation stages once everything else has been sorted out. By then, most deals should already be a yes or a no. Why Some Deals Should Never Make It Past the First Calls Deals fall through for a variety of reasons. Sarab identified a few of the most common issues he’s come across. Buyer-business mismatch: Pretty spreadsheets aside, some companies need a specific buyer for things to go well. Operationally heavy businesses, for example, will quickly expose any skill gaps. A loan officer will look at both the borrower and the business that is selling to determine if it’s lendable. Geography and culture: Moving into a new market without local knowledge will invariably add some friction. In the same way, stepping into a workforce or customer base that the buyer does not fully understand will prove difficult. Buyers need to be adaptable and understanding if they’re going to make things work. Financial trends: Hockey sticks should always be met with skepticism. A flat performance followed by a sudden spike may be real, but it demands explanation. Sarab likes to determine if it is truly sustainable by looking deeper into the business revenue, net profit, adjusted EBITDA figures for the future, etc. Rising valuation pressure: Increasing demand has pushed multiples higher, sometimes beyond what the cash flow can comfortably support. Layer in seller notes and personal guarantees, and the margin for error narrows quickly. Low liquidity: SBA rules may allow a low-liquidity transactions to work on paper, but this approach leaves no room for surprises. While money doesn’t buy happiness, it does buy you time to fix problems you’ll inevitably run into as a new owner. Walking Away Is an Outcome SBA lenders work to protect both bank capital and buyers’ personal guarantees. The rise of ETA has brought more first-time buyers than ever into the market. While the growth is exciting, the inexperienced buyers tend to bring about more deals worth a pause. Sometimes, the most useful conversations are the ones that end without a transaction being made. Whether the buyer realizes the commitment level is too much or the lender decides a deal isn’t a good idea, the result of walking away is far less damage than if they had pushed forward. Instead of thinking about the missed ROI from buying a business, buyers should think about how they avoided a potential catastrophe to their portfolio. Wherever you are in the process of acquiring a business, we do our best to consider what’s best for you. When you commission a quality of earnings report from us, you can rest assured that it will be packed with insights to help you navigate the transaction process. If that sounds good to you, please check out our website or set up a call with me to discuss more.