Lending Posture

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Posted by Jennifer Smith on

One of the top questions we’re asked in this unprecedented COVID environment is “are you still selling businesses?” The answer is a resounding YES! The follow up question usually has something to do with how banks are supporting those transactions, so we thought we’d examine what we’re seeing today from lenders and how deals are getting done.

First, we should acknowledge that there are so many businesses that are hurting right now. Many have closed their doors or are barely scraping by. Our hearts go out to these businesses and their owners. We hope things will turn around for them shortly. For the businesses that have been affected either in a relatively minor way or not at all, there are still buyers out there. Many are looking for diversification, to get out of the corporate life, or to augment cash flow in another business. There are also some that are just looking to capitalize on the current situation and get a good deal on a business.

Now that we’ve determined that there are buyers and sellers out there:  creativity is the name of the game. We’re seeing a lot of seller financing…anywhere from 10% to 100% of the deal. Seller financing can make a lot of sense in terms of protecting a sale price and after-tax proceeds; however, for those looking at utilizing bank financing, here are some dynamics that might help you understand lending in today’s environment:

  • Lenders are generally more cautious than they were pre-COVID. Credit standards have tightened and marginal deals may no longer be approved.
  • Liquidity took a hit during the quarantine as people tapped into business and personal savings to stay afloat. Lenders want to know there is still sufficient liquidity from the buyer.
  • Lenders want to fully understand the “COVID effect”, so they may ask to see year-to-date numbers for 2020 and compare them with the same time period in 2019 to see how the business was affected.
  • Buyers should plan to “stress test” their financial projections in case another quarantine or pandemic should impact the business in the coming months and years. This involves not only applying a sudden drop in revenue but also a qualitative discussion about what measures will be taken to protect the cash flow and service the debt.
  • A small (10 – 15%) seller note can help decrease the bank’s risk and demonstrates that the seller has confidence in the buyer’s ability to succeed. It also provides an incentive for the seller to transition the business well and to be supportive of the new owner in the community.

The good news is that lenders are still lending money and the SBA programs are alive and well. The hurdles may be a little higher and the paperwork might be a little more intense, but it’s good news for those looking to buy or sell. If you find yourself in either boat, please reach out for a confidential discussion.