TIP OF THE WEEK – August 18, 2020
Here at MAXIMA our deal activity has been relatively strong during the virus panic, with some clients’ operations only minimally affected by the pandemic and public response.
These days, you might think the biggest challenge for deals has been finding capable, optimistic buyers or avoiding distressed valuations.
Actually, the biggest problem has been delays on financing through the banks.
Banks are still eager to finance good deals but the process has become much, much slower, while requirements to show creditworthiness have become more stringent as well.
First of all, the commercial lending departments are absolutely BURIED under proposals to refinance or defer existing debts for other businesses. These are understandably quite urgent, but it means that a lot of new financing applications are getting moved to the bottom of the pile.
While you can keep some friendly pressure on the bank to move things along, the unfortunate reality means that you should expect financing deals with the bank to go through much more slowly than normal.
This is worse still if there are significant capital assets included with the transaction. Banks will often insist on getting an appraisal of fair market value. This isn’t unusual, but the current economic situation has a lot of the well-known appraisers stretched very thin and so they have long wait lists.
Unless you have special arrangements to jump the queue somehow for fast turnaround on an appraisal, you may be faced with a very long delay in getting your financing. If you are contemplating a business sale, consider getting an appraisal early in the process!
The other issue contributing to delays is the added level of due diligence performed by the banks. Financing term sheets will typically list specific required documentation to complete its credit approval. In addition to the borrower’s own information, this is usually basic financial information about the business being acquired, including financial statements, customer data, AR, AP, etc.
However, they will also include a requirement that reads something like, “Such other documents documents a the Bank may reasonably require.” In the current business environment, this can easily turn into a what feels like a second round of due diligence — on both the acquisition target and the buyer. Don’t take it personally when they apply that extra level of scrutiny — but anticipate additional time for the bank’s review.
Another potential delay that’s worth mentioning (but not bank related) is with landlords. Most leases for commercial/industrial property include a change of control clause which requires permission to transfer the existing agreement to a new owner. In our experience, this is almost never a problem. However, the level of concern expressed over new owners has become much more significant. It seems as though landlords are being more cautious about new ownership, which can lead to demands for large deposits and additional negotiations. This translates into a slower process.
The takeaway after all this is to plan for more time required for deals!
See below for some other resources you may enjoy:
Q3 Tax Tips and Traps
Our friends at KMSS have issued their Q3 newsletter with a variety of helpful tips on matters such as:
- Working from home
- Real estate projects
- Loans for value
- OAS deferral
- Unreasonable allowances
- Employment Insurance
- Changes to payroll
- Temporary lay-offs
Fascinating Charts Show How Americans Spent Money During the Virus Panic
Wolf Richter’s site is known for great charts. The link below will give you a fascinating overview of how our southern neighbors, buoyed by debt deferrals and stimulus/bailout funds, have been spending their money.