¶ Introduction to Mergers, She Wrote
In the world of business , not all deals are what they seem . Fortunes rise , empires crumble , all with the stroke of a pen Mergers , acquisitions , hostile takeovers . 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 . Welcome to Merger , she Wrote .
I'm here today with my good friend , dan Foley , who is a business acquisition lending officer with Evolve Bank . 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 . Thanks , dan , for having me .
Thank you ,
¶ Meet Dan Foley: From Dentistry to Banking
I'm happy to be here .
Yes for making the time and being on the show .
It was an easy morning . It's like nothing went wrong at all . Murphy's Law I'm just to be here . Yes , for making the time and being on the show .
Yeah , it was an easy morning . It's like nothing went wrong at all . Murphy's Law . 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 .
It can be a little intimidating if you don't know what's happening .
Yes . So before we get into the nitty gritty , I would love to know more about your past work history . How did you get into lending ?
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 .
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 . But you know , I was originally studying to be a dentist , you know , and then I switched to business . So it just worked out pretty well .
Oh , that's so funny yeah .
What drew you to dentistry ? It just seemed like , you know , it was a lot of close interaction with patients , which I really like . And you know , just , you know young guy thinking this , this could be cool . It's easy to makes good money .
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 . So I started getting some promotions and making more money than a young guy normally would . So I'm like well , this , this is great .
So I just kind of kept going with it and I got into sba lending in about 2005 .
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 .
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 . I really love what I do .
I'm very , very blessed to enjoy it so much and the people . It's great for me , just work that well .
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 ?
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 .
¶ What Makes Evolve Bank Different
Well , you know what ? There's a lot of truth to that , but there's a lot of differences from bank to bank . So we tend to specialize in business acquisition . So we not only have an appetite for it but we know all the regs around it .
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 . 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 .
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 . They have been so great to work with . 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 .
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 . But we've been very reasonable with how we um handle each transaction and uh , the , the , the , the work , the .
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 . A lot of bankers don't like the underwriting team and they think they're too finicky . We all get along really well .
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 . I mean , we all like each other and it's been terrific yeah , that's awesome .
Yeah , so you said preferred lender . You just go to the SBA and you get a loan number like what . I guess what does that mean for the , the lay person who doesn't work in banking ?
that's a great question , paloma . So there's three levels . You have the general , which you know the SBA is pretty much taking over everything and the bankers you know involved .
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 .
So that's where we fall , okay . 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 .
You know , they just don't have as much in place like a bank that's built around the SBA .
Got it , so there might be more back and forth during the underwriting process .
Yeah , and closing , and closing , yeah , and closing , and closing , yeah . So it tends to run into delays , particularly if you don't have all of that already laid out as part of your program .
Okay , that makes sense .
Yeah .
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
¶ Working with Buyers on Business Plans
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 .
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 . 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 . So they like that .
So I think that even can afford you a little bit of grace . 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 .
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 . I fed off of their excitement and it's like , well , how'd you find this place ?
And you know was enjoyable . I I fed off of their excitement and it's like , well , how did you find this place ? And you know what does this mean to you and like , oh my gosh , I've always wanted to do this . I'm like , wow , that's awesome .
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 .
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 . It helps with underwriting , obviously , because we're addressing all of their questions before they come up .
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 .
They sign the purchase agreement , then they go home and they start thinking about like , oh my gosh , what have I done ? Am I going to be able to do this . 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 .
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 . It helps it go through underwriting more efficiently . And then , of course , closing . You know , when we have efficient underwriting , closing tends to go much more smoothly too .
So it happens , it's been the biggest thing , the biggest change in my career , has been helping them with their business plan projections . 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 .
I'm like , no , it's not , it's fun and you have a much higher approval rate . But you know , I don't know why it's not like a standard thing . I don't get it . I have a good friend who's a lender . He was chuckling because he got a business plan while we were talking .
He's was a lender and he he was chuckling because he got a business plan while we were talking . He's like this thing should be written in crayon . I'm like , well , did you send him templates ? If you helped him ? He's like that's not my job .
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 . 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 ?
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 ?
you know , have a boatload of money . Well , and their legacy right is being transferred over . That's fascinating . 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 .
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 .
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 . That's just the culture . So it's always how can we work , how can we fix this ?
Not , okay , we don't want to do it so and I'm so grateful for that . 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 .
And sometimes they have a background that works well . Sometimes you're extrapolating from other backgrounds to try and build the background , and the business plan is meant to articulate all that . 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 .
And then I .
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 . So nice .
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 . Would that be a correct way to to talk about it from a timeline perspective ? One of the first things they're going to want to put together is a business plan .
Yes and no .
Okay .
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 . So there's a business that they're looking at , and I say , you know , let's do some due diligence .
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 . 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 .
So once they do a little bit of due diligence , you know , and then they get interested , they might make an offer . 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 . It's really easy .
And then I will send them templates . 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 .
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 .
It makes it so much easier if they don't feel comfortable with that also . But this , I have a business plan that they just answer questions and it becomes their narrative .
¶ The Underwriting Process Explained
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 . And you know I didn't do that years ago . I just took the business plan . I'm like , well , let's hope for the best . And you know I mean I would read it and if there was something glaring I'd point it out . But I started to point out more and more and more .
And then it evolved into why don't I just help you with this ?
Yeah , and so well , and if the outcome is better , why not ? Exactly , and , and it really I . 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 .
My job , my job satisfaction just went much , much higher . That's awesome , yeah .
So okay , so we've kind of talked about a little bit right , the buyer has a potential target . They're looking at you know , either have they , they've either put in an LOI or they're looking at . You know , either have they either put in an LOI or they're looking about putting in an LOI . They're probably already talking about lending .
Part of that process is working with you on a business plan . 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 .
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 . 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 . I mean , sometimes the review is and feedback is quite substantial .
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 . You know what could you share with the listeners .
So I would first say you know a lot of with the listeners , um . 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 . So I'd say first , you know , look at it with your eyes wide open .
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 . We're not allowed to do earnouts in the SBA or anything that has a performance based , you know , financial component to it .
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 . 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 .
So I have to rely on the seller to stay on for a while to act as a qualified person . Now , we're okay with that , but I always recommend that we have some sort of redundancies built into the business plan . Because if it's just a seller , what if you guys have a falling out ? What if he passes away ? What if he moves away ? And that has happened .
I had one last year with a qualified seller . 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 . So you know when you're talking about , you know , potentially millions of dollars .
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 . 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 .
But yeah , occasionally we do get things that come back .
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 .
Yeah , and I'm happy to be the bad guy . 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 .
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 .
Yeah Well , so I want to back up just for five seconds about something you said in your story about the HVAC company .
Yes .
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 . 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 .
It does not transfer with the business . You can't buy it as an asset . Part of the asset sale . So I just wanted to put some light onto that .
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 . 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 ?
Okay , because you know . 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 .
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 . They can always bring in a hired gun to be the qualified person . Sometimes people will have the seller stay on with 1% equity so they can stay on indefinitely .
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 .
I can imagine .
Yeah .
So talking about I think you mentioned that the transition period I think you said is , you know , 12 months is the preferable window . Am I saying that correctly ? Did you say that it was preferable to have a seller be in the transition period for 12 months ?
Oh no , I actually . I mean , if somebody were asking me , I'd say get the seller out as quick as possible . Okay , get the training and then get them out . 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 .
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 .
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 . But you know , sometimes it's important to have them stick around .
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 .
Yes , I can see that being . A huge benefit is to have an end in sight so that you pass the baton . You don't have someone because there is so much psychology attached to selling your business , your bread and butter .
Plus , it's your identity a lot of times , not just psychology , it's an emotional transaction .
Absolutely .
It can be . You know , I've had people cry at closings , you know .
I believe that . I believe that . So if someone was to start this process you know , I know lending can take a month . It can be extended . You know what take a month , it can be extended . 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 ?
It's a great question because it really I was just talking with somebody about this yesterday . The short answer is once we get into underwriting , it's typically about 60 days , sometimes 50 or 45 , sometimes 70 or 75 . Because you're pretty common to find something that comes up that we need to get fixed . But the biggest random question mark is before underwriting .
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
¶ Common Pitfalls in Business Acquisition
, the attorneys can be tied up but the so when they're collecting their documentation . Um , sometimes they get them together in a week or two . I've had several right now that we're working on months , and then I have one that's been going since October just collecting documents .
But you know , people sometimes start too early and in that particular situation , really smart people . But they started really early because they're planners . But we couldn't do much getting underwriting because there's so many things that were still to come for them .
They had to find location , they still had to get um a bid for tenant improvements and then the problem you run into is now old documents that you originally got expire and then we have to start , there's a domino effect and you have to start getting . Then that can lead to document fatigue and um . So you , you have to .
You have to manage those and and I I try to get everybody to get them in quickly . I send out checklists every week and have in red letters pending and green letters received . Yay , thumbs up and um . I send that to both parties so they're a little bit accountable , unless they asked me not to . But um and uh , that's the , probably the the .
The best way to get things in quickly is just keep everybody updated and accountable , but that is the part that takes the longest time and I always let them know once we get into underwriting . I've got a lot more control , but this is all on you guys and I can only do so much to collect the documents .
But yeah , once it's in underwriting , it usually goes pretty smoothly .
So you said one person was a planner and started a little too early . There's some people who are just struggling to collect documents because it's tax season . You know , if you had to tell someone the absolute perfect time to get things started if everything was perfect , documents could be pulled within five days of request .
What would be the best time for someone to really start the process with the SBA lending ?
Oh , in that case , once they have the letter of intent in place , or anticipate that it's imminent , then I'm like , yeah , let's get things going on my side I'll start collecting documents . Everybody's kind of in the same mind space that , yeah , this is moving forward and I just I'll start collecting documents .
Everybody's kind of in the same mind space that yeah , this is moving forward and I just I'll run with it . And then for the actual , you know , obviously you have an approval process . At what point does I mean ? Obviously there's some transactions that sign and close on the same day . There's some transactions that will sign early .
Is there a preference in terms of the underwriting process ? Where is it better if someone is having an early sign and close later , so that the document is essentially in final form and unless some big skeleton in the closet comes out , the people are probably going to proceed to closing . Or does it not really matter ?
Sort of on a case-by-case basis . I mean there's so many things that can play into that matter and sort of on a case-by-case basis , I mean there's so many things that can play into that . You know the structure , the industry , the you know the buyer's background in , you know . So yeah , I'd say , that's on the case-by-case .
Okay , no , I think the I guess , then the better answer I think is maybe just it doesn't . It doesn't play a pivotal role . It wouldn't be like someone saying like I should really sign early Because of course there are some .
Are you referring to the LOI ?
No no , no , the full purchase agreement .
Oh , okay .
Yeah , because I think there are some , you know individuals in this process of whether it's buying or selling .
They're antsy to get that purchase agreement signed and unfortunately , in that antsiness , they rush through the process of negotiation and sometimes there's this sort of I don't want to call it regret , but they look back on it and they wish they would have spent more time negotiating or standing up for the things that they wanted more , instead of it just being how
quickly can we get to the finish line ?
And that boy that opens up a whole can of worms too . Because now you're thinking , should I have representation as a buyer ? Most buyers are not represented in my experience , which ?
blows my mind .
Right .
I will tell you directly to the people who are listening .
Please , if you are a buyer , please get representation , because it is just wild to me that I think anyone in the transaction would not have counsel to at least bounce ideas off of or have someone to say hey , I'm going to read this document , and especially because , in the marketplace , the buyer is the one who's supposed to present the purchase agreement .
That's what's standard . And so to be the buyer and not be the one drafting the purchase agreement .
Right , they almost always use a template from the broker .
Oh , please don't say that , it's hurting my ears .
And then , depending on the size of the transaction . Are we talking about an asset purchase , a stock purchase , a membership interest only purchase ? I mean , you know , there's so many things that they may not know to look for .
I mean , even if it's an obvious statement , there's IRS clauses that can affect their taxation years from now , and so I often recommend well , I always recommend , you know , get counsel involved , have somebody review this for you if you're not , you know , really familiar with these , because I mean , gosh , I wouldn't go through my first home purchase by myself , and
that's much easier .
Well , and I will say , the form documents that are related to a real estate purchase are pretty cut and dry .
There's not these blatant lack of provisions in a real estate purchase contract , especially residential , whereas you sometimes get in I'll have someone refer me an individual who's already signed and closed and they're having issues post-closing and they send the document and it's very clearly a template and it's missing .
The provisions that would have protected them , would have allowed them to claim a breach of representations and warranties and unfortunately , I think that's the . You know , the ultimate potential pitfall , right , is if you're not the one drafting the document .
You don't know what's missing or what should have been included , sure , but also not being the first to draft .
I mean , if there's any chess fans out there , you know , there's the theory that being the first movement on the board provides some sort of advantage and I would argue the same when you're going through an acquisition being the first to draft the document allows you , you know , to throw in some negotiation keywords here .
It allows you to anchor the negotiations a lot closer to where you want to be , than to say , okay , I'm just throwing out this , either a template that's super neutral and it doesn't benefit either party , or , on the flip side , to allow the other party to draft the document and they're anchoring it towards them for sure .
Yeah .
So well in terms of you know the back and forth . I have worked on some transactions where the back and forth with underwriting on changes to the document have been significant . And then there are some where it's not so significant ,
¶ Timeline Expectations for SBA Loans
from the trenches of like something that's gone , either horribly wrong and you guys righted the ship , or you know a big hurdle that came up that could warn another you know business owner or a buyer of what to potentially prepare for or get around .
You know the story that I kind of go back to . There's two of them and I'll try to go through them quickly , but the one that's most appropriate for your question is I had a deal that was brought to me . It was a plumber who was looking to sell his company . However , he had not planned on selling .
There was a change in his health , I believe that prompted it , and so he had , for the last several years , really financed his entire resort style backyard and then a home renovation over two or three years . This is a big house , 6,000 square foot , really nice house . So we're talking hundreds of thousands of dollars and no bank would look at it .
The broker had gone to four or five banks and they were like no , because it showed negative net income every year .
Oh , wow .
Yeah , and he had some . You know he pushed the bar for sure . He was putting , you know , like new windows for his house under you know , excess materials expense or something like that .
So you know , and I talked to his CPA and the CPA is like she was embarrassed , she's like I tried to warn him and this is not on me and I'm like like we're not the irs , I'm not gonna talk to you , I just need to make sure this is legit . She's like oh yeah , it's absolutely legit , we have invoices for everything .
I'm like great , because I talked to underwriting and this is this goes back to what I love about where I work now at evolve . They got together and they and I said , listen , they've got the , they've got the invoices for everything down to five dollars and they've got proof of payment . At least they were smart about that .
So they said , if they can show that these are all personal expenses that wouldn't be passed on to the new owner , then yes , we can probably do this . So , to the broker's credit , he and his wife worked with the seller for three weeks . They went through three years of invoices and checks .
You know , showing payment Did a really nice spreadsheet with a link to the image of the invoice and the check Sent it to me . It was so impressive and we were able to add back like 96% of the ad backs . I mean this was everything over , like private schools for their kids and you know .
Running life through the business ? Oh my gosh , yes .
So , and the buyer was okay with it . He's like I get it . You know , I'll probably do the same thing to some degree , maybe not to that extreme , but so we got it all added back and it sailed through underwriting . Um , you know , and and um , you know funny story , side story I got stuck at the site visit .
I had a spider man over a wall because they accidentally locked me into a yard and so , um , so we don't do site visits anymore , the bdos anyway .
Um , but yeah , so I punched in a code and it just happened to perfectly coincide when the grandfather on the other side of the fence was leaving and he hit the button on his visor , so I thought the code worked , but it was actually him leaving and so when we hit the code again to leave , it wouldn't open .
And these are 12 foot walls , or eight foot walls with barbed wire , and we were stuck you Spider-Manned over barbed wire , yeah , how did you do that . I went to the back . It was a plumbing company , so I grabbed two ladders and I threw one over the other side of the barbed wire . So I made like an A-frame of two ladders and then threw my coat over .
Like out of an action movie .
Yeah , and I had my own theme music and everything . I was like it's so , um , so , anyway . So as I'm scaling down halfway down the other side , somebody gets a phone call and they open the thing .
I was like , well , at least I had my moment and we had a good laugh about it at least you know what you're capable of you yeah , and I must use these powers for good .
I love that . Yeah , all right . So there's definitely , you know , I'm seeing the flexibility that you're talking about with Evolve being willing to , you know , work with the client , work with the situation .
Yeah , they're very reasonable . I mean , it's been great .
So you said you had two stories . Was spider-man a barbed wire ?
no , the other one was a not as funny but just kind of a demonstration of I don't know how , I don't know how you follow up the the having to scale a wall with barbed wire I know and it's like but no , this one was I go back to because , just to show you the randomness that happens in lending , I had a deal was for a restaurant and , um , it was , on
paper it was diamond . So the seller and the buyer the buyer had plenty of restaurant experience and a lot of money and the seller was just looking to exit because he'd been doing it for 20 years and they met and they became best friends and they were really cooperative .
And then the buyer's wife had a separate stream of income in another industry that was like half a million a year . She made a lot of money and they had a $2 million home that they said , yeah , you can use that for collateral . I'm like this thing is going to sail through . Well , the wife had a very common name .
So as we started getting underwriting , her name came up with a felony charge and we're like , oh man . So she's like , nope , I'm in a highly regulated field , not a chance . And we're like , okay , we got to fix it . It was a third-party vendor that did the research and you know it does happen with common names sometimes .
I'm like , cool , we got the little burden out of the way , we're just sailing through . And then we get into a little deeper in the running and they order transcripts , find out the seller never filed his 2020 tax return or 2019 tax return .
And then so he called him and he's like I had no idea , but I've changed cpa , so let's , I got to track down my old cpa , so and this is during covid , so they had limited hours at the irs office so , um , I got you know , I got in touch with the old cpa and I got to the irs office , got them stamped the tax returns and brought them them back .
And we got that . I'm like , okay , I've never had two big deals like that . Things like that show up on such a sweet deal . And then I couldn't believe it .
We get into closing and four days before closing , the Treasury Department alerts us that the buyer had a $100,000 SBA line of credit that he defaulted on in 2008 when he filed bankruptcy , and he had no idea it was an SBA line of credit .
He just remembered he had a line of credit , so he had to come up with $100,000 to pay that off so he could get the new SBA loan . Oh geez , luckily he had it , but he was like wow , this really hurts .
Yeah , no kidding , but that's an important note , boys and girls If you have an SBA loan or a government loan that you defaulted on previously , you have to make good on that before you can get an SBA loan .
Well and that is an excellent point , because I worked on a transaction a couple of years ago that the bank had run a background check . Nothing came up , and then the SBA ran their background check , which apparently is much more in-depth , more like a federal background check .
Oh , thank you for pointing that out , because that was my first question . Why didn't this show up on the SBA background check ? And we went back to the SBA and they this was a funny part
¶ Surprising Stories from the Lending Trenches
the buyer was part of a tenth of one percent of a file that was accidentally deleted from the sba files , but it was still accurate at the treasury department and that's why I didn't show up early and was you know oh jeez , like last moment that that seems like a weird a really weird .
And all this happened on one deal that was otherwise smooth as glass well , so to to kind of like bundle up this idea about having the the background check , be a little bit more in depth or maybe miss things , depending on how the records are being kept at the treasury . Um , but it just so happened that the the buyer , had defaulted on an SBA loan .
They were aware of it , they did not disclose it and so the whole deal ended up falling apart , and I think it really underlines the importance .
Right , everyone focuses on the diligence related to the business that's being bought right , related to the seller , and instead , realistically , if you're a seller , related to the business that's being bought right , related to the seller , and instead , realistically , if you're a seller , you should be just as concerned with the diligence about the buyer , because this deal
signed , sealed and delivered it was the purchase agreement was pretty much a day away from being signed when all of this came up and the whole deal crumbled and of course , everyone was like could we have seen this coming ?
and it's like I don't think we could have without disclosure that really comes down to the personality of the bank and and the head of underwriting , because some , some chief credit officers , will say , oh , he must have known , and you know , that's a you know , you know , totally lied .
And it sounds like they did know and they , you know , were trying to get around it in . In a lot of cases they'll just say you're not somebody we want to deal with because you're not being forthright . In our case , he genuinely did not know it was an SBA line of credit . We believed him . There's really no way to prove it , but we believed him .
He made good on it and he did everything the right way . He made good on it and he did everything the right way . So a lot of it is how you handle those circumstances when they come up and , hopefully , when they're going through those questions . Have you ever had an SBA loan ? Have you ever defaulted on a government loan ?
Be honest , because it's easier to get around it , because it always comes up .
Very true , honesty is always the best policy . Aw , so I think we're all out of time today . As a final question for you , dan is there any recent business books that you read that you would recommend to listeners ?
Oh gosh , um , I actually oh , you know what . It's not recent , but the one that had the most impact on me and it wasn't even because of the business aspect was no-transcript , and this really changed my life in a totally different way .
Because when I was a younger guy I was kind of a nice guy but I had jerk tendencies , sometimes trying to be funny or sarcastic . And there was a point in that book and you know , I was married and we had a good marriage .
But I caught myself making comments once in a while , just trying to be funny , that were a little bit hurtful , or I get into an argument and I keep it going until I won , even if I didn't fully believe in my position . And there was a part in that book where he said a guy came to him and he said I don't love my wife anymore .
He's like well , to fix that , you need to love your wife . He's like I just told you I don't love her anymore . He goes . I'm not talking about love the emotion , I'm talking about love the act . And apparently love from , you know , a millennia was really considered more of a verb than a descriptive adjective .
And so he said you need to do loving things for her . You need to love on her , you need to do these things . He goes . The most important thing I can share with you is sometimes it's better to be kind than right , and that hit me like a ton of bricks . I'll still remember it . I was on a sorry .
I get choked up a little bit because I love my wife and I , you know , I regret .
You know how I treated her early in our marriage , and so I was on an airplane and I read that and it's just like for about three minutes I just sat in my seat and started backtracking through all the stupid things I've said or done as a young man in my marriage and and so I got home and I just I was a completely different person and you know I started
saying loving things to her and you know it threw her off because I think she thought why the sudden change ? What are you up to ? Because it was , it was very different and and I told her I'm like I read something and it just made me realize that you know I haven't treated you like the love of my life and the best friend you are , and you know .
And then there's a lot of other good business aspects to it too , but that hit me like a ton of bricks and it really changed my life dramatically . And you know , nothing's ever really hit me that hard or changed me that much . It's that one comment . It's better to be kind than right .
Okay , it's like yeah , it was really wild . Well , that is a book for everyone to read , apparently life-changing , I think . I've not read that one yet , so it'll have to be on my list .
Yeah , that's a good one . Well , thank you so much , dan , for you did a great job , thank you .
No , this was a great conversation and certainly more conversations to be had about SBA lending , for sure .
Yeah , I could talk about it all day , which is really kind of sad when you think about it .
Well , thank you for tuning in .
¶ Life Lessons Beyond Banking
In the world of business , not all deals are what they seem . In the world of business , not all deals are what they seem . Fortunes rise , empires crumble , all with the stroke of a pen Mergers , acquisitions , hostile takeovers Welcome to Mergers , she Wrote , where we examine strategies and stories behind the biggest deals in business .
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