How to Ensure a Deal is Compliant, with Scott Oliver, Lewis Kappes (How To Sell a Business Podcast, Episode 12)
On this episode of How To Sell a Business Podcast, Scott Oliver, Director at Lewis Kappes, joined host Ed Mysogland to talk about how to make sure a deal is compliant. They covered the process of reviewing proposed deals and preparing them for SBA compliance, the importance of using a seasoned SBA legal counsel, factors that can create problems, how to best work with SBA counsel, standby notes, and more.
How To Sell a Business Podcast is produced and broadcast by the North Fulton Studio of Business RadioX® in Atlanta.
Lewis Kappes
Headquartered in downtown Indianapolis, Lewis Kappes offers the depth and experience you would expect from a large law firm, with the responsiveness and attention you would receive from a small firm.
They take a team approach to help you achieve your goals. This allows them to adapt to developments and react quickly and efficiently to pressing matters, while placing the diverse experience and expertise of the entire firm at your disposal.
Lewis Kappes is a proud member of the Law Firm Alliance (LFA).
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Scott Oliver, Director, Lewis Kappes
Scott Oliver practices in the areas of commercial finance, real estate, and corporate transactions. He represents state and national banks involved in commercial financing, as well as clients involved in business/real estate transactions, including: real estate acquisitions/sales, business acquisitions/sales, leases, entity formation and governance, commercial issues, contract preparation, contract negotiations, and compliance.
As a closing attorney, Scott represents banks and non-bank lenders involved in SBA and conventional financing. He works in all stages of the lending process, including credit review, compliance, eligibility, lien perfection, title review/negotiations, preparation of security instruments/loan documents, subordination/intercreditor agreements, workouts, collections, foreclosure, and bankruptcy. Over the course of his career, Scott has closed hundreds of SBA 7(a) loans, SBA 504 loans, SBA CAPLine loans, and a wide range of conventional facilities. While stationed in the heart of Indianapolis, his team has closed transactions throughout the country in all 50 states.
Through his corporate practice, Scott represents a variety of businesses, from closely held corporations to multi-million dollar entities. He advises clients in transactions involving real estate matters, acquisitions, sales, partner buyouts, and general commercial contracts and disputes. His representation also involves guiding new and emerging companies through entity selection, formation, growth, and governance.
Outside of his traditional practice areas, Scott is an Adjunct Professor at the Indiana University Robert H. McKinney School of Law, teaching Legal Communication and Analysis. He is an active member of the Indianapolis Bar Association where he holds various leadership positions and manages small and large-scale events for the local community.
Scott earned his B.A. from Purdue University, where he graduated with highest distinction and served as the graduation commencement speaker. He earned his J.D., cum laude, from the Indiana University Robert H. McKinney School of Law. During law school, Scott was the President of the Student Bar Association, a member of the Moot Court Executive Board, Vice Magister of Phi Delta Phi, a legal research and writing tutor, and a student teacher at Shortridge High School in Indianapolis, Indiana.
Ed Mysogland, Host of How To Sell a Business Podcast
The How To Sell a Business Podcast combines 30 years of exit planning, valuation, and exit execution working with business owners. Ed Mysogland has a mission and vision to help business owners understand the value of their business and what makes it salable. Most of the small business owner’s net worth is locked in the company; to unlock it, a business owner has to sell it. Unfortunately, the odds are against business owners that they won’t be able to sell their companies because they don’t know what creates a saleable asset.
Ed interviews battle-tested experts who help business owners prepare, build, preserve, and one-day transfer value with the sale of the business for maximum value.
How To Sell a Business Podcast is produced virtually from the North Fulton studio of Business RadioX® in Alpharetta. The show can be found on all the major podcast apps and a full archive can be found here.
Ed is the Managing Partner of Indiana Business Advisors. He guides the development of the organization, its knowledge strategy, and the IBA initiative, which is to continue to be Indiana’s premier business brokerage by bringing investment-banker-caliber of transactional advisory services to small and mid-sized businesses. Over the last 29 years, Ed has been appraising and providing pre-sale consulting services for small and medium-size privately-held businesses as part of the brokerage process. He has worked with entrepreneurs of every pedigree and offers a unique insight into consulting with them toward a successful outcome.
Connect with Ed: LinkedIn | Twitter | Facebook
TRANSCRIPT
Intro: [00:00:00] Business owners likely will have only one shot to sell a business. Most don’t understand what drives value and how buyers look at a business. Until now. Welcome to the How to Sell a Business podcast where every week we talk to the subject matter experts, advisors and those around the deal table about how to sell at maximum value. Every business will go to sell one day. It’s only a matter of when. We’re glad you’re here. The podcast starts now.
Ed Mysogland: [00:00:36] On today’s podcast, I had the opportunity to visit with Scott Oliver. And if you’ve ever wondered who is in the deal beyond buy side, sell side, who’s the bank’s counsel? This is that guy. So any SBA loan has a attorney that’s looking out for the bank’s interest. And I thought it would be prudent for buyers and sellers to understand somebody that deals with how to make sure that your deal is compliant.
And Scott Oliver, he is everywhere. If you’re on LinkedIn, he writes all the time on it. He is a partner at Lewis Kappes and just one of those generous guys of information. And I can tell you that having met him now and talking about deals, he is the real deal as it relates to this segment of the SBA process. So I hope you enjoy my conversation with Scott Oliver.
I’m your host, Ed Mysogland. On this podcast, I interview buyers, sellers, advisors and all kinds of other people about what creates value in a business and how they take that information and make that business more valuable and ultimately be able to sell for a premium value. On today’s show, I’ve been looking forward to this interview for a couple of months now. It’s Scott Oliver of Lewis Kappes. So welcome, Scott.
Scott Oliver: [00:02:18] Hey. Thanks for having me on. I’m looking forward to it.
Ed Mysogland: [00:02:20] So in my introduction, I kind of gave a little bit of an overview of you, but and I guess like we were talking in the pre-show, I wanted you to talk about all the things that go on behind the scenes that most sellers and buyers don’t understand. So can you talk a little bit about your practice and how you’re doing that?
Scott Oliver: [00:02:44] Yeah, So I’ve been in SBA for about a decade. As you said, I work at Lewis Kappes. I’m a partner here now, and we really like to call it a lean, mean, oiled machine of getting deals done. So we have a good bench of attorneys and dedicated paralegals who are solely closing deals for SBA lenders in all 50 states. So all across the country. And while we’re doing that, there’s really systems in place to get those deals done. Some of the clients are having us interact directly with the buyers and sellers, while others have specific tasks that they want us to do that doesn’t involve any communication with the buyer or seller.
Ed Mysogland: [00:03:23] So what do you think your practice is made up between represented deals? My understanding is that there’s about a I don’t know, 10 percent come from represented deals like meaning from deal guys, M&A brokers, so on and so forth. I mean what is that what you see or no?
Scott Oliver: [00:03:43] Yeah, that’s pretty common. Normally, if there’s a broker involved, sometimes the brokers are fantastic. Other times, they can be a bit of a pain to deal with. But the big one that we see differences in are deals that are either representative of people who have counsel for the buyer or counsel for the borrower. And honestly, I’d say it’s probably 60-40. Sixty percent will have counsel, forty percent won’t. And depending on which attorney is involved, those deals can be walks in the park. As long as everybody’s communicating and being a real deal team with the same goals in mind of getting the deal done quickly organized, and also in compliance with the SBA regs, which is what I’m really looking at on my client side.
Ed Mysogland: [00:04:29] So how did you find — out all the different services that an attorney can provide, how did you find SBA work? I mean, yeah, I guess that’s what I’m asking is just how did you — I mean, because it is really a niche. There’s not a whole lot of people doing it right or am I wrong?
Scott Oliver: [00:04:47] There’s not a ton. I mean, there’s only a handful of law firms in the United States that have a fully dedicated team that closes SBA deals. Some people will dabble in it, and those people are more or less successful in that. But from my front, I initially went to law school thinking that I wanted to be a litigator. I like to talk. Everybody says that I like to argue and things like that. But I realized very, very quickly that that really wasn’t first off, what I was good at or to what filled my cup, what I was interested in.
So I started exploring options where I could put my knowledge of business, finance, communication skills and things like that to the test. In a way that’s the happy side of law, helping people get something done. So my second year of law school, I ended up getting one of those coveted summer associate positions at Lewis Kappes. I’ve been here my entire career. And during that time, I met with a couple of the partners who said, hey, I see what you’re interested in. Do you like business? You’re good at this sort of thing. Why don’t you try SBA?
And at that time, I said, like Student Bar Association. Oh, I’m in the Student Bar Association. Yeah, I’m good at that. And they said, no, no, no, Small Business Administration. Right? And so, they handed me files that were closed and said, look at these. Take a look, see what you think, read about the credit memos and then come back and talk with us and see if this is something you’re interested in doing. So I did that. And honestly, it sounds super cliche, I fell in love with the practice area, mainly because you were seeing deal after deal after deal of these entrepreneurs that have these goals and you’re figuring out how the deal structures are put together and what these entrepreneurs are doing to either start or scale their business. Fascinating.
Ed Mysogland: [00:06:32] Yeah. Well, and you just gave me about four other questions I didn’t think about, but can you start with your process? So a deal comes, it’s an SBA candidate. The SBA lender, I’m assuming, makes their pitch. Here is the letter, the credit letter, basically their letter of intent. And then I’m assuming that’s when you get involved or do you get involved prior to that? So can you take me from start to finish.
Scott Oliver: [00:07:09] Yeah. So most of our clients are institutional clients. So we’re basically the partner in their pocket where they can bounce ideas off of us at any sort of point. But a deal comes into our office when there is a signed commitment letter and a signed credit memorandum. So we’ll usually get a deal from one of the banks and we’ll look at it and we’ll say, okay, here are the basic terms. And then in that credit memo, that’s usually 50 plus pages, that is the deal. And the nice little packet is what we start with.
I personally prepare what we actually dubbed here at the office as a DLP. It stands for Digital Legal Pad. We can go down that rabbit hole if you’d like, but it was during COVID. I put together this basically a smart form checklist of any deal type that you could possibly imagine. And when we get those two documents in, we take that master version, and we’ll chop it down. And it will literally tell you everything that your buyer needs or the borrower in this instance needs to do in order to comply with the SBA standard operating procedure. So SOP 5010 sticks. And then it tracks communications with that bank with that closer throughout the life of the deal. So we can cut out some of the gut of the email correspondence and say, here’s what we’ve done, here’s what we need to do and here’s where we’re at when we’re getting ready to sit down at the closing table and close this thing out.
Ed Mysogland: [00:08:28] So, okay. So the smart pad, I mean what was the vehicle that — I’ve never heard of the smart pad. I mean, was it a Google doc? What does that mean?
Scott Oliver: [00:08:42] The way you’re putting it makes it sound more impressive than it is. So it’s a document that I put together actually when COVID hit, because we still have a big physical presence in Indianapolis in One American. Whenever a deal would come in, we’d have these big, they call them bankers files, tab documents where we print every single document, every operating agreement, franchise agreement and all that. And we put them in there and then we have this big box basically for every single deal.
COVID happened. And it’s almost comical, like lugging in like briefcases and backpacks, all these things, saying two weeks to flatten the curve, I’m going to have all my stuff at home. We’re going to take care of this. Well, two weeks, as you guys know, did not turn into two weeks. And at that point, I couldn’t do the physical paper anymore. It was getting so cumbersome, and deals were starting to pile up. And I was saying, this doesn’t work. So I got a Microsoft Word template out and essentially plug and play every single requirement and made a master version that takes, you know, if I had 100 deals on my desk, it condenses that so that I can send this document to any of my associates, any of my paralegals, they can look at it and know exactly what needs to be done for the client, electronically.
Ed Mysogland: [00:09:55] Nice. I mean, and similarly, in our shop, I mean same thing. I mean, the COVID hit, and we needed a means to effectively communicate on how we were going to continue to do deals. So that’s yeah, that’s fascinating. So what what version of SOPs are we on? We’re on G?
Scott Oliver: [00:10:23] SOP 50 10 6.
Ed Mysogland: [00:10:25] And they’re like an A, B, C, D, E, F?
Scott Oliver: [00:10:31] H, I, J, K, L, M, N, O, P. Let me see. I can’t recall what number it is, but it’s the one that came out in a couple of years back. And they’re saying that another version will be coming out, supposed to be in November, but it’s still anticipated in Q1 of this year.
Ed Mysogland: [00:10:44] So it’s funny that like in USPAP. So Uniform Standards of Professional Appraisal Practice, I know you know what that means, but for our listeners, in their documentation, they have guidance, different types of situations where this is how you should handle that. And I’m just wondering, with all the deals, I mean do they defer to you for interpretation of the SOP or is there someone that has authored the SOP that can give you guidance when you’re stuck?
Scott Oliver: [00:11:18] Most of the time, they’re deferring to legal counsel if they have legal counsel to interpret the SOP. That’s why it’s so important for when you hire counsel to hire counsel that doesn’t just dabble in it. If you haven’t seen multiple, multiple, multiple deals over a period of time, been in the space over a period of time, you don’t know how the SBA has interpreted things in the past. You haven’t seen how deals shake out in the event of default and all of that. So legal counsel, we’re usually asked, hey, what does the SOP say about this or how do we handle this?
But the SOP, at least 50 10 6, is going to be your eligibility guideline. So it’s almost like that baseline of what lenders must follow. Throughout that document, you’ll see prudent used a lot because the SOP provides these regs. But at the end of the day, the lender also has to be prudent, and the prudent lending standard is gray. Lawyers like gray because it requires to interpret but then the bank has to make these decisions, which are sometimes business decisions. And we’ll see a lot of banks get caught up and they’ll say, oh, well, we have this firm. And they said, no, we can’t do this no matter what. Draw a line in the sand where in many instances, depending on the deal, that’s not the answer. It’s here’s what the SOP says. You have to have an eligible deal. Of course. Here’s what the borrower is asking. Here’s the type of deal. Here’s the collateral. Here are your risks. Now, Bank, how do you want to proceed given this information?
Ed Mysogland: [00:12:50] When you say the bank, who at the bank is making that decision?
Scott Oliver: [00:12:56] So when we’re working with people, it’s usually a closer that’s on the other side. Most banks have closers. They’re the ones that are kind of on the ground level working with counsel. But if it comes to a business decision like that, that really requires additional input, you’re looking at the senior credit underwriter, you’re looking at bank management and depending on their, I guess, hierarchical structure, who is actually making a business/risk assessment based on counsel’s recommendation.
Ed Mysogland: [00:13:22] When the package gets to you, so they’ve already — has due diligence concluded or is it in process or where are they at in the spectrum of the deal?
Scott Oliver: [00:13:38] Usually, it has the due diligence, legal due diligence. Is that what you’re referring to?
Ed Mysogland: [00:13:42] Yep.
Scott Oliver: [00:13:42] Usually, they don’t have that in.
Ed Mysogland: [00:13:44] Legal — I’m sorry, accounting, regular accounting due diligence.
Scott Oliver: [00:13:49] Your underwriting is usually complete. So they have a credit memorandum. They’ve taken a look and said, okay, this collateral is available, here’s what we have to take. Here’s what we might take, depending on the specifics of the deal. All of that is usually taken care of. Unless there’s a trailing requirement. And as you know, through your work, deals change, circumstances change. Maybe I get a document in, and I say this is ineligible. We can’t do this. That requires a restructure of the deal. That can happen. And if it does, they’ll document their file with a change memo or they’ll have to get an update signed commitment letter from the client, what have you. So it’s an everevolving process throughout.
Ed Mysogland: [00:14:29] I get it. So does the — we keep on seeing all this stuff about like quality of earnings and things like that. So when credit — and again, I guess it is a business decision, but does your work, is it ever influenced by the, I suppose, the comprehensiveness or like let’s just say, you know, a credit — this comes from you get a deal and it has a quality of earnings report. It has all of maybe audited financial statements. I get that it is a business decision, but does that necessarily influence you at all based on the risk associated with the deal? Or is it just total — you know, this I’m doing compliance work and if you guys like the quality of earnings because it makes you happy, then have at it. Is that it?
Scott Oliver: [00:15:20] Yeah, that’s usually separated. And so what I like to tell my associates that are coming up through SBA too is we always have to remember which hat we’re wearing. That’s to protect and to benefit our firm, of course, but it’s also to protect the bank. We can’t be getting involved in the bank’s policies and procedures and underwriting credit box, things like that. If we get a deal in and credit says that it is good, we’re not looking at financials, we’re not looking at things like that. But if we get something across our desk and it violates the SOP, we’re required to point that out or we see an issue in a purchase agreement or resolutions, title work, searches. All of the different things that we do through our scope of services, we’re partnering with the bank and pointing those types of things out.
Ed Mysogland: [00:16:06] I got it. So but at the same time, if you see a structure that doesn’t comply and I’m trying to think of a situation where it doesn’t comply, and you just flag it. And now, it becomes either you have to change the deal in order for compliance purposes. And you’ve got an example of a situation where here’s the deal structure and yeah, this isn’t going to work. And by the way, I guess the bigger question is why wouldn’t the lender know the rule, you know?
Scott Oliver: [00:16:43] And most of the time, we’re not going to get a deal in where there is a glaring issue, especially if we’re working with some of our more experienced lenders in that space. They have goalposts. They have certain aspects within their underwriting process where they’re going to catch most of that. But at the same time, you might get a deal and the deal is approved with one borrower, let’s say. And the borrower isn’t formed yet. It’s an entity to be formed. I call that an ETBF on my DLP. There’s a lot of acronyms, right?
So let’s say that it’s approved in that manner. The borrower then gets an attorney, and the attorney is a brilliant tax attorney/corporate attorney. And they say, well, for such and such reasons, we actually want you to form a real estate holding company to buy the real estate, and we want you to form an operating company to run the business. And the borrower says, all right, lawyer, you said this, I trust you. I want to proceed in this fashion.
Well, that’s not what was approved with the bank. That doesn’t kill the deal, but they have to go to the bank and say, look, my lawyer said I need to have two entities, one for the real estate and one for the operating company. At that point, I would be getting involved because what that’s called is an EPC/OC transaction, eligible passive company/operating company transaction. That triggers some very, very strict requirements from the SBA. So we’d have to structure it that way.
And I’d be talking with the underwriter saying, look, we have to have this eligible passive company. This eligible passive company has to lease 100 percent of the real estate that it purchases to the eligible operating company. We have to have requirements in the SOP with the lease, the rent payments and things like that. And we need to make sure that when we get to the closing table, that eligible passive company is not receiving the working capital because you’d have a guarantee, at least a repair, probably a denial in that situation.
Ed Mysogland: [00:18:41] I get it. So I was wondering, because I had never heard of the term eligible passive company rule. And we’ve done lots, lots of SBA deals where there’s an operating entity and a real estate entity. So I’ll be a lot more eloquent these days on that. So are there other provisions that you see that are so underutilized that you just kind of shake your head on, if you only knew about this, you would run toward it and say, yeah, this really works pretty well.
Scott Oliver: [00:19:21] From a buyer perspective?
Ed Mysogland: [00:19:22] Yeah. Buyer or seller. Yeah, let’s go buyer.
Scott Oliver: [00:19:26] So I think most of the time that what we see with buyers or buyers counsel is not that they structure it in a way that’s not advantageous to the buyer, it’s that they are drafting documents and they don’t have an understanding of what is required by the SBA. And if they were to either have that understanding initially or consult with somebody who does know the SBA, whether that’s the lender or another attorney, they could draft documents that are compliant at the outset or at least have an understanding of what those need to look like so that they can start talking with, let’s say, the seller. Or another good example is talking with the landlord, right? Talking with the landlord early and saying this is the type of business we have. Here are the lenders requirements. Here’s what the SOP says. And by the way, we need this landlord waiver signed and doing that early. I see so many deals where counsel is involved for a month and then they just start talking about the purchase agreement and the landlord waiver a week before they want to close. Doesn’t work.
Ed Mysogland: [00:20:26] No. And again, it’s a reflection. I know in situations where where we’ve dragged our feet, it’s, all right, this deal is teetering. And it’s funny, it’s either it happens to either be at the quarter where financials are going to come out or it’s going to be at the year, and everybody wants to see that. So I get it. So I wanted to ask about do you guys ever make concessions? Do you see banks ever make concessions on risk? Because I’m sitting here going, all right, most banks, so they’re going to get 75 percent guarantee. They have, I don’t want to say little exposure, but certainly they don’t want it to default. But at the same time, they want that loan. But do they ever make any kind of concessions or it’s like, yeah, you know what, we’ll wait for the next one?
Scott Oliver: [00:21:27] Yeah, I don’t deal in absolute. So I could never say no, they will never make a concession, right. And that’s not my place to say for those banks in those instances. But at the same time, a bank is not going to waive something that jeopardizes its guarantee. So there are aspects of any sort of deal where the SOP or the SBA has came in and said, if you do this or if you do not do this, you are either looking at a repair or you’re flat out denied for your SBA guarantee. Those types of things, I mean, I personally never seen a bank give in on that, but there are other things that also from our perspective, recommendation wise, they shouldn’t give in to, but they might make some concessions just depending on the specifics of the deal.
So you and I were talking a little bit offline, just kind of shooting the breeze about different deal structures. But one example that I’ve seen before is when you have a situation with, let’s say there’s a borrower and they just have a little satellite office, right? So homebased businesses are becoming more common. And let’s say everything about the deal is approved, but we find out, hey, they rent space two days a week out of One American. Complete example. And they go there and there is a computer. They sit down and they just want to get away. And we look at it and the requirement is that you need to have a lease for the term of the loan.
Ed Mysogland: [00:22:49] I get it.
Scott Oliver: [00:22:50] And if that happens, the borrower might say, well, that’s not working. We have a we work agreement and I can’t get that. The lender will tell them it should be, the lease should be the term of the loan. But they might make a business decision and say, okay, given the circumstances, the fact that there’s no collateral other than a 1997 LG computer screen right on a desk that they don’t own, we’re okay making this concession here and we’ll close the deal without requiring you to have a ten-year lease.
Ed Mysogland: [00:23:19] Yeah, I can see that one. So I guess where I wanted to head next is where are the, or better yet, who are the biggest hassles that you face? Because I mean certainly, well, yeah, who are the who? We’ll start there. Who gives you the greatest amount of heartburn and deals?
Scott Oliver: [00:23:47] Normally, you’re going to see landlords are hard to deal with, but I think the the more direct answer to that is if we have buyer or sellers counsel who is operating outside of their wheelhouse. And I’m not putting down any attorneys, but if we get a deal in and it is a let’s say a $4.5 million business acquisition, so it’s an M&A transaction and buyer either hires a criminal law attorney or a family law attorney that’s never seen an M&A transaction in his or her life, that will be very difficult to have a smooth transaction there because they just haven’t experienced. It’d be like asking me to represent somebody in a DUI case. You would never do that because that doesn’t make sense for me. That’s one side of that coin.
The other side is actually probably what you wouldn’t think. It’s when we get a deal and they have insert law firm’s name where the law firm and the attorneys are used to doing $100 million, $200 million, $1 billion deals and maybe it’s your buddy. And they said, we’ll take this case, and we’ll not charge you $1500 an hour. We’ll take it, but we’re really, really experienced, sophisticated attorneys. And the reason those deals will sometimes have more headaches is because they treat it like a billion-dollar transaction when it’s a $4.5 million transaction.
At that point, you’re arguing for the sake of arguing, they’re not understanding how SMB, small to medium sized business, transactions operate. And those can end up being really, really difficult. Mixing the egos with some of those folks that can be very, very hard. So you have to hire somebody who is right for the job, somebody who knows lower to middle market types of deals and preferably somebody who knows those deals and also knows SBA lending. If you have that, I mean that’s a walk in the park. And we’ll close those deals all day every day.
Ed Mysogland: [00:25:43] Well, I’ll tell you, and we face that same hurdle. I mean, we had a deal and it was half that. And at the end of this thing, they had $100,000 plus legal fee, and they’re total sticker shock. And it was like how in the world did you not think that this was going to happen? You saw the marquee, you’ve been to the office, you knew what you were getting into. But anyway, it is what it is.
So along the hassle factor, I was curious to know from the preferred lenders versus the homegrown banks, I mean is there any difference? Or I suppose volume probably helps, but I’m just curious to know whether or not, I know from our standpoint, when we’re battling somebody, like you said that doesn’t do a whole lot of SBA work, it really elongates the process. It becomes substantially more complicated than it necessarily needs to be. So do you find the same or no?
Scott Oliver: [00:26:53] Well, we deal with both, PLP lenders, preferred lenders, and then also GP lenders. Both of them, you will find quality banks and non-bank lenders on both sides. All that means is that when you have a PLP lender, they have a lot more flexibility in decisions that they can make on their own without having to ask the SBA or get approval from the SBA. So that does result usually in a much quicker closing timeline. It will sometimes result in better certainty to close, which is usually a big, big, big want from borrowers.
And generally, those are the ones that have met certain guideposts throughout the process. They’ve closed a certain number of deals. They’ve done certain things. They’ve met quality standards. So that’s usually what you see with PLP lenders. But GP lenders are usually in the plight to obtain their PLP license. So I’ve seen, in my opinion, some of the best banks have started as GP. They’ve worked their way through it, they’ve obtained their license and then it’s game on and they’re crushing it. So I wouldn’t look to that necessarily from a borrower’s perspective but it’s a factor to consider.
Ed Mysogland: [00:28:06] You know, one of the things about SBA lending and you used to hear a lot of the default rates, I don’t think that there’s nearly the level of SBA default. Is that an accurate statement or do you guys not track that or ever hear of it?
Scott Oliver: [00:28:22] I don’t look at the default rates as often because I’m more of a closer on the closing side. Our litigation team for creditors rights would probably have those types of statistics, and I’d be interested to know that as well.
Ed Mysogland: [00:28:32] Yeah, because to me, I think the whole system is a lot better at using the SBA as a tool to finance as opposed to the Wild West. So I was just curious. So I know we were talking about the SBA coming out with whatever next version is supposedly in November. But I mean, to me, I look at that document and I mean, it’s pretty comprehensive. And you just wonder, what else can you throw in? And I’m not asking you to provide commentary. I guess that is a living document.
And where I’m heading with it is who do you turn to for guidance on it? And I know I touched on it a little earlier, but prudent is one thing, but it’s a whole nother thing that it’s a big document for people that don’t know. I mean, there’s a ton in there. So I guess that was kind of my question is, even the best practitioner has to defer to somebody. Who would that be for you?
Scott Oliver: [00:29:51] Yeah. So we study that document, of course, and it’s a document in and of itself. But then you also have CFRs and various links throughout it that will really give you even deeper detail into what you look at. So if we’re going outside of that document, right, we’re usually looking to being plugged in with trade associations such as NAGGL, some of the other local associations, the SBA directly, other law firms, other lenders and things like that to keep up on the types of trends that are going on and to get clarifications when things come out.
I mean, I mentioned names, but if something comes up and I’m really scratching my head here and I’m thinking, what does the SBA think? Well, I’ll call somebody and say, hey, have you seen this before? What do you take away from this? So that’s part of it, just developing a knowledge base outside of the document and making sure you’re up to date with procedural notices, too. Have you read the procedural notices that come out from time to time, too?
Ed Mysogland: [00:30:50] Yep. Well, I’ll tell you, one guy and granted, you’re a nationwide guy, but here in Indiana, Eric Armacost. I don’t know if you’d know what a great resource. He has helped us immensely on so many different occasions and he is just, as far as the SBA goes, they are really fortunate to have a guy like him because he is so generous with time as well as the information he’s providing. So brokers differ widely. I mean, I know we talked about the seller’s counsel and landlords being probably the ones that give you the greatest heartburn. But in our profession, how can we better work with folks like you?
Scott Oliver: [00:31:45] With brokers specifically?
Ed Mysogland: [00:31:46] Yeah. I mean, from the standpoint of how can — from a brokerage standpoint, I mean we put — hopefully, we’ll put together a sound deal. We’ll have all the information. All the forms are going together. But from the time you get all the underwriting, your underwriting package and now we’re heading toward closing, is there anything, any tripwires that we can be aware of that you know what, if you were just smart enough to listen to me, this is what will make your deal go a lot smoother. Anything come to mind?
Scott Oliver: [00:32:23] Yeah. So in those situations, if I’m directly dealing with a broker, it’s usually because there’s not another lawyer involved, right? So it’s somebody who — buyer doesn’t have counsel, seller doesn’t have counsel, we’ve got a broker and we’re dealing with them. The best thing that they can do is to communicate effectively with our office. Many times, broker forms, not putting them down, but sometimes broker forms can have some glaring issues that will cause repairs and denials for the banks.
If something like that comes up, and I as counsel reach out to the broker and say, hey, we can’t have this or we need this, this way, and we’re met with absolutely not, we’ve seen this before and we’re never going to do this, that is not the way to approach it. And I will get that sometimes. They’ll say, I’ve closed a thousand transactions and I’ve never had counsel ask me for this. Well, you’re being asked now, and I don’t know which transactions you closed for who, but you probably closed them incorrectly and the bank took a risk. My client needs it this way. And if we can get on the phone or even on email and just walk through it, talk through what it needs to look like, usually it’s done within a matter of five minutes. And snappy, buyer’s happy and the broker looks great and usually I’ll use that broker in the future as well.
Ed Mysogland: [00:33:36] You know, the tough part is and again, there is — and I preach that to our younger guys. I mean, there’s a certain role that you play, and everybody wants to get the deal across the finish line. Everybody. There’s no one that’s sitting here trying to dump on your deal. But at the same time, you have to understand that all these people that are loaning you millions of dollars, they have to understand the risk that they’re taking. And it’s not a reflection of you professionally to come back and say, look, we have to do it this way. And again, and if your client doesn’t like it, then he doesn’t like it, and he has options. He can pull the deal and start over. But, oh, by the way, knowing what I know about you, we’re probably going to bump into you again. And the bank is probably going to be in the same position for the same client. So why not just address it now. Go ahead.
Scott Oliver: [00:34:43] Most banks have a similar approach. I mean, there are differences in lenders and you can figure those out on your own. But at the end of the day, if I’m asking a broker or whoever it is for a very specific revision, there’s a reason. And sometimes they’ll get upset and say, well, we’ll pull the deal, we’ll go somewhere else. Well, you go somewhere else, you’re going to have the same issue. Assuming that the lender understands the SOP and understands the transaction.
So we’re never trying to step on anyone’s toes. Like you said, we’re all kind of super cheesy, but we’re in this together and we want to get this done in a way that protects all parties. I’m obviously looking out for the bank, but at the same time, I’m also looking out for a buyer in a way, because that buyer, if something goes wrong, that buyer is not going to be able to repay its note. And then I have a client who has a defaulted loan. I don’t want that. The bank doesn’t want it either.
Ed Mysogland: [00:35:37] Sure. And you would think that that would be self-evident. And yeah, we bump into that periodically where the seller has dug their heels in, and this is the way I want it kind of like a kid. I’m not going to change. Well, okay, well, but at the same time, you’re not going to get a deal. It doesn’t work that way. And I know that you think that you have all the leverage. And this is what — you know, we’ve been counseling this for years. The closer you are to completing the deal, the less leverage you have over everybody. And you just need to understand that this is just part of the process. It’s not a reflection of your business. It’s just the way it is, especially when, oh, by the way, somebody is loaning your buyer 80, 90 percent of your purchase price. And you would think that it would resonate. But boy, sometimes it is a real, real challenge. Speaking of 80 or 90 percent, standby notes, that seems to be the vehicle of choice these days to get deals across the line, the seller standby notes.
So I guess what is your opinion — I mean granted this is back to risk. I understand that the bank has to make that decision. But some of the provisions that you have seen, like for example, standby note is great to bridge that equity gap. Totally get it. But where I was heading with it is not only that, but now earnout used to be a lot of the deals we had, especially service businesses. And now they’re in favor of self-canceling notes. I mean, are you — I guess what I’m asking is, are you familiar or have you seen any deal structures where service-related businesses are able to mitigate their risk through some sort of, yeah, I mean, you got the self-canceling notes, you can’t do earnout, but any other vehicles that you’ve seen or no?
Scott Oliver: [00:37:55] I’ve seen some of those unique vehicles in non-full standby seller notes. And usually when there is a seller note that’s not on full standby, meaning it’s not being used as equity injection. The ball is a lot more in the lender’s court because they’re looking at it and they’re saying, okay, how is this going to impact my borrower? What does the bottom line look like here? What types of provisions in here are either compliant or are there any concerns about eligibility in here? There’s more flexibility when it’s not being used in injection.
But the opposite side of that is when it’s being used as injection, there is very little to no wiggle room there. And that is what — you see people talk about this a lot on the Internet and other places, but the full standby note is what it is. If your seller is going to be taking back a note for any amount of money and it’s being used as a full standby seller note, there are no payments. There are no payments of principal and interest during the term of the loan. And there’s a bunch of other provisions in there as well, such as not being able to act on any of the collateral that the seller might be taking that’s securing the note. It is just that a full standby note, no deviation, because then you have equity injection that’s out of whack. And equity injection is a big hot topic with the SBA that cannot be violated in any instance.
Ed Mysogland: [00:39:16] Well, one of the things that I guess is a myth is that you can petition the SBA to release principal or interest or both on those standby notes. I have never seen it happen ever, ever, ever. But I think it’s somewhere in the SOP that that you can do that, but I’ve never seen anyone get any kind of payment. You? I saw you shake your head. Yeah.
Scott Oliver: [00:39:47] I have not seen that either because when you have a deal that’s structured and they say, hey, Ed, you’re going to have to inject $500,000 into this deal. And you say, I can’t. Can I take at least $100,000 of my equity from a seller note? And the bank says yes. Well, in that instance, yeah, you’re getting credit for that $100,000 seller note, but that seller is not getting paid until the SBA is paid in full. And that is the whole purpose of that note, that vehicle, because they are strictly subordinate to the SBA. It’s a very bright line approach that they take. So short answer no, I have not seen that on those types of deals.
Ed Mysogland: [00:40:24] I get it. All right. So my last question, I ask of all of my guests, but unfortunately, you’re going to get the three-part one. So the question is, if you had one piece of advice to give our listeners, what would in your case be most valuable in getting a deal done? And so the three parts are what would you tell a buyer, what would you tell a seller, and what would you tell an attorney representing either of them?
Scott Oliver: [00:40:54] I’m going to take the easy way out here and give you one answer for all three.
Ed Mysogland: [00:40:57] All right.
Scott Oliver: [00:40:58] And it is make sure that your deal team is in order or whatever you want to call it. Some people will call it their board of directors. Some people call it their deal team. And what I mean by that is when you are heading into the LOI stage or really any stage in your search, make sure that you’re thinking about who is going to be my counsel on this transaction, who is going to be my lender, who is going to be my broker if there is one, who is going to be my accountant, who is going to be my emotional support, right?
Ed Mysogland: [00:41:29] Sure.
Scott Oliver: [00:41:29] Whether it’s a spouse, a friend or somebody else who’s going to be my mentor, all of this sort of things, if you have those solidified going into it, you will have such an easier time getting that deal to close. And I preach this a lot when I’m talking to buy side counsel or if I’m by side counsel, I’m saying who has experience in what? How is this going to be organized? And how are we getting to the closing table? If you have that in order, you’re sitting pretty on that deal and much more likely to close and much more likely to close without copious amounts of Advil.
Ed Mysogland: [00:42:06] I got it. All right. Well, what’s the best way we can connect with you?
Scott Oliver: [00:42:10] Yeah, so I’m really active actually on LinkedIn, which is something that people on Twitter don’t like to hear. But you can find Scott Oliver on LinkedIn. You can find me on Twitter, @SAOliver_Atty or send me an email. My firm is Lewis Kappes and my email address is SOliver@LewisKappes.com. I’m always open to chat, whether it’s SBA, M&A or any of the topics we’ve discussed today. I’m a bit of a nerd, if I must say so.
Ed Mysogland: [00:42:39] I don’t think you’re a nerd. I think you’re right in the sandbox I like. So I totally appreciate you and what you do. Everything that we’ve talked about is going to be in the show notes, including where to find you and where. So, Scott, thanks so much for hanging out with me this morning.
Scott Oliver: [00:42:57] Thank you so much, Ed. I appreciate it.
Outro: [00:43:00] Thank you for joining us today on How To Sell Your Business podcast. If you want more episodes packed with strategies to help sell your business for the maximum value, visit howtosellabusinesspodcast.com for tips and best practices to make your exit life changing. Better yet, subscribe now so you never miss future episodes. This program is copyrighted by Myso Inc. All rights reserved.
