Hoop Jumping and Banks
This last week has been a whirl wind, from getting and letter of intent (LOI) signed to having to last-minute construct my team for legal, accounting, and insurance due diligence. Most of my week, however, has been spent filling out paperwork for banks.
SBA Lender
Choosing the right SBA lender can be crucial. To find the right bank, I took my deal pre-LOI and ran it by 4 different banks. This was critical in understanding how the banks would work with me. Here are the banks that I looked at:
Live Oak Bank
First Bank of the Lake
First Women’s Bank
Dogwood State Bank
What I discovered was the 3 of the 4 were cashflow lending banks, and one was collateral. First Women’s Bank is a collateral lending bank and therefore not useful for the types of business I am interested in. The other 3 all gave a thumbs up.
Once under LOI, I discussed rates, servicing, and process with them. Turns out that Live Oak Bank had the lowest rate out of the gate. I took their rate and shopped it to the other 2 cashflow banks. The other banks agreed to match it, but would not do better. This left me with 3 good choices.
Plenty will advise going through the process with at least 2 banks so at the last minute if they leave you at the altar, you won’t lose the deal. I chose instead to work with one bank, and work quickly. If this bank leaves me at the altar, then hopefully that will happen quickly as well. This might leave me a chance at a second bank. My reason is basically respecting the banker because it is a lot of work to process these loans. The bankers don’t get anything until it closes, and by having a frank conversation with the banker, who assured me they would get it done. Call me naive, but my gut said the banker was telling the truth.
The paperwork deluge was enormous. The list of documents that needed to be filled out included the following:
Personal
Copies of our drivers licenses for both my wife and I
Personal resume
3 years of personal tax returns
Any affiliate companies tax returns
Loan application
Personal Financial Statement
IRS Form 4506-C
IRS Form 1919 for both my wife and I
Proof of funds
Covid Questionnaire
Credit Questionnaire
Business
Confidential Information Memorandum (CIM)
3 years of the businesses tax returns
First quarter balance sheet and income statement
Aging of Accounts Receivable and Accounts Payable
Proof of Addbacks
Signed LOI
Letter from the owner as to why he is selling
IRS Form 4506-C from seller
Seller statement for the Bank
My Projected 24-month by month projections with explanations
Copy of the proposed lease
Business Plan (that needed to have specific sections)
Articles of Incorporation
For the most part, this was just filling out paperwork and uploading the correct documents. However, some of these elements took significant time. For instance, the business plan ended up being 41 pages long, and required research and significant proofreading. My wife was super helpful in this regard.
401K ROBS
For better or worse, I waited until I had a deal under LOI before initiating this process. My reasons were basically all three providers I had checked with, Guidant, Benetrends, and Mysolo401K all stated they could get it done in 30 days. Additionally, I was not certain how much to roll over.
The amount of rollover was no small decision, as basically the percentage of the company owned by my 401K plan vs me is directly proportional to the percentage of equity brought by my 401K vs my savings. For instance, if a deal is $1M, and thus 10% required for me to bring would be $100K. If $90K comes from my 401K and $10K from my savings, then my retirement plan will own 90% of the business and I would own 10%.
Why does it matter if my retirement plan owns the majority of the company? For these reasons:
When dividends are made, they are divided based on the percentages of ownership. This basically means that the more my retirement plan owns, the more money I can’t access without penalties outside the business.
401K ROBS requires the company to be a C-corp. While large companies can benefit greatly from this structure, the vast majority of smaller companies don’t like the double taxation, and therefore elect to be an S-corp or an LLC.
The more that is in my name, the easier it will be to buy back the company from my 401K plan.
If I ever need to sell the company, having it as an S-corp makes it worth more because it can be sold as an asset sale.
Local Banks
Having to find a bank for both my 401K ROBS plan and for the business checking and merchant account, led me to start searching for banks in the area. I am not a fan of the big national banks, as I believe they are a big part of the problem in society today. This has me searching for a local community bank. I used these two resources to begin my search:
My plan is to speak with each of the local banks, as high up as I can get, and get a feel for how they operate, what they have to offer, and their balance sheets. This will let me make a more informed decision on which bank to choose. Since this business rarely receives cash, the location of the bank is not as important as it could be. That said, if I want a relationship with the bank, it is likely going to have to be somewhat close by to the business or my home.