As a former banker, we see Buy Out transactions falling apart at the 11th hour. Here are a few reasons why Lenders withdraw “verbal” indication of approval to finance a SME Buy Out transaction. The original version appeared as a “Post” on Linked In.
(1) Inaccuracies in the information provided whether deliberate or not.
(2) Assets pledged as collateral have lower values than previous appraisal or estimate.
(3) Real estate pledged as collateral have issues, i.e. appraised value, environmental, type of use, etc.
(4) Previous credit or legal issues that were not disclosed.
(5) The bank’s priority position with respect to security may be compromised.
(6) Banks lack confidence in the new owners.
(7) Imminent changes in the industry, i.e. structural, regulatory, technological, etc.
(8) Contracts and agreements on which projected future cashflows are contingent upon are not properly signed or executed.
(9) Financial projections especially EBITDA are becoming less realistic.
(10) Weaknesses in ratios at the onset of the transaction that cannot be mitigated.
(11) Banks lack confidence that the intangible assets i.e. patents, trademark will hold its value post transaction.
(12) Too much of a Goodwill component with no logical backbone.
(13) Disagreements / potential contentious issues with other lenders.
(14) Bankers perceived the business valuation as too high or unacceptable.
(15) The company’s customers’ loyalty is to previous owners resulting to a potentially higher attrition rate.