Hi Reader

I'm sure you've heard the phrase that "time kills deals."

Well it does.

Especially in the summer when sellers can easily get annoyed and decide to go golf and vacation instead.

Today I'm going to share 12 of the craziest obstacles that have actually delayed my deals.

I'm also going to give you the best tips to avoid these obstacles.

Ready? Here they are.

1. Landlord Waiver

When using an SBA loan to fund your acquisition, securing a landlord waiver can be tough. If the business you’re buying has a lease and you need that location, this waiver is mandatory. It gives the SBA lender first rights to your business assets on the leased premises if you default, and requires the landlord to give the lender a long notice period to collect those assets.

>> I had a $5M deal delayed for 4+ weeks once, while landlord counsel and bank counsel wrangled over this exact issue.

Landlord Waiver Tips:

• Get the waiver from your lender early and provide it to the landlord when negotiating the lease or extension.
• Connect the landlord directly with the lender at the first sign of trouble. Their lawyers can work out any flexibility.

2. Business Registration

Many businesses require multiple registrations at various government levels and sometimes with private certification bodies. These registrations are essential to legally operate and serve existing customers. For SBA 7a loans, these must be in place before closing.

>> Believe it or not some government agencies (like small towns) require registration to be sent in by snail mail or fax! I've had this become a hurdle since many people don't know what a fax machine is (just kidding).

Business Registration Tips:

• Work with your lawyer or diligence provider to get a definitive list of required registrations.
• Handle these early, and for those you can’t file until closing, check what your SBA lender needs (sometimes a draft filing is sufficient).

3. Professional Licensing

Trades businesses are hot right now, but licensing can be a hurdle. Without licensing continuity after closing, you cannot operate. Each state has its own licensing scheme, and different lenders have different requirements.

Professional Licensing Tips:

• Have multiple continuity plans, including one that doesn’t require the owner if possible.
• Get your lender to review and sign off on your plans in writing.

4. Wrong EIN

For an SBA deal, if you’re purchasing assets (or stock) with an acquisition entity, you need the entity’s EIN letter. The name on the EIN letter must match the entity’s name exactly. Mistakes can delay your closing and require extensive time to fix with the IRS.

>> I had a deal get delayed because the wording was off by one letter.

EIN Tips:

• Obtain the EIN letter for your acquisition entity early and ensure it matches the entity name exactly.
• If it doesn’t match, call the IRS at 1-800-829-4933 to fix it, or file for a new EIN with the correct name.

5. Flagged Wire Transfer

Wire fraud is common, so financial institutions are cautious with large transfers. Getting your wire transfer flagged and delayed at a critical time can cause significant issues.

>> I had a deal get delayed because of a wire transfer flag that required by client to drive a couple of hundred miles to a bank branch for an in-person identify confirmation.

Wire Transfer Tips:

• Prepare for your wire transfer early.
• For large wires (six figures), inform your financial institution in advance.
• Have a backup plan that may involve going to a bank branch if needed.

6. Defaulted Prior Federal Loan

This can cause issues with your SBA loan approval process. Ensure that any prior defaults are addressed well in advance. Defaults will cause an error with the final SBA approval (called getting the PLP number).

7. Inexperienced Bank

SBA 7a loans are complex. The experience level of your lender affects how smoothly your loan closes. An inexperienced lender can cause major delays and complications.

SBA Lender Selection Tips:

• Work with an experienced SBA broker to select the right lender.
• Check lender volume using SBA’s official lender reports. Avoid lenders with low deal volumes.

8. Multiple Revisions to APA

Lengthy revisions to the Asset Purchase Agreement (APA) can delay your deal. Seller’s counsel can sometimes be a bottleneck, especially if they lack experience.

Seller Counsel Tips:

• Include in your LOI that the seller agrees to hire M&A counsel.
• Avoid sellers trying to DIY legal work (this just puts all the work on your deal lawyer.
• Provide the seller with a list of good M&A lawyers.

9. Insurance

You’ll need life insurance and a business (commercial general liability) policy. Delays in obtaining these can postpone your closing.

Insurance Tips:

• Start working on these policies early. Get lender requirements in writing.
• Consider working with a specialist for life insurance.
• Ensure your lender doesn’t need an additional policy for the HoldCo early on.

10. Liens

You can’t close if there’s a lien on any assets of the target business. Some liens, especially equipment leases and SBA loans, are hard to terminate.

>> I've had many deals where the lien payoff that was the biggest delay turned out to be... another SBA loan!!

Lien Tips:

• Have your due diligence provider check for liens early.
• Work with the seller to ensure all liens are accounted for and will be terminated or paid off at closing.
• Sometimes assuming equipment leases is easier than terminating them.

11. General Processing

There are two types of SBA 7a loan approvals: PLP (Preferred Lender Program) and general processing. PLP approvals are quicker. General processing, which involves sending the loan to the SBA, can take weeks.

SBA Approval Tips:

• Only work with PLP banks.
• Be aware that partial asset acquisitions often require general processing.
• Special credit situations or prior federal loan defaults will also require general processing.

12. F Reorg

If you’re buying an S corp using a HoldCo and it’s a stock purchase, the seller needs an F reorg. Inexperienced F reorg advisors on the sell-side can create delays or make mistakes.

F Reorg Tips:

• Ask the seller to hire an F reorg-focused tax attorney.
• Consider hiring a tax lawyer to review the process to ensure it’s done correctly.

There you have it. My best tips for helping you avoid the 12 craziest deal bottlenecks that I've encountered. Hope they help you close your deals on time!

Happy (deal) hunting!

​

Eric Hsu, M&A Lawyer

Publisher, Freedom Through Acquisition Newsletter