Due Diligence Matters
Feb 01,2018
A company’s financial statements are important in assessing a potential borrower’s situation. But thorough due diligence requires looking closely and deeply at all aspects of the company’s operations, from applicable economic and industry conditions to sources of collateral and business operations — and beyond. Only then can you, as lender, accurately evaluate the borrower’s financial status and minimize your risks of delayed payments and default.Assess risk and review financialsBefore you review a borrower’s financial statements, research industry risks. This risk assessment identifies what’s most relevant and where your greatest exposure lies, what trends you expect in this year’s financials, and which bank products the customer might need. Risk assessments save time because you’re targeting due diligence on what matters most.Now tackle the financial statements. First evaluate the reliability of the financial information. If an in-house bookkeeper or accountant prepared it, consider his or her skill level and whether the statements...
Beware the Risks of Signing on New Customers
Dec 09,2016
On Monday morning, you receive two phone calls from business owners wanting to borrow money from your bank. The first is an existing customer who needs $1 million to build a new warehouse. Her company has never missed a loan payment with your bank, and it has a solid business credit score. The other has never applied for a bank loan. Instead, the owner has borrowed money from wealthy family members to grow his business. This borrower needs $1 million to build a warehouse. Which banking opportunity sounds more attractive?Expanding your customer baseIt’s generally easier to work with existing customers, especially if they have an established track record with your bank. But sometimes you need to branch out and pursue new banking opportunities. When you do, it’s critical to “dial up” your due diligence procedures.By doing your homework, you may unearth hidden risks and liabilities. In addition, showing a genuine...
Five Factors to Consider for Your Due Diligence Approach
Oct 25,2016
Before reviewing a borrower’s financial statements, consider the industry in which it operates to determine what’s most relevant. Doing so will help frame your due diligence efforts and credit risk assessment. Focus on five factors In 1979, economist and Harvard Business School professor Michael Porter identified five competitive forces to consider when developing business strategy. This five-factor approach remains useful today. Power of customers. Start by understanding the borrower’s target market. A company that relies heavily on a few customers for a large portion of its revenue may be at the mercy of key customers, especially if there are multiple competitors in the industry and no long-term contracts. This factor affects the prices and terms a borrower can negotiate with its customers. Power of suppliers. Likewise, identify the companies that a borrower purchases raw materials and resources from. Consider the existence of long-term contracts and possible alternative suppliers, if a key...
Care to Take a Drive Down M&A Avenue?
Jun 26,2014
Mergers and acquisitions (M&As) are an ambitious way to gain traction in today’s competitive construction marketplace. With so many baby boomers approaching retirement age, market analysts expect that there will be plenty of bargains for small to midsize businesses in the coming years. In fact, $10 trillion worth of baby-boomer-owned companies are expected to soon change hands, according to the Exit Planning Institute.But M&As can be fraught with peril. Deals go bad, new co-workers don’t get along, goodwill evaporates and profits suffer. Between 70% and 90% of deals fail annually, according to the Harvard Business Review. Smith & Howard's M&A and Due Diligence professionals can help steer you in the right direction and guide you as your deal moves forward. If you’re considering a drive down M&A Avenue, here are four ways to steer clear of trouble.1. Stay in your laneWhen buying a competitor, perhaps the biggest mistake construction owners...
Pricing and Positioning the Business for Sale
Apr 30,2014
Sell-side due diligence, or valuing the company’s assets and examining and documenting the health of the organization, is a fundamental component of the sale process. This procedure, even for small businesses, will help drive a selling price that satisfies ownership while reassuring a buyer of sufficient return on investment.ESTIMATE VALUEThere are many methods for valuing an organization, although the eventual selling price is always based on the value perceived by the buyer. Two common methods are:Asset valuationThis approach is common when a manufacturer is being sold for liquidation, as the assessment identifies the potential selling prices for used equipment, facilities, inventory and real estate. This approach also applies to businesses being transferred to new owners for operation, in which case intangible assets can greatly impact overall corporate value. For example, a manufacturer with few physical assets might hold intellectual property that hasn’t yet been commercialized, or it may have long-standing...
Commercial Lending Report: Beware of M&A Rules of Thumb
Jan 17,2014
Lenders often finance mergers and acquisitions, and sometimes after the buyer and seller have agreed on the selling price and terms. Always inquire about the due diligence that a buyer has performed prior to your involvement. Too often, the parties are eager to close, so they sidestep the formal valuation process. Instead, they may rely on industry rules of thumb to negotiate price.Pitfalls aboundNo matter how well known an industry rule of thumb is in regard to selling price — such as one times annual revenues or five times earnings — it should never be the sole method of valuation. Rules of thumb can be off point, to the extent that they are:Oversimplified. There’s more to valuing a business than “magic” formulas imply. Otherwise, thousands of trained and experienced business appraisers would be out of business. Valuing a business requires consideration of three tried-and-true methods: the cost, market and income...

Go back to Blog Home