Covid Questions from Banks, Part I

Covid Questions from Banks, Part IWe are still watching deals happen during this unique year in our history. What we’ve begun to notice more and more is that banks are asking more questions. With an overall feeling of caution in the air, an industry already known for its caution in “normal” times has become even more cautious.

We wanted to share some of the questions banks are asking our clients as they pursue traditional financing.

Strategic Questions

How has the business been affected by Covid-19?
This doesn’t just concern finances, but the status of your lease, the state of your employees, and the general state of your industry (this includes general forecasting on the future). There will be more specific questions to follow, but this is an “executive summary” answer.

Did the business shut down? If so, for how long, and why?
Obviously, a bank will be happy to see a simple “No” here, but well-answered “Yes” and “Why” responses are also helpful.

Did the seller pivot and does the buyer have to change anything about the operations or model in the near future?
This is the asterisk that banks are going to put on your older financials. They want to know what things look like now that you’ve made adjustments (if you did) and what the buyer will have to do (if anything) in the months ahead.

Are there growth opportunities because of the crisis?
While there is much doom and gloom in some parts of the market, those in transportation and manufacturing have had banner years. Some pivots have also yielded great results for businesses.

PPP/EIDL Questions

Did the business receive a PPP loan or an EIDL loan?
This is fairly obvious and part of the financial snapshot of the company anyway.

Does the business expect the PPP loan to be forgiven?
Well, this is slightly more complicated as it’s not entirely in the hands of the seller. We’ve
written about this already, but we expect more clarity in the months ahead to assist sellers in answering this question.

Will the PPP loan be paid off by the seller prior to the sale of the company?
This hasn’t been a deal breaker, but if it’s a yes, it has seemed to have provided some comfort to the banks. Understandably, if a seller is hoping for loan forgiveness, they might choose to wait rather than pay off a loan that would have been forgiven, especially if it’s a large amount.

Supply Chain Questions

Has your production or supply chain been disrupted? Please explain in the context of pre-Covid vs. post-Covid.
One unexpected side effect of the sudden demand for Plexiglas is that it’s doubled and tripled in price. Businesses that you wouldn’t immediately think had anything to do with that material on a day-to-day basis are seeing the price of it go through the roof. There can be delays measured in weeks to obtain Plexiglas at the new price.

How does this affect margins?
In the Plexiglas example above, obviously without a severe (and understandable) change in price to the customer, margins are going to get chewed up. This will need to be explained across every product/service in your business.


The big question: What are your detailed projections for the next 2-3 years?
We’re seeing banks ask for forensic level detail here as we’ve never seen before: they want month by month breakdowns. We know that these are educated guesses at best, but this is what we’re seeing creep into diligence at this moment.

We don’t want to overwhelm you with all of the questions, so we’ll save more for a future article on this subject. In the meantime, if you don’t want to deal with the bank on your own, give us a call. We’re happy to help!