Author: RogerP

The Difference Between a Commercial Loan Officer and the Bank Branch Manager

Article by Roger Schlueter, MBA

There is a Difference Between the Bank Branch Manager and a Commercial Loan Officer! Lots of Banks are having their Branch Managers do smaller Commercial Loans. This does not mean they are trained in Credit Analysis, Accounting, or Loan Structuring. They are just at the bank branch every day and they sometimes know their customers. They will be told what documents to ask the customer to provide and usually pass this information on to some other Officer or to “The Underwriter”, to hopefully get an answer in a month or two. They will usually say, “I need the underwriter to approve this loan”. I advise my clients to ask for a Commercial Loan Officer to talk about their loan. This will usually be a young, new loan officer but a loan officer just the same. The loan officer should have some lending experience, if only by seeing what other more experienced officers are bringing to the weekly loan meeting. They will also have access to other more senior officers that will sometimes give good advice. 
I had many borrowers that come to my office looking for loans, grants or lower interest. Sometimes they are working with a Bank Manager on their loan request and do not want to look for another bank because their Bank Manage told them the bank will do the loan, they just need more time. After about three months or more, they are decimated to find out that their loan request has been Declined by the bank. That is when they give up or contact someone like me to help them put together a Bank Proposal that can be presented to the bank. An experienced Commercial Loan Officer can usually tell a borrower whether their bank will approve a loan. The trouble is that the bank is suppose to log in the request and then, if they want to decline the loan, they need to have supporting information like Credit Reports or all the information for a loan request. I worked for a bank that one of the senior loan officers told me, “if you want to decline the loan, run the credit first and see if you can decline because of credit”. This is fine for the bank that may not want to do small loan requests but the borrower does not get a fair shake in the analysis of their loan request.
What usually happens when the Bank Manager looks at a Commercial Loan is they end up passing this information on to a commercial loan officer who has no real interest in the borrower or the loan. The “Underwriter” is a fictitious person that the bank uses to put the decision out of the hands of the Manager or Officer. They usually do not exist in Commercial Lending unless you are dealing with a very large bank that is sending the loan off to another office to be approved. The “Underwriter”, came from the housing market. The Mortgage Company or bank needs to sell the home loan off to Fanny Mae or Freddy Mac and needs the approval of the “underwriter” of these organizations.
In Summary, always try to talk to a Commercial Loan Officer to finance a Business Loan. Have the Personal Banker or Bank Manager finance the Vehicle loan, boat, or home improvement but always talk to a Commercial Loan Officer for any Business Loan.
Please address any questions or comments to this blog or email me at roger@rogerschlueter.com I also have a website at schlueterfinancial.com with more contact information.      

Check Your SBA Questions and Responses with the SBA SOP

Article by Roger Schlueter

The SBA Rules and Regulations are voluminous and complicated. The SBA SOP (Standard Operating Procedure) is 401 Pages and is only about the Application and Eligibility and does not include Servicing and Liquidation. The SOP is also updated at least once each year which makes knowledge of the SOP very hard to keep up with. I print the SOP out in it’s entirety every time it is updated so I will have all the current information. I find it is easier to look and flip through a binder than look at a small computer screen. 
I have found even people with knowledge of the SBA sometimes become mistaken when certain issues come up, that need some sort of ruling in order to proceed with the project. Even if the SBA states an issue that needs to be complied with or an issue that needs to be addressed, you need to check out the validity of the issue before you change or drop your plans. Most SBA employees are very knowledgeable but sometimes you find that the answer is wrong or not addressing your situation. I have even received three different answers to a question from three different SBA employees.
I will usually look my question up in the SBA SOP and then Email the office in Sacramento California because that is where they do the Processing for this area. I will also call the St. Louis office because I know several of the workers at that office. Emailing is hard because you cannot ask a followup question. I will then see if I get some correlation of the answers and hopefully be satisfied with the answers and proceed with my loan.  
I recently had the SBA stop Processing a SBA 7a Loan because they said my refinance of a loan needed an additional benefit to the borrower and quoted the SOP Pages that were used in the determination. My loan was a Line of Credit and as such did not need to show a benefit to the borrower. I really had to stop short and not respond badly when telling my banker what to say in response. 
The SOP can be found on line at www.sba.gov then you want to type in the search bar at the top of page – SOP and click SEARCH. Click on Standard Operating Procedures (SOPs) and Guides | sba.gov – Then Click on VIEW LENDERS SOPS – Then click on the SOP # which is 50 10 5(E) – this is the latest SOP. Pick the Clean or the SOP with the Track Changes. I would pick the clean. 
There You Go !!!!
The SOP’s Index is just that, an index. The index is hard to use because it is not broken into enough subsections, but it is usable. It is broken into three sections, A, B, and C. The A section is for Lender Issues, the B section is for the SBA 7a / Guarantee Program and the C section is for the SBA 504 Program. When banks ask the SBA for Assistance the SBA personnel always ask if they have looked it up in the SOP. This is the SBA’s Bible of sorts and is usually the final say on any lending issue.
Please address any questions or comments to the Blog at roger@rogerschlueter or for additional contact info go to my website at schlueterfinancial.com  

Handling Multiple Companies in a Financial Analysis

Article by Roger Schlueter, MBA

Companies looking for Financing have many problems that they need to overcome. Some of these problems are common and some problems need a little creating problem solving to overcome them. Most good financial people and banks will always start the analysis of a financial need with a Financial Analysis of the companies financial statements. 
The financial analysis is always started with a Spread of the companies financial statements. This is pure grunt work and is usually accomplished in a few minutes or hours depending on the complexity of the financial statements, the number of years analyzed and any changes made to the format of the financials themselves. This is mind numbing enough if the analysis is one company and three years financial statements. Sometimes the analysis is five years and then the individual or company has other companies which are related or connected in some way. Then the analysis can be a combination of Watching the Grass Grow or the Paint Dry and the most boring three hour lecture that you ever had in college. 
The way I start the spread of a company that will take many hours of pure grunt work is to buy a six pack of tallboys and a bag of  Snyders Sourdough Nibblers and Hunker Down for a long protracted engagement. 
The whole idea of the Spread Sheet of the financial statements is to do three things:
1) Spot Trends in Sales, Earnings, or Expenses
2) Check Ratios – Cash Ratios, Debt Ratios, and Expenditure Ratios
3) Analyze Cash Flow and end up with a Coverage Ratio for your debt
I will always spread each company on its own for three to five years. The spreadsheet is a good tool to create the sales and expense projections that will also be needed. The projections and cash flow statements need to be done for each company before putting them together to create the End Result of the combined entity that will pay the debt service of your loan from the bank. 
When you have several companies owned by the same person or entity, they may all be run out of the same physical location and managed by the same people. Decisions are probably made by the same people and when getting a loan for Assets that can benefit several companies, it is wise to put the spreadsheets together for that purpose. This is because, on their own they probably do not have the wherewithal to buy the building or equipment, but together they have ample cash flow and capacity to make the deal happen.
Lets start with an Example:
I’m working with a individual that has a total of four companies. Two of the companies are slow growth companies and had problems during the 2008-2010 Recession. they may still may make money but it would be unwise to put all your assets into an entity that may become obsolete or could go out of business in a few years. One of the companies has had exceptional growth and profits over the last three years. They owners have also started a forth company that is related to the high growth company but was only recently created and has only three months of operating financials. 
The owners want to buy a building that would house all four companies but the main reason for the new location is so the High Growth Company and the Newly Created Company can operate more efficiently and grow to their true potential. 
The spreadsheet is done on all four companies, really three with the newly created company not having any years to spread. Giving all four spreads to the banker caused problems because he may not understand the situation the way you want him to understand it. We decided to combine the High Growth company and the Newly Created company to show the new direction of the Owners. The Slow Growth companies were also combined to show a slower entity that still created cash flow but was not the focus of the New Direction the Owners wanted to go. 
The two spreadsheets were both given to the banker and it showed the new direction with Growing Sales and Earnings and the Slow Growth entities that still had earnings. If we had combined all four spreads it would show an entity that was deteriorated and weakened by the Slower Growth Entities. Our Cash Flow was done with the High Growth and the Slow growth but also combined to show the Cash Flow available to pay debt service by all entities. 
The bank has a spread and cash flow that shows the true potential of the High Growth company but also has a spread and a combined Cash Flow that shows the value added by the Slow Growth companies to the Cash Flow. The End Result of the combined Statement is enough Cash Flow to cover the Debt Service and a Coverage Ratio which impressed the banker. The banker could now see the direction of the company and the true Cash Flow Available to Pay Debt Service and was not bogged down or diluted by the Slow Growth companies.
Please address any questions to the Blog or email me at roger@rogerschlueter.com  You can also get more contact info at my Website at www.schlueterfinancial.com        

The Spreadsheet of Financial Statements

Article by Roger Schlueter

I have talked about Spreadsheets many times in this Blog but have not explained what they are or how to use them. All bankers will fill out a spreadsheet on your financials if you are applying for a business loan. All financial Analysts will also start with a spread for the analysis of your financial statements and sometimes for the projections.
A Spreadsheet, or Spread for short, is an Excel (you can use any other software for spreadsheets) Spreadsheet. The spreadsheet term is a generic term meaning a sort of accounting form that you can format with numbers and calculations. Our Spreadsheet or Spread, is a Form that will show the financial statements of a company or division etc., next to one another in sequential order by year, quarter, or month. It will show Trends in the  upward or downward movement of the Company’s Sales, Costs, and Expenses. The Spread will also have the ratios that are most important listed by year. Good Spreads will also show percentages of most the expense and profit numbers as they relate to Sales. Most analyst or bankers will perform all the calculations whether the spread calculates the numbers for them or not. My spread did not have the percentages for Sales, Costs or Expenses and I would calculate these by hand and write them on a printed spread. This is not a class in financial analysis so you will have to look up some of the spreadsheet terms and calculations yourself but most will be self explanatory. 

Spreadsheet Analysis
       Company Name:
Address  :
# of Months 12 12 12
Date 
(Mo./Day/Yr.)		 9/30/2012 12/31/2011 12/31/2010
BALANCE SHEET
Cash and Marketable Securities $0 $0 $0
Receivables $0 $0 $0
Inventory $0 $0 $0
Notes Receivables $0 $0 $0
Prepaid Expenses $0 $0 $0
Loans to Shareholders $0 $0 $0
Other Investments $0 $0 $0
$0 $0 $0
CURRENT ASSETS $0 $0 $0
Net Fixed Assets $0 $0 $0
Intangibles $0 $0
Land $0 $0 $0
Leasehold Improvements $0 $0 $0
Accumulated Depr. $0 $0 $0
Other Assets  $0 $0 $0
TOTAL ASSETS $0 $0 $0
Short Term N/P – Bank $0 $0 $0
Notes payable – Other $0 $0 $0
Accounts Payable $0 $0 $0
Accruals $0 $0 $0
Taxes (Income) $0 $0 $0
Current Portion LTD $0 $0 $0
Accounts Payable Misc $0 $0 $0
Cash Overdraft $0 $0 $0
$0 $0 $0
$0 $0 $0
CURRENT LIABILITIES $0 $0 $0
Long Term Debt $0 $0 $0
Subordinated Officer Debt $0 $0 $0
$0 $0 $0
TOTAL LIABILITES $0 $0 $0
Common Stock $0 $0 $0
Capital Surplus $0 $0 $0
Retained Earnings $0 $0 $0
(Less) Treasury Stock $0 $0 $0
TOTAL NET WORTH $0 $0 $0
TOTAL LIABILITES & NW $0 $0 $0
PROFIT AND LOSS STATEMENT
# OF MONTHS 12 12 12
YEAR ENDING 9/30/2012 12/31/2011 12/31/2010
_________ _________ _________ _________ _________ _________
SALES $0 $0 $0
– COGS $0 $0 $0
= GROSS PROFIT $0 $0 $0
– SGAE $0 $0 $0
= OPERATING PROFIT $0 $0 $0
-Officers Salary $0 $0 $0
-Depr. Expense $0 $0 $0
-Interest Expense $0 $0 $0
-Rent $0 $0 $0
+ Other Income $0 $0 $0
=Earning Before Tax – EBT $0 $0 $0
– Income Tax 0 $0 $0
=Profit After Tax – PAT $0 $0 $0
OPERATING CYCLE
+ Days Receivable #DIV/0! #DIV/0! #DIV/0!
+Days Inventory #DIV/0! #DIV/0! #DIV/0!
– Days Account Payable #DIV/0! #DIV/0! #DIV/0!
– Days Accruals #DIV/0! #DIV/0! #DIV/0!
= Operating Cycle #DIV/0! #DIV/0! #DIV/0!
RATIOS
Percent of Sales Growth #DIV/0! #DIV/0! #DIV/0!
Profit as % of Sales (anualized) #DIV/0! #DIV/0! #DIV/0!
Debt to Equity Ratio #DIV/0! #DIV/0! #DIV/0!
Working Capital 0 0 0
Current Ratio #DIV/0! #DIV/0! #DIV/0!
Quick Ratio #DIV/0! #DIV/0! #DIV/0!
RECONCILIATION OF NW
Ending Net Worth $0 $0 $0
– Profit After Tax – PAT $0 $0 $0
– Beginning Net Worth $0 $0 $0
= New Equity $0 $0 $0
CAPITAL EXPENDITURES
Ending Net Fixed Assets $0 $0 $0
+ Depreciation $0 $0 $0
– Beginning Net Fixed Assets $0 $0 $0
= Capital Expenditures $0 $0 $0
 
   
 

SBA Methods of Valuing a Business

Article by Roger Schlueter, MBA

These Business Valuation Methods were sent to me by the SBA (Small Business Administration), and supposably will be accepted by SBA in their evaluation of financing for a Business Buyout. I also ran into the exact same document on the internet at www.collin.edu/sbdc/docs/Business-Valuation-Methods.pdf  , I think it is a SBDC Document but it is quoted from a book. There are many ways to measure the value of a business, and these are but a few of the methods. As for as I can tell, these are accepted by SBA for the evaluation of financing, for a business buyout.  
“BUSINESS VALUATION METHODS
(All Valuations MUST BE based on Historical Data)
I. Adjusted Book Value
Take the Book Value of net worth
-assets not acquired
+liabilities not assumed
+fair market value of assets acquired
+any net worth adjustments
=Adjusted Book Value
____________________________________________________________
II. Capitalized Adjusted Earnings

First Step: Adjust Historical Earnings
Seller’s Discretionary Last 
Cash Flow Year
Net Profit   50.0
+Officer’s salary +70.0
+Discretionary expenses +30.0
-New Owner salary -60.0
Adjusted Profit  90.0
Second Step: Get the adjusted profits for 5 years then do a Weighted Average of the
Adjusting Earnings
Year Earnings Weight Adjusted
95 $ 50 1 $ 50
96 $ 30 2 $ 60
97 $ 70 3 $ 210
98 $ 60 4 $ 240
99 $ 90 5 $ 450
Totals 15 $1,010
/15
Average $ 67 (rounded)
Third Step: Calculate a Discount Rate
Determine T-Bill Rate   5.0%
Determine Offset Risk Rate 12.0%
√ Establish rate of return based on risk
factors
√ Establish rate of return based on general
economy
Determine Offset Illiquidity Rate   3.0%
Total the Rates 20.0%
Fourth Step: Take the weighted average of the adjusted earnings and divide by the
discount rate.
Example:
$67/.20 = $335
___________________________________________________________________
III. Discounted Future Earnings

First Step: Adjust Historical Earnings
  Last
 Year
Net Profit   50.0
+Officer’s salary +70.0
+Discretionary expenses +30.0
-New Owner salary -60.0
Adjusted Profit  90.0
Second Step: Get the adjusted profits for 5 years then do a Weighted Average of the
Adjusting Earnings
Year Earnings Weight Adjusted
95 $ 50 1 $ 50
96 $ 30 2 $ 60
97 $ 70 3 $ 210
98 $ 60 4 $ 240
99 $ 90 5 $ 450
Totals 15 $1,010
/15
Average $ 67 (rounded)
Third Step: Determine the discount rate
Determine T-Bill Rate   7.0%
Determine Offset Risk Rate 12.0%
√ Establish rate of return based on

< div>risk factors

√ Establish rate of return based on
general economy
Determine Offset Illiquidity Rate   6.0%
Total the Rates 25.0%
Fourth Step: Estimate growth, both real and inflationary (for this example, we are estimating a 5%
growth rate).
Fifth Step: Multiply the estimated earnings for each year by the estimated growth rate until estimated earnings for the next ten years are determined.
Sixth Step: Multiply the adjusted, weighted earnings by the estimated growth (1 plus the growth rate) to determine the estimated earnings for the first year.
Seventh Step: Using the net present value table, multiply the estimated earnings for each year by the factor for the discount rate for each respective year to determine the discounted value of future earnings.
Eighth Step: Total the discounted earnings.
Ninth Step: Determine the residual value by subtracting the growth rate from the discount rate and
dividing the difference into the discounted earnings for year ten.
Tenth Step: Add the residual value to the total discounted earnings.
Year Previous Growth Adjusted Factor Net Present
Year (1+5%) Earnings (25%) Value
Earnings
1 67.0 1.05 70.4 0.80000 56.3
2 70.4 1.05 73.9 0.64000 47.3
3 73.9 1.05 77.6 0.51200 39.7
4 77.6 1.05 81.5 0.40960 33.4
5 81.5 1.05 85.6 0.32768 28.0
6 85.6 1.05 89.9 0.26214 23.6
7 89.9 1.05 94.4 0.20972 19.8
8 94.4 1.05 99.1 0.16777 16.6
9 99.1 1.05 104.1 0.13422 14.0
10 104.1 1.05 109.3 0.10737 11.7
Net Total 290.4
Residual   58.5
Total 348.9

________________________________________________________________

IV. Cash Flow Method

First Step: Identify Available cash for debt service via rule of thumb, sources/uses, or any other
acceptable method.
Last
Year
Net Profit 10.0
+ Depreciation   5.0
Adjusted Profit 15.0
Second Step: Choose a reasonable maturity and market interest rate for the financing requested.
Years
Fixed Asset Purchases 10
Working Capital     7
17 / 2 = 8.5
Average Maturity 8.5
Interest Rate 12%
Third Step: Reverse-compute the amount of total funds that the cash flow can support given the
maturity and interest rate chosen (using an amortization table or calculator).
Cash flow of $15,000 annually at 12% for 8.5 years is an an
nual debt service for the total amount of $79,696.69 (computed on a monthly payment basis) or $77,295.78 (computed on an annual payment basis).

Cash flow valuation establishes a range of $77,000 to $80,000.

________________________________________________________________________
V. Gross Revenue Multiplier
Please use the attached table (Top 30 Business by SIC Code) and the following:
• SDC or SDCF = Seller’s discretionary cash flow [same as Method II, step 1]
• EBIT = Earning before Interest and Taxes
• EBITDA = Earning before Interest, Taxes, Depreciation and Amortization
Example:
Last Year’s Sales * Multiplier
Top 30 Type of Business by SIC Code
(Counted from 10/98 to 8/02)
Rank   # of SIC    Description Rule of Thumb1 or Multiplier
   Loans Code
1   1900 5812   Eating and Drinking Places 2X SDCF or 25 – 35% of annual sales
2     405 7231   Beauty Shops 1.5X SDCF or 4X mthly sales + inventory
3   337 7538   General Auto Repair Shops 35% of annual sales, 1.5X SDCF
4   325 5411   Grocery Stores 1 – 2X mthly sales or 11% of sales
5   260 8041   Off / Clinics of Chiropractors 20 – 70% of annual fees + FF & E
6   235 5999   Miscellaneous Retail Stores 25 – 50% annual sales + inventory
7   231 7389   Business Services 63% of annual sales
8   228 8351   Child Day Care Services 2X SDCF or $1500 – $3000/enrolled child
9   175 8011   Off / Clinics of Doc of Med   20 – 40% of annual fees or 1X SDC
10   165 7299   Misc Personal Services 70 –75% annual sales
11   165 5813   Drinking Places (Alcoholic) 40 – 45% annual sales + inventory
12   163 5947   Gift, Novelty, & Souv Shop 4X mthly sales + inventory or 1.5X SDCF
13   142 7991   Physical Fitness Facilities 1 year’s annual revenues
14   129 4212   Local Trucking W/O Storage 5X EBIT
15   127 7379   Computer Related Services 57% of annual revenue
16   124 5531   Auto & Home Supply Stores 35% of annual sales + inventory, FF & E
17   120 5461   Retail Bakeries 4X mthly sales + inventory, FF & E
18   117 0781   Landscape Couns & Planning 1 – 1.5X SDCF + FF & E
19   113 6411   Ins Agents, Brokers, & Ser 100% annual commissions
20   112 7999   Amus & Recreation Services 45-50% of annual sales
21   112 5992   Florists 34% of annual sales + inventory
22   108 1751   Carpentry Work 4 – 5X EBIT
23   105 5541   Gasoline Service Stations 3X EBITDA – business only
24   105 7349   Build Cleaning & Maint Serv   50% of annual revenue or 1.5X SDCF
25   105 8021   Offices & Clinics of Dentists 1 – 1.5X SDCF + FF & E, 50-70% Rev
26   105 4213   Trucking, Except Local 1 – 1.5X SDCF + FMV of fixed assets
27   103 5941   Sport Goods & Bicy Shops 4X mthly sales + inventory
28   99 7215   Coin-Oper Laun & Dry/clean 70 – 100% annual sales or 2.3 – 2.5X SDCF
29   94 7532   Auto Body & Uphols Rep  35% of annual sales or 1.75X SDCF
30   94 5399   Misc General Merch Stores 15 – 25% of annual sales + inventory
31   92 1799   Special Trade Contractors 45 – 55% annual sales
32   90 1711   Plumb, Heating, & Air-Cond 24% of annual revenues or 1.5X SDCF
33  88 5499   Miscellaneous Food Stores 4 – 5X SDCF
34   88 2752   Com Printing, Lithographic 50% of annual sales and inventory, FF & E
1 – 1.5X SDC
1 Source: The Business Reference Guide 2002 tenth edition, by Tom West, 2002.”
Summary – Like I said earlier, there are hundreds of ways to value a business and usually it is what the seller says he or she will sell it for. In that case you need to find a way to show the business is worth the amount you are paying or renegotiate, to lower the price of the business. 
Please address any questions or comment thru the Blog or email me at roger@rogerschlueter.com  or you can also find more contact info at my Website at www.schlueterfinancial.com