With apologies to Charles Dickens, the Ghost of Project Past appeared to me recently and helped me solve a very real situation in the present: A client had just turned to me for help in structuring financing for a new customer. I faced this situation many years ago so I was able to provide advice. Here’s what happened:

Project Past. My client’s customer wanted to buy one convenience store from a seller who owned several similar stores. The income and expenses of each store were all reported on one income tax return. The seller could break out the revenue for each store, but it was impossible to break out certain administrative costs that each store shared. Even more challenging, the seller hadn’t yet closed his books for the prior year. Finally, the seller had bought and sold stores in other locations within the last 12 months.

The buyer wasn’t much help. She had managed one of the stores, but not the project location. So I had no historic statements to rely on.

My Frustration: And a Visit to the CCO. Like Bob Cratchit of legend, I picked up my head from my work and left my lonely cubicle. I walked down the long mahogany-paneled hallway to the resplendent office of the Chief Credit Officer.

The CCO was at his desk, sitting in his overstuffed leather executive chair. His gray suit matched the color of his hair. I told him my dilemma. He leaned back in his chair and asked “Are you trying to demonstrate repayment ability? Or are you trying to meet SBA size standards?”

While I reflected, he continued:

CCO: I presume you have projections in Exhibit 8 of your application, and I presume projections demonstrate repayment ability. The financials of the departing business won’t help show ability to repay because that business is departing. New management will manage Operating Expenses. The ability to repay depends on how well new management can control those expenses so as to result in positive cash flow.

ME: I knew the CCO was big on demonstrating management ability by how well they controlled operating expenses. I had to comment on management ability in each of my write-ups, and he had trained me to analyze control of operating expenses. He was right. No one was going to make a credit decision based on the departing management’s control of expenses.

“So, I don’t need historic statements?” I asked hopefully.

CCO: Yes of course you do. You need them to discuss gross revenue trends. If the projections are for $2 million in revenue you want to make sure that historic statements don’t show $1 million. And if they do, you must question the projected increase. You aren’t determining ability to repay based on historic statements. But you are determining whether projected revenue is reasonable.

Sure, it is best to verify projected revenue using historic tax returns. But you cannot use what you don’t have. Find some alternative sources. Get the business’s books of account, financial statements, or information contained in an affidavit by somebody with personal knowledge of the facts. The buyer must be relying on some sort of financials to show the business is profitable. Find out what the buyer relied on. She’s not taking a flyer on a wild goose, you know!

And by the way, you can kill two birds with one stone. You can use the same information to verify size standards. Take a look at 13 CFR 121.104. SBA allows you to rely on other information for size standards.

A Toast: To Your Financing Solutions, Every One!

Richard Jeffrey
Senior Associate, CDC, 504 Programs