“Understanding the Underwriting Process for a Loan” Transcript

The following is the transcript for the recently recorded webinar, “Are You Worth the Risk? Understanding the Underwriting Process for a Loan.” It has been edited for clarity. You can view the webinar here.

Kirsten Petras:

Hello everyone and thank you for joining us today for “Are You Worth The Risk? Understanding the Underwriting Process for a Loan”, understanding that, and this is the second in our OnPoint series. I’m Kirsten Petras and I have the pleasure of leading our sales team as they work with borrowers like yourself to strategically use debt to grow their business. And today I am delighted to moderate a conversation with our Executive Director of Underwriting, Kirsten Petras, Executive Sales Director at Barry Kehl and ask yourself, are you worth the risk by the end of the next 30 minutes.

As a courtesy to the other attendees, your phone lines have been muted, but we welcome and encourage questions and as a matter of fact, we have received many more questions than we expected and anticipate that several of those may get answered as Barry reviews some key points today. But we do also want to take time to answer specific questions, as well as encourage you to use the Q&A feature and interface so that we can answer questions as they come up while you’re learning more.

So for the optimal view of the panelists and the information, if you look at the top right corner of your screen, you should be able to click and select the side-by-side layout. This meeting is being recorded and within the next couple of business days, you will receive a follow-up email with a link to today’s webinar recording and our contact information if you’d like to continue the conversation.

Thank you again for joining us. Welcome to part two in our OnPoint series and as you see here on the next slide, it is part of some ongoing information that we’re going to be sharing with you so that you understand all the nuances and intricacies of what it takes to actually get deals done in this current environment.

So today Barry Kehl is joining us. He’s our Executive Director of Underwriting. Barry and I both joined Oak Street about nine years ago and under Barry’s leadership and expertise in assessing the unique risks of businesses, such as MGAs, CPAs, and RIAs, our teams have grown our portfolio to nearly $1.2 billion.

And Barry, who you can see here on the slide was not only educated at IU, he is also a huge IU fan. We’re getting ready to experience March Madness here in Indianapolis, Indiana, but Barry’s also built a team of underwriters who seem to all come out of Purdue University. So while that’s a little Indiana humor, and we are funny to ourselves here in the Midwest, we do lend nationwide and as many of you have been hunkered down so have we, and this has led Barry’s team to incorporate virtual diligence and take innovative measures to continue to assess the risks that are unique to these businesses, and continue to do business during the pandemic.

Barry, welcome to the OnPoint series, thank you for being here with us today to share insights into the underwriting process. Is there anything you’d like to add about your own background or about your team that I didn’t touch on? And maybe you’re on mute – so there we go, those of you playing webinar BINGO, you’ve got the “you’re on mute” square.

Barry Kehl:

All right, thank you. Thanks Kirsten. No, it’s great to be with everyone today. I look forward to the discussion going through Oak Street’s, you know underwriting process and really how we evaluate credit risk. So, you know, I’ve got a great team of underwriters. I’m hopeful some of you might’ve actually been through the process and experienced that. But if not, we look forward to that potential opportunity in the future.

In terms of my background, no, I don’t want to spend really any time on that other than to say I’ve done this for a long time and I’m more than anything hopeful that I can bring one or two things of value to you today, as you may think about how to use debt as part of your ongoing business strategy. So with that, I’d say let’s go ahead and get started because I know we’ve got a lot to get through.

Kirsten Petras:

Well, here, what we’re showing all of you that are watching today is just kind of an overview of the overall funding process, right? You’ve got to make the application, that’s got to get reviewed. And for those of you familiar with the Oak Street process, we’re trying to put out a term sheet and agree to some terms before we start the underwriting process. The underwriting process sits right there in the middle. It’s almost like it’s the spine of everything that’s happening for funding alone and putting responsible debt out there on your balance sheet.

So, you know, with that, Barry, why don’t we just jump in right here? Underwriting use gets highlighted, talk about how the teams work together to put out a good product, to put out a good loan, that has the ability to be successfully repaid over time.

Barry Kehl:

Absolutely, you know, we’ll hit on some of the more credit risk related items later, and this is really process oriented and one of the things that we try to do at Oak Street that may be a little different than some of the other lending shops, is we have a process, we call our flagpole process and it would be pretty similar, I think, across some other financial institutions of how they utilize meetings of the management group on the front end.

So even before a borrower goes into the full underwriting, no matter how small or large the loan is, we bring a meeting together where the management team evaluates upfront information, and that includes the financials. This is where the sales and the underwriting teams work together really on that front end piece. And we set a scheduled meeting once a week to go through the different lines of business and the deals. And the goal of this really is to become as familiar and evaluate as much as we can on the front end with the borrower so that we can provide the best type of structure, we can evaluate the terms that make sense based on the risk that we’re dealing with, and in the hopes of it really is so that there’s not a lot of change along the process.

I know from a customer’s perspective we want to be consistent. We want it to be smooth. Now that doesn’t always happen, sometimes there’s things that we find along the underwriting process, where there will be changes, but the goal of this is really to make it as smooth as possible, so that it’s consistent through the underwriting process. And so that’s really part one of the underwriting/sales, I would call it a combined function to move it towards a term sheet and once that is done, a term sheet gets signed, we agree to those upfront terms, a deposit is made, and then that really kicks off the underwriting process.

Kirsten Petras:

Well, in looking at this here, there are seven stages that are being featured, and we did get many questions about overall turnaround time. So on average, how long does the underwriting process take?

Barry Kehl:

I would say that in general deals typically will get done in 30 to 60 days. There’s variations within that time frame you know, if there’s negotiations of a buyer-seller transaction that reoccur and such that they can potentially extend that, but 30 to 60 days would be the normal timeframe. And in terms of the underwriting section, I would say half so if we’re talking 15 to 30 days would be the normal timeframe that it’s within the underwriting function.

Kirsten Petras:

Now, some of this you’re doing here with your team, obviously most of this, but sometimes maybe we have to use outside organizations or vendors for valuations. We did receive several questions about valuations. When exactly is it that your team needs to engage an outside valuation company to have one completed and still be able to meet this time frame?

Barry Kehl:

Okay, by policy, we have a requirement of $3 million – so that’s $3 million of relationship exposure. That may be one loan that you would come and make an acquisition of size where you would need a loan of that size, so anything above 3 million, or it can be a combination if you’ve made a growing number of acquisitions over time, maybe smaller ones. Once you move up to kind of that $3 million and plus range of debt with us is when we would require a third-party valuation.

Kirsten Petras:

And I know my own experience with my team has been that that’s something we’re making a decision on really at that review stage, that flagpole stage. So we know that that’s part of the scope of underwriting when the client is kicking off that part of the process. So I suppose that’s how we know how it may or may not affect the overall turnaround time of getting from underwriting to decision, to closing and funding, which is ultimately what we’re all trying to accomplish.

One specific question though on the topic of valuations came in and it said, I’m just going to read these questions in their purest form: “How is the valuation of the book determined relative to purchase price and how does that affect the deal?”

Barry Kehl:

Yeah, it can impact it significantly. The valuation, the business valuations typically have a standard methodology about how they do it. And in these lines of business you know, with insurance loans, investment advisor loans, the CPAs, you’re going to see cash flow being the primary driver of valuations.

And I don’t think that’s probably a surprise to anyone. You know, we’ve seen multiples in these various industries, I would say for the most part, all of them climb, maybe on the CPA side are a little more stable, but we’ve seen some increasing multiples over the last several years in the insurance and the investment advisor space.

And, you know, it plays a big part in how we evaluate the deal structure. Evaluation may come in quite a bit lower than what the client is willing to make the purchase for. And that’s something that we have to build into our loan structures.

If you consider a book of business valuable enough to pay more than what a third party would say, what that might mean is we’re going to need additional cash equity in the deal, or perhaps a seller note needs to be increased to make the alignment correct there and you know, purposely put the risk across the grouping of people within the transaction – so certainly that is a big part of it. And it’s a lot of what we do. I mean, the business acquisition loans are something that I think we have a specialty in, and it’s really a need within those industries. So it certainly plays a big part towards those structuring.

Kirsten Petras:

Well, I know we’re about to get in a little bit more detail specifically what people are aware of known as the five C’s of credit, but before we get there, one last question that I know came in and that we’re asked often is, what are the main reasons – what are maybe the top two reasons a loan would actually not make it through underwriting or not get approved in the end?

Barry Kehl:

I think number one is it goes back to cash flow. You’re going to hear that a lot. It has to work from that perspective. And once we get into the underwriting process is really when the underwriter is able to dig into the financials in great detail and look and make sure the loan will work for the borrower. What we don’t want to do is make the mistake of putting a borrower in a bad position, over leverage them, and be in a position where they can’t be successful. So that being probably one.

Two, it varies. We may find something litigation wise, there might be something come up like a tax issue liability, a lot of times it may be a negotiation of subordinated debt on seller docs that sometimes get in the way of ultimately making it all the way through the transaction. So, more technical stuff would be examples of other things that kind of come up during that process, but predominately it’s cash flow is the trigger that kind of stops the engine there.

Kirsten Petras:

Thank you. We’re going to go ahead and get a little deeper here having you explain the five C’s of credit, which you hear a lot about when you work in lending. As you explain these, one of the questions that somebody actually asks, they must maybe even work here at Oak Street, is how exactly do the five C’s of credit help guide your risk assessment?

Barry Kehl:

Yeah, it’s really a good, simple way to look at it. It’s been in the credit industry for a long time, the five C’s of credit. I’m sure most of you have heard of it. It’s definitely within every bank vernacular that you might’ve come across. And it’s a good way to think of it from top to bottom. And there’s really the first two I’m going to hit on, I’m going to call 1A and 1B, because particularly in our industries that you’re in it’s relationship-based business models, you’re providing a product, but you’re building a relationship. And so unlike a lot of industries that might be manufacturing, where hard assets are part of the collateral package that really doesn’t exist in our industries that we’re talking about here, you’re building relationships and you’re building enterprise value.

And so really we’d mimic that in that. Number one, let’s go to 1A, well, we just call it Character, the first C. It’s important that we do business with individuals that are identified as high credit. And I’m sure you do the same as you build your book of business. And, you know, some of the ways that we do that to double check on things, we do background checks, we obviously run credit, get credit scores, both on individuals and the business, we evaluate the tax situation. I mentioned that earlier, just to make sure that there’s not ongoing tax filings that have not occurred tax liens and liabilities that, we would want to be aware of because the one thing good they can do is they carry a pretty big stick and they can kind of knock us out of the way in terms of our collateral position, if they want to. So that’s why that piece is important to us.

And then, you know, things like how long you’ve been in business, I like to say history is the best predictor of the future, and while that’s not always true in general, it is. And so, you know, knowing how long you’ve been a business owner or how long you’ve been in the industry and your ability to show a track record through time is obviously something that’s quite important with that piece.

As we switched to 1B cash flow – you know, cash is king. I know everybody’s heard that, and it’s really the lifeblood of your business, right? It’s how do I generate sufficient cash flow to make my payroll, cover my rent, pay my mortgage, cover my operating expenses, and pay my debt service? And then on top of that, pay myself in order that I can cover my own personal living expenses and lifestyle. So, you know, cash flow is primary and it’s something that obviously goes into a lot of our analysis and we do evaluate it really on a global basis. The businesses that you’re in don’t require a ton of capital on the balance sheet. And so in general, that gets distributed out to the owners of the business and we want to make sure that there’s enough cash flow to support the business debt service and the personal. So that’s a big piece of it and building in enough cushion to weather the storm, because while we would love to see businesses do this, and we project this a lot of times, the reality is that that’s not how business operates. It tends to go up and down and it’s those times of having that extra cushion that gives the opportunity to work through those times and be successful.

Kirsten Petras:

Well, we had several questions about cash flow. So I wonder if this is a good time to just kind of touch on a few of them. You know, specifically one question is “what documents are you looking to review to do your cash flow calculation?”

Barry Kehl:

It’s centered in the financial statements of the business. A lot of you might do CPA prepared financials. Some of you may just do internal and then have tax returns. So some combination of your annual and quarterly financial statements and/or tax returns will be a huge part of that piece. And then also we, again, since we look at things from a global perspective, personal tax returns and your personal financial statements are critical in that as well. So it’s really those along with your Credit Bureau reports and some validation efforts we have there to make sure that we capture everything would be the central points for that.

Kirsten Petras:

Well, and then another question that’s being asked is that “when getting a business acquisition loan, are you also looking at – are you just looking/or also looking at the seller’s information?”

Barry Kehl:

We would definitely also be including the seller’s information. So you know, I think it’s two things: one, we want to make sure that we get a good feeling of what the future holds, we might call it a proforma. You’ve heard that term before – we want an accurate proforma of what the business will look like, and that’s going to take a combination of your existing financials and look at the seller’s financials so that we can do a combined review of that.

And as we structure deals with that kind of information, I’m hopeful that it would give you as the borrower, confidence that I’m making the right decision. Because if we come back with, this seems to be a situation from a cash flow perspective or leverage perspective, that’s not gonna work. While we may be a little conservative at times, I think in general, that’s for the best interest and so those two pieces are critical in that juncture.

Kirsten Petras:

Well, I think what we also see is that we have businesses that operate at a certain level and they’re buying a business that operates at another level. Collectively, they become bigger and so we can take into account their historical performance, the historical performance of the target, and that might allow us to lend maybe a little differently than some traditional banks might given the understanding that we have of how these businesses operate and how these revenues perform.

Barry Kehl:

That’s a great point because – just one point on that Kirsten, because you make a great example there, and this might be helpful. You may be an operator that runs at very strong profit margins meaning you’re very efficient, you manage your expenses very well, and you may be buying someone who historically has’nt. And by seeing how those two entities combine, the thought would be you’ve proven an ability to do this. And so as you build out a proforma, that might mean an improved margin for the seller’s business as well that we can take that into consideration. So some of those are the minute details of things that we look for in the differences and the similarities between the two.

Kirsten Petras:

So as we kind of transition into this next C of capital, we’re often asked about whether people have to have down payments on their acquisitions, or, whether they’re making their own injections of equity. So why don’t we go ahead and hop into how you guys see a business having capital on their balance sheet?

Barry Kehl:

Yeah number three is capital. Balance sheet strength is a lot of what we’re talking about here. And I mentioned earlier, it’s not normal that you would necessarily see insurance agencies and investment advisors, and CPAs to have huge balance sheets, but nevertheless, it’s important to have a strong balance sheet. And that can take the form with cash being on the business balance sheet, or it may be, you know, partly a result of the cash being distributed to the individuals and they’re carrying substantial personal liquidity.

That’s capital – that’s ability to use equity, skin in the game, whatever you want to call it, to participate in the risk of a transaction. And that’s what’s really important to us.

We’re looking for an alignment that we know we’re going to take risk as lending money. We want a borrower who’s confident and stands behind their business and is willing to also put in some of that. And most of the times, if we’re talking specifically about acquisitions, we want to see the seller to participate in the risk as well in the form of a subordinated seller note.

So it really creates that alignment so that the likelihood of success really, I think, maximizes that kind of opportunity. And so, you know, that’s key number one. Number two, it’s weathering the storm. We talked about that a little bit earlier is you’re going to see these cycles in the business and the way that you weather the storm is to have a balance sheet capable of doing it, because if anything impacts cash flow, and we’ll talk about COVID here in a minute as an example of a condition, that can impact it without even giving it any kind of future thought, and so the balance sheet provides that ability to weather and that’s why it’s, you know, in this case, it’s number three, but certainly an important component of the credit risk function.

Kirsten Petras:

Well, when you just mentioned again, the connection of that capital to the capability of cash flowing, and we’ve had a question come in that says, “when you take out a personal loan for cash flow, they do what’s called a debt to income ratio and personally it’s usually a 45% measurement for that debt to income ratio. What percentage or ballpark percentage would you look to for that cash flow ratio for a business acquisition loan?”

Barry Kehl:

Yeah, good point. It’s a little bit of an inverse ratio on the business side. So rather than debt to income, what we really more traditionally measure is called debt service coverage. And so what we’re doing there is we’re kind of flipping the numbers. What’s the total EBITDA or cash flow that the company generates, and then we divide that by the debt service requirements.

So we’ll take all of the principal and interest payments that are due within all of your total business debt structure and include that in that denominator. And what we generally like to see is something on a pre-distribution basis, north of 1.5 times that. A lot of times on the larger loans that we do we’ll set financial covenants, and one of the covenants is a post-distribution, meaning this is the cash flow that you keep in the business, you may have made some post year distributions to yourself, but, you know, netting those out, we want to see a 1.25 or better is generally a benchmark that we’re looking at.

Kirsten Petras:

Appreciate it for answering that right there in the middle of all this. We kind of hop now around and get right to that collateral piece. You know, somebody is asking about valuations again. And the question is, “what weighting do you assigned to soft, or the drivers of the enterprise value, such as team harmony, cohesion, talent retention, relationships, et cetera, or do we only follow kind of a mathematical model of EBITDA multiples or revenue multiples?”

Barry Kehl:

It’s heavily, from evaluation perspective if we stick to that, it’s heavily weighted to the actual true cash flow number. That’s really the driver for the valuation.

Now, what I would tell you though, is and we get the opportunity and this more so in the pre-COVID days than what we’ve been able to do post-COVID, because it’s harder obviously to be face-to-face, but with some of the larger transactions, we really want to have face-to-face conversations with you as the key operators of the business and inside of our due diligence trips, we evaluate some of those items that you bring up, what kind of harmony do we see? What kind of team-oriented strength do we see in the organization and has that proven itself over time? Those are things you can see and you feel, and when you have conversations with one another, that comes through, and that is always something that goes into part of the process of making a final decision.

But in terms of, if we talk specifically on the valuation piece, you know, we’re going to be driven mostly from more of the mathematical equation that’s tied to cash flow.

Kirsten Petras:

Well, in recognizing the way we lend, our “collateral” in quotes is not traditional. We’re not putting liens on buildings and brick and mortar and things you can kind of take to auction and collect on in a bad situation. And so really knowing how people are operating these businesses, securing and retaining the relationships that subsequently create the recurring revenue streams that we’re in essence collateralizing, I’m saying a whole lot back to back here, is at the heart of what your team is trying to understand.

So yes, a multiple of this valuation to ensure we’re within these brackets is a big piece, but I think that aspect of the people that are running the business and how aligned are they with the success of the business, is something you guys really know, really understand, really can see when it’s working well, and it has been a key contributor to our portfolio performing at the level that it performed. So, you know, with “collateral,” I keep doing that like this, right? But you know, what are the differences in collateral when you’re making a CPA loan, for example, compared to like an MGA loan?

Barry Kehl:

I wouldn’t say there’s great differences in terms of what we are considering our collateral. Again, it kind of goes back to 1B, is cash flow to some degree, because what our collateral is, is your enterprise value. And there’s nobody who wants to see that happen for you any more than what we do.

You’re building wealth really by your business is enterprise value and the better cash flow stream and strength on your income statement that you’re able to produce, you’re effectively building your net worth that way. And that’s really what we’re relying on. So we’re evaluating the cash flow, but we also know in hindsight, what you’re doing is you’re building your wealth.

Now, when you decide to make that a liquidation for yourselves, you know, that’s obviously your decision. That can be short, that can be long-term, you all have different goals and ideas about that. And how you want a legacy. Some of you want a legacy to keep within the organization of people that you brought in, that you highly value, that you want that to transition to. So all those things come into play, but that’s really our collateral.

And so the better you’re able to build cash flow, the more valuable your entity is going to be, and it really puts us in that position. And that’s how we kind of look at it.

We ensure we’ve got a first lien on all business assets. That’s typical with what a bank would do with another type of borrower. But the difference is a lot of their value is based on hard assets. It may be equipment, it may be mortgages and real estate, whatever the case may be. That’s not the case with us, it’s really that enterprise value that gets measured by the cash flow strength of the businesses.

Kirsten Petras:

Well, I can’t believe I’m about to say that but we’re about at 1:30. Now, that being said, as I mentioned, we have several questions to still get through, and we’d like to take the next 10 minutes and get through. So if you’re able to stay on for about 10 more minutes, even if you’ve brought a question to us, we may still have a chance to answer it, but I did feel I should mention that those of you that need to leave, because it’s 1:30 already, this is being recorded. But for those of you that can stick around for another 10 minutes, I think you’ll learn quite a bit still as Barry continues to answer these questions.

So Barry, you mentioned COVID, I mean, talk about a condition, nobody expected. So what are some conditions, what are you looking for in terms of these outside influences on these businesses?

Barry Kehl:

Yeah, lastly, conditions is the last of the five C’s and it’s the stuff that’s really out of our control but we have to take it into consideration. And that’s why I go back to that cushion word in terms of the balance sheet and having a cushion in your cash flow coverage, it’s to weather these kinds of things.

The economic events, nobody could’ve dreamed what we’ve been through over the past, little over a year now. And you know, we’re still being impacted, some of us more than others and I’m hopeful for the group on this that you’ve not been tragically impacted by it, but it’s those kinds of things that from a business owner’s perspective, we want to take into consideration when we do a deal with you, that there’s enough cushion and conservatism that you get through occasions that you cannot control.

So economic conditions, the interest rate environment is obviously very favorable right now, rates are very low, and I don’t expect them likely to go much lower. So if anything, over time, they’re likely to increase. We just don’t know the timing but that increases your debt costs over time so you want to make sure that you don’t get over leveraged and have that risk.

That in a nutshell, just think of the things that are out of your control that can potentially impact your business. You need to sensitize that in a little bit to how, when you make an acquisition, when you consolidate debt, all those things, so that you’re in the best position so you can get through over the time that you’ve got debt on the balance sheet.

Kirsten Petras:

Well, in a question that came in, some of our business lines we serve really specifically the RIA business line, their revenues may be directly affected by the market. And so one of the questions is to speak to market declines and how that could actually impact cash flow and valuations.

Barry Kehl:

Oh, that’s great question. We’ve not seen, other than for the short time, I think it was the second quarter of last year when we really saw a really short term hit on the market. And I know some of our RIA portfolio felt it. Fortunately the market recovered quickly, and has since been really solid.

Now what the future holds, I don’t know. I think we’ve all got different opinions there of what could happen, is the market overvalued right now? Are we getting ready with this recovery to take another step up? There’s arguments for that both ways.

But I think the point in the question asked is a perfect one. Can it impact revenue? Absolutely. And we don’t know if there was a sizable market correction, that’s going to be a hit, and we’ve tried to really, in the investment advisor space, structure conservatively with that mindset, because I don’t want situations where a 20-25% hidden revenues completely destroys the business model. And so when you’re able to allocate risks off of yourself and whether that be through equity, with the seller holding some of the note in an acquisition type circumstance, I think that does protect you.

So it’s certainly something to keep it front of mind as you structure deals, negotiate deals because the multiples in that space have continued to increase and for good reason, it’s been a tremendous industry now for several years, but you gotta be careful that you don’t get bit on the back end.

Kirsten Petras:

All great insights, Barry. On the next slide, we kind of start talking about some terms and we got many questions about terms starting with use of funds, loan purpose, right? We talked about business acquisition loans, we didn’t really touch on succession loans, but those have been happening at a more rapid pace here in the last year than we’ve probably seen before. One of the questions is “we are interested in obtaining a working capital loan that could be used for our growth or to buy back shares from a current partner. What hurdles do you see in obtaining these types of loans?” So I think they’re touching on a partner loan, a partner buyout, as well as the debt as maybe a working capital loan.

Barry Kehl:

Yeah. Good question. Here’s how I would start that. I don’t know that there’s necessarily any hurdles, but what I would suggest is there’s ways to structure the right type of debt for the right type of asset.

And I’ll say it like this, you know, working capital, I consider really short term assets. It may be, I need a working capital line to support payroll for a given month when I know it’s going to be light and my receivables, my commission receivables, fee receivables, client receivables, on a CPA may be running light that quarter. Maybe you’re in a cyclical business. So you need a short-term need from debt that you utilize, make your payroll, do your expenses, but then when the inflow of revenue comes back into normal, you pay back down that debt so you’re matching, short-term need with short-term debt.

Partner buyout, well, I think what you want to remember to do is match your long-term assets with long-term debt. So if you’re buying somebody out, if you’re buying a partner out of business, that’s really a long-term venture for you. You’re going to buy a book of business and that’s more longer term so a longer term loan would make a lot of sense so you can amortize the debt over a longer period, recognize the cash flow, and cover your debt service over time.

So you don’t want to mismatch really your use with the type of debt. So I don’t think there’s any hurdles, but I think where we would have some discussion is let’s find the right product that’s going to put you in the best position, because the one thing about working capital lines, if you use them wrong, our expectation is they revolve and they get cleaned up because of what the purpose is for. And if you can’t do that, then you’re stuck with a balance that would have to potentially be more aggressively amortized than what you would like and we’d rather not even get into that position. So just food for thought there.

Kirsten Petras:

So as we yet, again, are about to run out of time, and I cannot tell you how many more questions we have, but we are going to be hosting another OnPoint webinar here. And while the main topic will be about the legalities of acquisition and the legal steps it takes to get a deal done, we certainly can revisit a lot of this information as part of that.

But as we wrap up do you want to take a minute and actually talk a little bit about, there was a section there on that previous slide about experience and expertise and then strengths and weaknesses. Speaking from experience and expertise, my team often sees strengths and weaknesses in a business that we’re trying to put a term sheet out differently than your team sees the strengths and weaknesses.

So as the audience is thinking about the strengths and weaknesses you might see in them, what would be some of those things? And then is there something there in the, just the overall background and management that people should be thinking of themselves as they’re talking to a lender and presenting who they are to that lender for consideration of a loan?

Barry Kehl:

Ooh, well being an underwriter at heart, obviously experience is always something that we consider a strength. If we’re able to see a business that has gone through cycles over a number of years and proved to be successful, showing the ability to have a solid low leverage balance sheet, have strong operating margins, have a management team with depth and breadth that you know that if the owner were decide to sell to them, that they could step in those shoes and really not miss a beat, that to me, big picture macro, is a great way to understand a strong company.

Now that doesn’t mean we’re all that way because we’re not, we’re different positions. And so I don’t want anybody to think that it has to be that for us to do a loan, but that’s the goal, you know, that means low credit risk to us and obviously, that makes our decisions really easy. The harder ones are those that are in the different stages of building that.

And you know, a perfect example of just something to keep in mind, a loan purpose that would be, “Hey, I want to borrow money to staff. I want to hire a bunch of producers.” And in this business, that can be a great step, but what would be concerning, or maybe a weakness in there is if you wanted to borrow all the debt to support all of those staff hirings.

And the reason I say that is because let’s say two of the five ended up being a really non-incremental help, and you need to get rid of them. They’ve offered no real strength to your business, haven’t produced, then you’ve got to carve off two really unproven assets that did nothing for you, and yet that debt that you used to pay them to come on board is still stuck on your balance sheet and so you’ve kind of set yourself behind.

So those are kind of things, as you think through how to use debt and use it properly, a good mix of the right equity, the right debt structure, is the best way to make sure that you get through those. So just food for thought.

Kirsten Petras:

I have to say, as we wrap up, two final thoughts, one lots of questions about interest rates and I would just say that interest rates are going to stay historically low for an extended period of time here.

And so on the advice of Barry there, you’ve got to weigh out the right way to use debt. So maybe it is a good time to use some debt, maybe not turn everything into debt, but it is a good time to assess that as an option for growing your business. We have so much more information here that I’m going to probably put my marketing team in a spot by saying I think we’re going to have to do a follow-up one of these with you, Barry, you are in high demand, people have a lot of questions for you.

So while the next scheduled event is our session on the legal aspect of getting deals done, look for another invite for another underwriting webinar. I think that people are very, very interested in learning more about what happens behind the curtain of underwriting. It’s not often they get face to face with an underwriter. My contact information and Barry’s is here on the screen. Feel free to reach out to us.

Those of you that are here will get a recorded copy of this and those of you that registered that didn’t join today are going to get your recorded copy of this. Barry, thank you again for joining, thank you all for joining and staying long, and just be sure to join the next Oak Street Funding OnPoint webinar about “Legal Implications of Getting Your Deal Over the Finish Line”, but keep an eye open for an invite for another underwriting one. I have a feeling this one won’t be too off in the future. And with that Barry, thank you so much. Have a wonderful day, everybody.

Barry Kehl:

Thanks, everybody.