Given the economic turbulence of the past several years, bank-related concerns have become a more significant factor in company operations and transactions. Consider, for example, a corporation that proposes to sell some of its assets or one of its operating divisions to a purchasing company.
The seller will typically need its bank's consent to transfer any assets that act as collateral on a continuing bank loan. The seller's bank may require the seller to use all or a portion of the proceeds to pay down the seller's debt to the bank. This factor could impact the transaction's timing, structure or even its terms. The bank may have an incentive to approve the sale in order to monetize some of its collateral, but it will also want to ensure that the collateral attracts a fair price. The bank must also consider whether the sale of a portion of the business could harm the value of its remaining collateral.
One important factor may be whether the seller is in default on any of its banking covenants. A healthy balance sheet and income statement should go a long way in reducing a bank's concern. Meanwhile, weak financials often will result in greater bank diligence and reasonably so.
A seller's bank may have input on the transaction structure for a proposed sale. Parties to a potential transaction may assume that they can make minor adjustments to a transaction structure during the process of negotiating a transaction, but internal banking requirements may prevent the seller's bank from approving proposed changes to a transaction structure as quickly as the parties would prefer, even if such changes do not appear to change the substance of the transaction. Consider, for example, a proposal to contribute an asset to a single-member limited liability company and a sale of the LLC interests rather than a straight sale of the asset itself in order to simplify state sales tax reporting in connection with the transaction. The parties to the transaction should plan to allow the seller's bank sufficient time to approve the change to the transaction structure.
For the reasons described above, a potential seller that has experienced some economic distress should initiate communication with its bank early on in the process of a potential transaction and minimize changes to the transaction structure in order to expedite the process of obtaining bank approval for the transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
