February 8, 2019 by Reece Tomlinson
When a bank has serious questions about the sustainability of a business, which they have provided debt to (normally large amounts of debt), they often suggest that they perform a “look-see”. Although this term sounds harmless, it’s actually a very serious request that the business owner needs to be very cautious of because it can equate to serious consequences for the business and its stakeholders. When a look-see request comes through it generally means the bank has lost confidence in the business it has provided lending to.
To start, a look-see is essentially an audit of the business and its financial health. When a bank performs a look-see, the bank will appoint an accounting firm (normally with receivership capacity) to assess whether the business has any chance in repaying the monies that are owed to the bank and whether the risk factors associated with the business remaining a client are going to increase. In short, they are looking to see if they should start receivership proceedings and are relying on a third party to give them a formal review of the financial health of the business. What makes this all even worse is that look-sees can cost a considerable amount of money and guess who ultimately pays for it? That’s right, the business.
From experience, there are three major issues with a look-see;
One of the main problems with a look-see is that, from experience, they are extremely flawed. They lack objectivity because often the accounting firm that performs the look-see will likely perform the receivership proceedings, which can account for hundreds of thousands of dollars of fees to the receiver, which I must remind you, are paid first in a receivership proceeding. You can connect the dots as to why this shouldn’t give any business owner the warm and fuzzies. Equally, it should be of concern to lenders as well because the lack of objectively may equate to undue losses to the bank in a receivership situation.
Another major issue with a look-see is that the firms who provide them for banks often look at the business from one lens and that is purely of the financial strength, on paper, of the company. They rarely provide insight into methods on how to turn the business around and help it get back on track, which is partly due to the fact that these firms often do not have experience actually turning the business around. Therefore, not only is the business being asked to pay for the look-see, what they receive from it is essentially what they already know. The reason I suggest this is that by the time a look-see is requested from the bank, most business owners and executives have a very clear idea that the financial performance of the business is far from where it needs to be as this is typically apparent in the form of missed or late payments, layoffs, lawsuits, etc.
The look-see is a financial blunder. The reason that it is a financial blunder is simple, it costs a lot of money and the business is the one on the hook to cover the cost. Assuming the result of the look-see is favorable, which they are often, the business will still be responsible for paying bill. What happens is that the look-see is often charged to the business from the bank whether the business agrees to the fees or not; they are tacked on to lines of credit or deducted from available cash, which can include a lot of additional interest and overage charges from the lender.
If as a business leader you find yourself in the unfortunate circumstance of being asked by the bank to permit them the ability to perform a look-see, you have a few options.
This is your best bet as you can simply provide a flat out no or ask for an additional 60 days, up to 120 days, to correct the financial situation of the business and get it back on track to a point where the bank is happy with what they observe. From experience, I would suggest doing this in a formal fashion via your lawyer or via your turn around consultant as it is important for both parties to understand that this is an official method of moving forward.
If the bank is unwavering in their request for a look-see, then do so on the condition that in the event the results from the look-see are not favorable, that another accounting firm will be required to perform any receivership proceedings. I have found this as an effective way to ensure that there is little capacity for the firm performing the look-see to have anything but an objective opinion of the situation.
The look-see is a very serious request and one that business leaders need to take seriously. If you are facing this situation or need help avoiding them it is important to seek qualified help as soon as possible.
Custom capital solutions designed to grow your business to the next level. We help navigate the complexities of business when the stakes are high.