August 18, 2014

Beware – Seller Note Financing

Filed under: Uncategorized — comparadungrp @ 7:48 pm

There are varying reports regarding the number of Baby Boomer owned middle market companies in the United States.  However, there is a consensus that many of them will be for sale.  One report states that there are 83 million Baby Boomers representing the largest single sustained growth of the population in US History.  It is also stated that this generation started and grew hundreds of thousands of successful privately held businesses.  Additionally, it is reported that going back to 2011 and forward to 2029, there will be approximately 671,000 middle market businesses worth an estimated $2.47 trillion to be disposed of during this period.

Because of succession issues, finding qualified buyers will be challenging and giving new leverage to buyers.  At the lower end of the middle market, sellers will have to decide among other things, whether to ask for an all-cash offer or decide to take back a note or provide some form of seller note financing.  This structure comes with some pros and cons:  if the seller expects an all cash offer he/she will in all probability be limiting the number of potential buyers and a reduced purchase price.  On the other hand, a purchaser who will make a higher offer utilizing a form of senior debt financing will probably ask the seller to take back a portion in the form of a note.  Furthermore, the financing institution may not be willing to finance the level the buyer is requesting, and thereby requiring the buyer to put in more equity or the seller to assume some of the risk in the transaction.  In the former situation, the buyer typically has gathered as much equity as available to him/her and is looking to leverage the remaining portion, either through the institution or the seller.

When the seller takes back a note he/she has immediately put him/herself at risk as to the payout of the full amount of the purchase price.  The question becomes how do sellers eliminate the risk of default and not realize the full purchase price of the company.  There is no sure fire way to avoid this risk if the seller truly wants to sell the company and move to the sidelines.  However, the more due diligence that is done can give one more comfort in reaching the full payout, but this does not provide a guarantee.  If the buyer is an accomplished business person with a history of successful operations, again, one can gain more comfort based on the historical operations of the person’s company.  However, if the buyer is a first time buyer, plenty of corporate experience, but no ownership experience, then the future is even less certain.

Adding to this burden, all of the collateral will be pledged to the financing institution and the seller note will be in second or third place depending on whether there is sub debt and/or mezzanine financing in place.  The long and short of this scenario is that all of the assets will be pledged, including those of the buyer (personal residence) and no collateral left for the seller

The best that the seller can do is to know the buyer as best as possible and make a business decision on the qualifications of the buyer and his/her abilities.


June 21, 2012

Banking – How to Have a Successful Relationship Review

Filed under: Uncategorized — comparadungrp @ 8:51 pm

As we all know, the American Economy is attempting to rebound from the worst financial crisis since 1929. There have been many casualties along the way, which has created a great deal of hesitancy in all categories on the next steps, that would include expanding operations, taking on new commitments, and in the banking industry extending and taking on new relationships. Everyone wants to feel certain that all is going to be okay before taking on any additional burden. To have and maintain a successful banking relationship is dependent in part, on communication. This communication should be in the form of timely and accurate financial statements with a narrative that tells the complete story of operations and the results.

The extreme of the most recent example would be the IPO issued by the investment banks on behalf of Facebook. For example, there has been a lot of anticipation about this celebrated company and its market value. Prior to the offering, some of the analyst questioned the performance of the company and how it was going to be sustained. They were trying to head off any surprises. The IPO went forward, and within hours, the market reacted negatively regarding what is now thought to be some insider information that revenue performance was not going to be as robust as once thought. The Shareholders’ response has been a suit brought against the company and the investment banks that underwrote the IPO. Needless to say, no one wants any surprises. This is an extreme case compared to middle market companies going in for their annual review; however, I would suggest that to the owner of a middle market company, compared to a $100 billion stock offering, the annual review is just as important.

This is the time that many companies will be submitting their financials for review. Most companies have a 12/31 year end, management has closed the books, and the accountants have been in to complete their review of the financial statements and stated an opinion. The next step for management is to submit these financials to the bank for a review and any increase that they may have a need for at this time. In the past, management has sent the financials in the mail to the banker and waited for a response after the review. If there was a need for additional funds, above what was already available, they would make a phone call and request the need at that time.

Given the uncertainty in the economy, and the cautious state in the banking industry, I would suggest a more proactive attitude should be taken. We have all heard how some banks have asked certain clients to leave and find another bank to meet their needs. This does not have to be because of a downward trend in the company’s financial performance. It could very well be because banking management has taken a more in depth look at various industries and decided the portfolio is too heavily weighted in a particular area, and they want to reduce the potential risk. Furthermore, during a strong economy, risk managers (credit administration) are more incline to take on more risk and their willingness to take that extra step is there. Internally, there is a friendly tug of war between the commercial bank marketing manager and credit administration. Each has a goal; commercial banking is to make more loans and increase the profitability; and credit administration is to reduce the bank’s charge offs and lower the number of classified loans on the books.

A better idea is to provide your banker with a well thought out plan, a review of the past twelve months and how the financials reflect those activities. Better yet, given the past, what is the plan for the next twelve to eighteen months and how will the financial performance be reflected during that period? Doing this requires more work, but in the end it will be well worth the effort. Preparation of some proforma financials would be very positive and a narrative to go along with them is good. To be more pro active, you can call the banker and request a meeting. Tell him or her that you would like to provide the year end financials and review the company performance. I can assure you that the banker will be happy to make time for you. Furthermore, this is a great time to ask that a credit officer attend the meeting, a credit officer that will have input on the relationship. The relationship manager is the advocate for your banking relationship and by meeting the credit officer you have just recruited another advocate. By meeting both sides of the bank and presenting your company, you have now become, more than financials, but a living, breathing entity that is known to the bank by name and not by numbers or industry. While there are no guarantees, a well thought out presentation will make a positive impression on the bankers which will build confidence around your management style.

Lastly, once all of the above is done, this document cannot be put on the shelf. I would suggest that it should be reviewed monthly and compared to actual results. Differences should be noted along with your action plans; so that an accurate explanation can be made the next time this information is presented to the banker. If the financials are not required to be submitted monthly, make a point to send them in quarterly, and have a face to face meeting semi – annually to go over the performance of the company. Here again, invite the current risk manager to attend the meeting, particularly if there has been a change either in performance or the credit officer. I can tell you from experience, those that will be reviewing this information have long memories.

One last comment, if you are not prepared to do all of the above before your review date, ask for an extension of 60-90 days. Be prepared to explain why you need an extension and be able to provide supporting facts that will justify your need.

November 22, 2011

Has Banking Become A Competitive Sport

Filed under: Uncategorized — comparadungrp @ 3:39 pm

The current economy has not been worse since 1929, the last major financial collapse.  The banking industry has suffered and the commercial banks are very deliberate in choosing to remain with existing commercial clients and choosing new clients.  They are picking their teams for the future.  There is an urgent need to generate earnings, but the risk managers have taken a stand to keep their portfolios void of troubled loans.  They are looking for that credit that can run a 4.3 forty yard dash, has a vertical leap of at minimum of 39 inches and can be durable for seasons to come.  As customers/ prospects present their credits to the bank ,they have to show consistent liquidity of 1.5 x’s for a current ratio, the debt to net worth ratio must be less than or equal to 3.5:1 and declining.  More importantly, how will the cash flow hold up over the next 3-5 years?  Will your company survive the cut to be on the team?

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