Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
How can business owners get the credit they need to grow their companies? It’s a common complaint in this economy, since the financial crash of 2008 spawned tighter federal regulations on banks and sent more solid companies into the red.
Upsize scoured recent interviews to show how bankers are thinking about credit today, and offers the best of their advice.
1. Think like a banker. Owners should think like bankers when approaching a bank for a loan to fund an acquisition or expansion. And bankers are most interested in the ability of the borrower to repay the loan. “We’re really looking primarily at cash flow,” says John Kimball, Park Midway Bank. The loans are underwritten on an analysis of what the company spins off in cash, and how much of that is available to repay the loan with a little bit of extra cushion. “Then we’re looking at the company’s ability to replicate the cash flow” going forward.
2. Develop the skill set. Whether purchasing a company or starting one from scratch, bankers will evaluate the acumen of management based on their knowledge of the industry and their track record with similar businesses. Prospective borrowers should have solid work experience with the type of company they’re seeking to buy or start, and management teams should fill in any gaps with skilled people before seeking a loan. If it’s a purchase, before making the loan bankers will evaluate the cash flow the company generates under current ownership, and consider whether the new owner can duplicate that performance. Having the right skills is key to convincing the banker.
3. It’s personal, too. Know what the credit bureau says about your personal history and clean it up to the extent possible. “That’s still a very important factor in the decision,” Kimball says. “Even though this is a business loan, the banks look at your personal finances.” That includes an analysis of all household revenue and expenses, to see how much cash the new owner will need from the business in order to live.
4. Conserve cash. Most acquisitions and start-up models require a real equity injection, bankers say, as much as 30 to 40 percent down payment, and not borrowed money. Home equity loans in general often don’t qualify anymore, as they used to before the financial crisis. And not only do you need an equity injection sufficient to buy the business or start the business, but you have to think about the business’s liquidity and cash needs. Cash is the oil that lubricates everything.
5. Make a buck. Kimball says tighter federal regulation since the financial collapse has changed the way banks evaluate customers. “As an example, it used to be that the bank was analyzing just cash flow: is there sufficient cash flow to repay the loan?” But now the regulators really don’t like banking relationships where the business is losing money. A bank can be in danger of having to classify a loan as a problem loan. “We understand your need to manage for taxes, but make sure you at least make a buck,” says Kimball.
6. Stay profitable. “Your ability to demonstrate consistent profitability is important to retain control of your company,” says Bridget Manahan, senior vice president and a commercial lender with Western Bank. “Too often we’ve seen companies bite off a risk in the name of growth and then there’s an unexpected event.”
7. Fund your losses. Part of underwriting credit is the assessment of management, and your bankers may do more if they’re confident in your track record to recover from a quarterly loss. But the decision boils down to math. “What the bank wants to see is if you’re going to take the loss, how are you going to fund the loss?” explains Manahan. There are three ways to do that: You can borrow to fund it. You can retain earnings to fund it. You can put in additional equity to fund it. “We’re in an environment where you can’t say to a bank, We’ll grow our way out of the losses. That’s not a story they want to hear anymore,” Manahan says.
8. Don’t discount to win business. “It merits saying: We are in an environment where you need to be realistic about how much growth we can expect. This is the time to reinforce your message of credibility,” Manahan says. “There is a temptation to buy business, and I think it wise not to do that.”
9. Provide hard numbers. Access to financing may appear limited, but in reality requires more proof on the business owner’s side that financing is merited. Terms are tighter, but in reality are reflecting protection for the borrower as much as for the bank. When you talk to your banker to discuss new financing, a change in terms or other banking issues, make sure that you have a solid plan as well as the data to back it up, advises David Rom, Platinum Bank. Meet with your certified public accountant prior to a bank meeting to get clear on opportunities and challenges. Hard numbers will demonstrate that you’ve done your homework and understand the risk as well as the rewards.
10. Face it and fix it. One of the most important signs of a healthy banking relationship is the feeling that you can talk to your banker about your business situation. More importantly, is your banker coming to you to discuss your financial situation and head off the small problems before they become huge? Is your banker tackling the huge problems with the goal of helping you succeed? Is your banker willing to work with your other banking and financial relationships, including your CPA and wealth management adviser? Many business owners right now fear a call from their bank. Even if their bills are paid, they aren’t sure of how to address questions about financial projections or meeting covenants. “But if there is an elephant in the room, you can bet that everyone sees it,” says Rom. “You might as well be straight and look to your banker to help you find solutions. Smart bankers don’t want to see you fail.”
11. Talk often. Communicate at least monthly with your banker to stay in touch with what is happening at your bank. One reason is the continuing volatility in the industry. More banks may change hands this year, and it does affect bank customers. Almost always, a bank is pre-sold to another financial institution prior to closing, Rom says. Closings are typically done on a Friday so that the new owners have two days to organize a re-opening by the following Monday. Although the new owners try to minimize disruption to customers, any transition could affect timely direct payments and deposits and other online and automatic banking services. The new bank owner will also review the loan portfolio and may demand full payment on loans that exhibit red flags such as late payments. Another reason to communicate regularly is to develop your banker as a knowledgeable adviser to your business.
Upsize: You sold Orbit Systems to MindShift Technologies Inc. earlier this year, buying out your two business partners and remaining on as executive in charge of MindShift Midwest. How did you find
your buyer?
Steve McFarland, MindShift Midwest (formerly Orbit Systems): Over the last two years we had been approached by several different companies that were interested in doing something with us, and we had no interest. One thing I would tell all business owners is never say no until you see what’s on the table. We took the time to hear what those buyers had to say, whether it was a strategic buy, a financial buy.
Over those couple of years I had a very good sense of what the market was, what people were willing to pay. I had a really good sense of strategic buyers vs. financial buyers. I had a really good sense of how they attributed value to an organization, what the equations were. And I had a pretty good idea of what we were worth and what our options were.
That’s something I would recommend to any business owner that thinks they want to exit their company any time in the next 10 years. It’s not a waste of time to have those conversations. If you want to really become educated on what your company is worth and how they value you, those are all really good.
Upsize: Did these potential buyers all value your company the same way?
McFarland: No, it was incredibly varied. I talked to some equity companies that were doing rollups, and they had even picked up companies that were similar to us in the marketplace in this geography. All their thing was, they were rolling up, they were gutting companies, trying to drive revenue, trying to drive earnings, and ultimately an equity group wants an exit, and a very short-term horizon. In that case you’re looking at something that’s going to destroy your organization in the not too distant future. They’re going to turn it and sell it again, and it’s like a machine. I was not interested in that at all. I wasn’t looking for an exit that would take me out, or that would damage our organization. I was interested in protecting our customers and employees.
On the other end of the spectrum you have people who are growing their own business, because they want market share, they want to be a dominant player, they’re working for companies that can differentiate in the market, and it’s a very strategic acquisition.
And in between you have all kinds of things going on. I talked to a company that did an acquisition here in the Twin Cities, and it had been a failure, and they were looking to fix that.
Upsize: How many prospective buyers did you talk to?
McFarland: I would say we talked with six or seven different groups over a two-year period. They ranged from sole proprietors to equity groups to companies that had a variety of ownership.
Upsize: When did it start becoming serious with MindShift?
McFarland: I started to look at how I could create an exit plan for my two partners. We talked to a couple of brokers, people who would put your business up to the market. I thought, I’m going to call the guy at MindShift and see what they’re up to. I called him, and said, Hey what do you think.
And they said they were still looking to expand in the Midwest and hadn’t found a good acquisition target, and if we were serious about it they would be happy to sit down with us. That started a conversation that pretty quickly led to an offer.
Upsize: Your deal closed quickly, too. Why do you think that was?
McFarland: A lot of it had to do with the fact that the due diligence they did four years ago hadn’t changed, other than we had grown and we had been successful with our model. From a due diligence perspective we had a lot of things prepared: We have very good books. We have a very good controller here. If you don’t have financials that you would share with anybody, that’s something you should strive for.
John Kimball,
Park Midway Bank:
651.523.7829
jo**********@************nk.com
www.parkmidwaybank.com
Bridget Manahan,
Western Bank:
651.290.8140
bm******@**********nk.com
www.western-bank.com
David Rom,
Platinum Bank:
651.332.5252
dr**@************mn.com
www.platinumbankmn.com
