At a recent event in Chicago organized by Ravinia Capital, my firm Virtas Partners presented on “How to Prepare for an Exit or Capital Transaction before Taking it to Market.” Here is one of the themes developed from that presentation:
There are different tiers of lending that are suitable for companies based upon where they are in their lifecycle as well as the lenders’ perceived level of risk. When something happens to a company that creates doubt, they find it increasingly difficult to remain with a traditional cash flow lending structure. As a result, they are encouraged to find what is known as an asset based credit facility. The company now has to tell a credible “story” to address its issues that have created a perception of elevated risks, leading to an increased level of lender scrutiny and higher rates.
An experienced consultant/investment banker needs to make an initial assessment of the management team as well as the believability of the story. What happened and how has it been fixed so that it is not recurrent? The business plan, if any, needs to be carefully reviewed. Is there a strategic plan or a tactical plan? Does the plan provide action items with timing that are tied to the pro-forma (financial projections)? If not, the plan will have no credibility in the eyes of the lender. Does the plan address interdependency of functional areas? Does the plan consider operational limitations such as bottlenecks and space limitations?
Prospective lenders particularly key-in on the company’s CFO/Controller. Lenders need to be assured that information such as financial statements and borrowing base reports will be accurate and timely. The accountant will probably be asked for coverage ratios to determine if there is sufficient liquidity to effectuate the plan. If not, then the lender is unlikely to even issue a term sheet. And if they do issue a term sheet, it should be understood that there is much to do before funding. The amount of lender requests and conversations during the diligence phase can be daunting. This is when the art of the deal happens. It is during this time that business owners and their management team discover the world of “ineligibles.” This could have a dramatic effect on the amount that the lender is willing to provide which of course affects liquidity. For those business owners not working with an experienced professional we have one thing to say: Good luck!