Preparation Tips for Mid-market Financing

Posted on: August 23rd, 2018

tips for mid market companies

We are in the golden age of mid-market financing. Capital is abundantly available from banks, mezzanine funds, private debt funds and hedge funds. Given the great track record of middle market debt returns over the years, many investors both institutional and high net worth have now increased their allocations to the space.

New lines in the market are being formed with private debt funds taking share from banks who in turn are taking share from mezzanine funds. Debt multiples are expanding and covenants continue to be borrower friendly. This is one of the best moments to be a middle market borrower as loan options are plentiful and lenders are open for business.

While the availability and terms of the financing may have become more favorable, the lender diligence process remains the same. Lender look to gain comfort with the cash flow, collateral and character of the deal. Some lenders focus more on EBITDA while others on collateral. Regardless of the type of lender you are engaging with, it pays dividends to ensure you are up to the challenge of the lending approval process.

The process is the prism through which the lender learns and makes a decision on the creditworthiness of your company. It is like an extended interview where the end result is a big check. It will touch on all aspects of your company including products, customers, management, financial results, financial projections and legal. Given its importance, it is worth thinking about how to improve your game, so you will shine throughout the interview process. Here are 5 preparation tips that will lead to mid-market financing success.

Tell a Great growth story

All lenders like to hear a strong and relatable growth story. It allows them to connect with your vision and place it into context with other companies they know. A great story creates narrative framework through which you can highlight all other aspects of the business.

Clean up your numbers

All lenders like companies with clean numbers and strong monthly reporting. If you have lousy numbers and do not have formal month end closes, clean it up before your start talking to lender.

Run a background check on yourself

Background issues in deals can be thorny ones, especially when they are surprises late in the process. It is smart as a precautionary move to see what is on your background report, and be able to explain or clean up anything erroneous before the lender sees it.

Prepare a powerful Confidential Memorandum

Most companies reuse existing PowerPoints that may be outdated or weak. A powerful Confidential Memorandum will articulate your vision in the best possible light, grab the attention of the lender and make them excited about lending to you.

Track your performance vs. budget

Lenders want the comfort of knowing you are measuring yourself with a budget. Companies with budgeting processes are more self-aware and perform at higher levels. Even if it is new to you, start a budget process so you can have meaningful financial discussions with the lender using budgeted results as a baseline.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.