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.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.