Selling your Business the Right Way to Lenders

Often when companies enter the lending markets, they get a bit anxious and fail to communicate the basic and important aspects of their business. It’s a bit like being at a speed dating event and having to convince the other party of how wonderful you are in less than 15 seconds. Expressing your business is something companies do every day of the week through sales and marketing. Explaining why you are a strong company, why you are a good company, what value you bring are done all the time. Yet, companies can somehow forget this when they are selling themselves to lenders.

Process of Engagement with Lenders

The process of engaging with a lender is similar to the process of engaging with a large potential customer. Both want to know your strengths and differentiators. They also both want to know a bit about your financial strength and growth plans. Lenders have a much deeper scope than a potential customer and will conduct a copious amount of financial due diligence. The key to communicating your business model clearly is first having a strong grasp on type of business you are. This means your historical core business that contributes most of the revenue and gross margin. Not the business you want to grow into or the business you dream about being but the business that you currently are.

It’s perfectly fine to talk about the business you want to grow into but only after you have established clearly the type of business you are. Explaining how revenue is formed and sustained is also important. Do you have recurring revenue based on contracts, or episodic revenue that is one-off in nature? Do repeat customers comprise the majority of your revenue or do you have to source new customers every year?

Use the Right Language to Classify Businesses

Finally, it is helpful to research the different frameworks that lenders use to classify businesses. Terms like business services, technology enabled services, razor/razor blade may not mean much to you, but they are the classification language that lenders speak. By learning these terms, you can describe your business in a manner that will be more easily understood by lenders. This increases the clarity quotient of your business and increases the probability that the lender will easily understand your business model. The writing style is also of paramount importance and can be an impediment to lender understanding.

The Right Business Model Clarity

When describing the business fundamentals, use simple factual language, not hyperbolic language. Stay away from injecting too many adjectives when explaining the business model. When you start the sales process before the lender even has a basic understanding of the business, it can be a lender turn off. The more business model clarity, the more successful you will be at generating high levels of lender enthusiasm for your deal.

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.