 Raising Capital Best Practices
Hiring an Intermediary is a
Capital Idea!
By Penny Hulbert
Published: September / October 2008
Every business needs help at
some time, and the need for financing usually trumps all
other situations. Although conventional wisdom has
business owners or their CFOs going out to “fight the
good fight” on their own, often a financial intermediary
is a key player in the process.
Financial intermediaries
operate with varied titles and may hold different
licenses as financial consultants, investment bankers or
even mortgage brokers. Whatever the title, the best
known role the financial intermediary plays is
identifying the most appropriate sources of financing –
both the institution and the right contact person.
But that’s just the tip of
the iceberg. Financial intermediaries also assist with
financial analysis, suggest the company’s most
appropriate capital structure and financing, structure
partner buyouts, develop succession plans and produce
budget forecasts.
These are all critical
roles. Here’s an example: A business owner was selling
his $30 million company to his son. Senior debt is
cheapest, so finding the right bank was important.
However, there was a limited amount of equity, so the
owner needed another layer of financing – mezzanine
financing. The Catch 22 aspect was that if the owner
took on too much debt, the bank would still need to be
paid back even if the company wasn’t profitable. Equity
financing, although more patient, would expect a
significant return. This owner didn’t know who could
provide which type of financing, or if it would be at a
fair price, and consulted a financial intermediary. The
same holds true for business owners who plan to buy a
competitor. They seldom know what their expectations
should be, or whether debt, equity or a combination best
suits their needs.
When it’s time to contact
the intermediary
There are three common
events that trigger a call to a financial intermediary:
-
A change in the business:
Usually a change for the better, this may include a
planned acquisition or purchase of a building. An
example is that of an individual who wanted to acquire
“his” division of his employer’s company – a division he
had run for years. Even though this was not a large
transaction, it was a complex one. Typically, smaller
banks may be most appropriate for smaller deals, but the
complexity of this situation made the use of a larger
bank a better decision – with the financial intermediary
shepherding the deal and directing the client to the
proper lender.
-
A change in the current
financial relationship: When there is turnover in
management of the current funding source, the business
owner may lose confidence in the source’s knowledge of
(or interest in) the business. This lack of confidence
may be heightened by poor client service, increased
requests for documentation or delays in response. An
example of a change in the business that created a
change in the financial relationship is that of a $40
million business whose financial situation changed from
a cash flow-supported basis to an asset-based one.
Although the CEO and CFO knew all the right bankers,
they no longer fit banking criteria and needed a
different type of lender. Their financial intermediary
was able to identify the right contacts and explain the
market realities of asset-based lending.
-
A change in the economy:
Using the energy or real estate sectors as examples,
business owners can be buffeted by major swings in the
economy or drastic changes in market forces, any of
which can affect their financial well-being.
Finding the right
intermediary
As is so often the case,
working an existing (or previous) business network and
asking for referrals from trusted business acquaintances
may be the best way to identify a financial
intermediary. Following that with due diligence about
the intermediary’s previous engagements and successes,
supplemented by a more “gut level” feeling about the
ability to develop a relationship of trust, should
result in a good selection.
Although some financial intermediaries prefer to be paid
on a consulting basis, it is more common to set a
retainer and then pay on the basis of successful
accomplishment of the deal. It is not uncommon for the
intermediary to expect an exclusive listing, similar to
that of a real estate agent.
It’s still a relationship
business
The best client/intermediary
relationships are based on a high level of trust that
reflects the credibility of both parties. Clients should
expect their intermediary to demonstrate integrity,
creativity, proven problem solving skills and a passion
for their clients and what they are doing for them.
All told, the financial intermediary wears a lot of hats
– some of them surprising. The best of the breed are
counselors, business consultants and advocates for the
client company. So set another place at the Thanksgiving
table, because the right intermediary will almost feel
like a member of the family!
Penny Hulbert, principal
of
Links Financial LLC, is president of the Tampa Bay
Chapter of the Association for Corporate Growth.
Spanning a professional career of more than 20 years,
she has worked for premier firms in the financial
services industry. Her areas of focus have been debt
financing, financial management/consulting, project and
process management, team and leadership development and
problem loan resolution.
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