Authored by Ken Mann | Managing Director, SC&H Capital Special Situations
Your business is feeling a cash squeeze and needs to find new money or a buyer. Somebody suggests that you hire an intermediary, but you already have one “offer” (for purchase, refinance, or investment), so you are reluctant to hire an investment banker to find other possible solutions. We have seen how this horror movie ends and it’s often not to the advantage of the business owner. We regularly remind businesses and their advisors of the common pitfalls of a single suitor or single-solution approach.
Top 6 Pitfalls of a Single Source for Financing Approach:
- The company is making a decision in a vacuum. How can you choose a type of transaction such as refinance versus equity infusion, let alone the best suitor for that type of transaction without knowing what all of your options are?
- The single solution approach puts the company at great risk of failing to get the needed support for its chosen path. As an offshoot to pitfall #1, you are not likely to get the support of your existing creditors (or a bankruptcy court) without showing them evidence of a true market test.
- All of the company’s eggs are in one basket. The touted “offer” is usually nothing more than an indication of interest from a lender or investor that has done little diligence. In almost every case where our client tells us they “have an offer,” we learn that the offer was less than half baked, therefore, there is much work to be done to get the interested party across the finish line.
- Even with a bona fide offer, the price and/or terms are likely to melt down by the time the suitor gets through diligence. A potential new lender will want to disqualify certain collateral, the potential buyer will want price reductions based on its findings, and the number of reps and warranties will likely grow. Absent competition and real options, the cashflow constrained company will be dealing from a position of weakness and have no way to prevent the freefall.
- Missed deadlines and broken promises are likely. Almost inevitably, things come up and absent a date certain process or competition from other suitors, settlement gets pushed back a few weeks. Management hangs on, with no other options handy. They want to draw a line in the sand, but absent viable alternatives, the suitor continues to make all of the rules and controls the pace. Time is lost while damage is done to the business as customers, vendors and employees, already nervous, lose faith and disappointment sets in.
- You leave money on the table. Competition drives price. We like to think of ourselves as expert negotiators that squeeze the last few dollars out of any buyer, investor, or lender. But nothing, or no one, improves price or terms better than a competing alternative solution. So, if you did not run a process, you probably left money on the table.
After reviewing the pitfalls of not running a process and pursuing a single-suitor, why is it that, with so much at stake, some companies are reluctant to run a thorough process when reasonable and natural justifications exist? This hesitation is often driven by management and we have our perspective on the concerns that so frequently hold them back from undergoing a robust process.
The 4 Common Reasons Management Are Hesitant to Run a Robust Process:
- Negotiating from weakness, the management team is afraid to insult or chase off their potential white knight, which is likely demanding exclusivity. An experienced expert can explain to the suitor on the table why a process is beneficial to them.
- Management is trying to save the fee associated with “closing a deal I already have.” The improvements that come with a process almost always far exceed the costs of the process. Further, it is important to develop a Plan B to the current offer, just in case it falls apart.
- Perhaps this particular suitor is offering employment and/or equity to the management team, and so they are not enthusiastic about pursuing other possibilities. Management should play “free agent” and consider each meeting with each potential investor or buyer as a job interview. The first offer is not necessarily the best one the team will see.
- Management believes there “isn’t time to run a process.” The lack of time is precisely why you must run a process; it may be too late if you start the process after your initial deal falls apart. Lenders and courts are reticent to cut you off if you are running a real process, and usually welcome an outsider coming in to conduct it. Finally, the process is faster than you might think –often 60 days.
It is incumbent upon us as professionals and advisors to encourage our clients to embark on an investment banking process that produces multiple solutions, thereby helping them avoid the pitfalls of pursuing a single solution.
Please contact us if you find yourself navigating hesitations about running a process, as with the right partner, not only can you prevent experiencing the pitfalls referenced above, you have the opportunity to find an outcome that aligns with your objectives.