Carl and I talk all the time about the importance of relationships…
The WHY is simple: A solid relationship with the seller creates a powerful dynamic you can leverage at critical points in the dealmaking process.
Working with banks and financiers is no different.
It’s important to build up a network of banks to inspire confidence in your ability to raise funds. This will help you secure your offers and get them accepted more quickly.
When making connections with financiers, there are a few questions you need to ask – before you draft any letters of intent (LOIs) – to make sure the lender is a good fit.
And these questions aren’t one-offs…
Banks change their criteria and expectations over time. Building a real relationship with your contacts by repeatedly checking in with these questions will pay off as their criteria change.
Here are the top three questions to ask a financier – BEFORE you go under an LOI.
1. What kind of lending do you do?
Every financier is different and the products they offer will vary.
Asset-based lending… cash flow lending… accounts receivable factoring/discounting… traditional commercial loans… SBA loans…
Beyond just the type of lending, be sure to understand their credit approval process and what information they ask for.
For example, when obtaining an accounts receivable facility, what sort of documentation does the financier need on the existing customers and aging list? What degree of contact do they need to have with those customers to verify their creditworthiness?
Getting an understanding of the requirements will help you position your offer – and set expectations with your seller as to what information they will need to provide to help you facilitate the transaction.
2. What industries is the bank lending to… or not?
Just as crucial as the products themselves, you also need to know what industries the bank will work with or avoid as a lender. This is one of the areas that will change as a result of economic circumstances.
Over the last few weeks within PROX Capital Group, my private equity group with Carl, we’ve talked to a lot of banks…
And right now almost no one will touch the hospitality, restaurant or entertainment industries.
The reasoning is simple – there is just too much uncertainty facing those industries with ongoing shutdowns and social restrictions still in place as a result of COVID-19.
Some banks have specialties, such as a national SBA lender (industry agnostic) or one that does construction lending only.
The key is to find a bank that aligns well with the industry (or industries) in which you’re interested in acquiring a business.
Just as Carl and I recommend staying in your lane in terms of what type of business you want to buy and what sector it’s in, the same goes for lending.
Find a bank that has the industry appetite and experience to work with the business(es) you’re looking to buy.
This will make the entire negotiation, deal structure, offer and close MUCH smoother and easier.
3. What kind of equity, collateral or personal guarantees are required by the bank?
This is the killer question… You must know what’s needed from you – the buyer – when leveraging debt from the bank. Be direct when asking about this.
Remember every loan product is different.
Even more so, every bank is different.
Depending on the business you’re buying and the type of lending you want, the financier may look for something different from you in terms of “skin in the game.” Skin in the game isn’t just money – banks are also looking for people who have relevant industry experience.
The answer to this question will tell what types of debt you’ll be able to use when structuring your deal.
It will also tell you about the partners you will need to close the deal – whether it’s a partner-buyer, an equity investor, a general manager from within the business or someone else who has relevant skills or experience that you lack.
And if you do need a partner, now is the time to find one. BEFORE you’ve signed an LOI and a deal is hinging on your ability to quickly find funding, a cash injection or someone with industry knowledge to give the bank a little bit more security.
Someone who can put a personal guarantee on the loan. Or even put cash into the deal.
The answer to this question also shows you the limits to the debt you can get. If you’ve got a partner who is willing to put in $250,000… and the bank wants a minimum of 10% of the total deal value… you’re limited to transactions worth $2.5 million.
These three questions will help you establish and build relationships with financiers. And their answers will reveal critical pieces of information.
Better informed means better able to seize opportunity.
By taking action and doing your homework upfront, you will increase your chance of success 10-fold.
Asking the right questions and building a solid network will open up a world of possibilities when it comes to your offer structure and will give you the ability to be creative in your dealmaking.
Remember, you’re only one deal away…
Adam Markley
Co-founder and publisher, Dealmaker Wealth Society
P.S. Carl’s weeklong Dealmaker Launchpad training program will not only help you get in the dealmaking mindset, but also help you build and strengthen your network of potential sellers, lenders, fellow dealmakers, accountants and more. Start feeling out financiers by NEXT WEEK and you could have a deal in the works within a month. Sign up for this seven-day masterclass here.
