Over the next decade, it’s estimated that more than 75% of business owners plan to exit their companies, and many of them will do so by selling. For owners, that can be an intimidating prospect, requiring careful planning and often complex tax and estate considerations, not to mention the challenge of finding the right buyer who is willing to pay the right price for the business. Yet a successful M&A also requires something else: financing. In fact, a buyer’s inability to secure the required capital can be one of the major reasons for an M&A failing—sometimes leaving the seller to start the process all over again.
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CWB can help. Its deep and holistic support for business owners includes commercial banking, financial planning and wealth management services, as well as advice on selling a business through its unique alliance with Vancouver-based deal and valuation advisory firm Sequeira Partners. Yet the bank can also tap the power of the corporate banking world, specifically through its syndicated loan operation, to provide the much-needed financing to make an M&A possible. “We are very active,” says John Cherian, Managing Director and Head, Corporate Banking–Loan Syndications and Agency, at CWB. “Many private owners don’t know that we can actually assist their buyer with financing, but we often can.”
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The beauty of syndicated loans
Syndicated loans are financing vehicles through which a lead lender (or agent) packages up a potential loan and offers other lenders (usually financial institutions) the opportunity to participate in the debt offering. From the lenders’ perspective, syndication disperses risk; from the borrower’s perspective, it allows for loans at a scale and with terms that might not otherwise be available through more traditional forms of credit.
For mid-to large-scale M&A transactions, syndicated loans can provide the vital financing needed to see the deal through. As well, understanding CWB’s loan syndication offering—and what lenders in a syndicated loan program are looking for—can be hugely beneficial to sellers.
Sometimes, the benefit can be direct. For instance, a CWB business client may wish to transition their company but their buyers—perhaps family members or a management team—lack the capital needed to complete the transaction. “We might get involved with the buyer after the owner has signed a letter of intent and makes CWB aware of their need for financing,” Cherian says. “At that point, we implement information sharing restrictions between the commercial side and my group to ensure a high level of confidentiality and to enable our team to work independently with the buyer.”
Less directly, Cherian’s team often gets involved when a business owner starts a discussion about selling the company—and wants to know how to make it more attractive to lenders upon whom a buyer will probably rely. “In an ideal world, a client tells their relationship manager they are thinking about selling and asks, ‘What are some of the things I should be thinking about?’” he explains. “At that point, we can be brought in to provide insights from a lender’s perspective.” For instance, Cherian’s team could provide feedback on an owner’s valuation of the company, or point to challenges and opportunities a potential buyer may face when trying to secure a loan, or even suggest ways the owner could smooth the financing of the M&A.
What are some of those factors? Cherian says the most important thing is for an owner to be prepared for the comprehensive due diligence that lenders typically require. “For one thing, the financial records have to be in order,” he explains. “And then they really have to be open to being asked questions they might not have been asked for a long time. Especially to long-term owners, these processes can feel very intrusive. Some owners are like, ‘I’ve been dealing with you guys for 20 years—why do you need a copy of my ID now?’”
Opening the books
The due diligence lenders require goes beyond ID, of course, it will also involve a close examination of the company books and its future prospects.
Cherian says his team primarily considers enterprise value going forward, which they estimate by modelling cash flows according to various sensitivity scenarios to calculate collateral and the company’s ability to service debt. They will want to see a “clean” balance sheet, one that is free from potentially problematic items like shareholder loans or non-active assets. As well, a quality-of-earnings report or an evaluation prepared by a qualified sell-side business valuator will help assure potential lenders that the price paid for the company aligns with its real value.
Lenders also consider growth and synergy opportunities that might be realized under new management. And it helps if these opportunities are clearly articulated in the seller’s marketing materials for the company. They will also, of course, look at new management’s ability to turn that potential into reality. “Different management might be planning to give the company a different direction or increase its service offering to the market,” Cherian explains. “So we always try to look at it as a brand-new company and ask, ‘Are we comfortable lending X amount of dollars to this company in this industry? What will be the impact of the owner selling this business?”
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Indeed, the potential ramifications of the owner’s exit on the company’s operations, brand and, ultimately, cash flow is “a big question” for lenders, Cherian says. “Can the new owners continue the company’s success or are they going to experience a bit of a dip because the existing owner really was the company?” Owners considering selling can go a long way towards addressing that concern by demonstrating the strength of the remaining management team and taking a “back seat” in operations. “That can even mean having the owner transition out of the day-to-day into, say, a chair role—before they put up their first ‘for sale’ sign,” Cherian says.
As with so much else when it comes to M&A, the sooner owners and buyers reach out to their banking partners to understand the financing landscape, the better. “On the buy side, getting the financing in order can take time, and acquirers need to ensure they get through their investment committee and that they are comfortable with the loan offer,” Cherian says. “And on the sell side, the earlier we are engaged, the more guidance we can provide.”