Advisors & Money

Rules listRecently, a company we are aware of had a situation where they had someone who was interested in purchasing their out of compliance debt from the bank.   Management was so sure of the deal that they arranged a meeting with the representative of the funding source and the bank.

The meeting went well, the bank was certainly interested in being relieved of a loan that is in special assets and it appeared that things would work out for everyone.   Until their banker received an email indicating that the funding source was no longer interested in purchasing the loan and the company had hired the funding source representative as a “consultant”.

There was a certain amount of surprise at both the change of events and the fact that the company had hired the consultant with relatively undefined duties.

At about the same time, another business associate who is seeking funds for a start-up approached us for an investment. While his business plan didn’t fit our criteria, he also indicated that he had spoken to someone who had indicated that he could bring in the funding necessary, but wanted to be hired by the company on a fee for services basis before committing to bring in the funds.

What To Look For When Dealing With Providers Of Services As Well As Funding …

Realizing the behavior described above is more common that we had suspected and since Revitalization Partners is an established restructuring and management services firm as well as having an investment fund, we wanted to lay out some of the things to look for when dealing with providers of services as well as funding:

1.  BE WARY – Be wary of anyone who makes an instant commitment to provide funding unless it is their own personal money.   Almost every funding source has an investment or loan committee.   An expression of interest is NOT a funding commitment.   In today’s climate, there is too much money chasing too few good deals. Getting you to believe that your deal is wrapped up means that you’ll stop talking to other people. Or, as in the case of the company described, you’ll start talking about “having the deal” to your bank and business associates. Remember that only between 10 -20% of “expressions of interest” turn into actual funding. You can evaluate several proposals at the same time; and should.

2.   FUNDING COMMITMENT UP FRONT? –  Think very hard about anyone who promises funding if you hire them on a fee for services basis. Yes, we always hope we can and we like to use our fund to help companies that we are working with.   But, because we, like almost everyone else, have an investment approval cycle, we can never make that commitment up front. And our funding of a company is not dependent on our providing them services. The need for our services and a qualified investment are separate things. About the only thing we can say is that we probably won’t fund the hiring of a competitor. And there may even be an exception to that.

 3.  ARE YOU READY TO RAISE MONEY? – As we wrote in our last blog, there are all sorts of criteria for finding the right management or restructuring advisor.   And the skills that a money finder may bring to the organization may be very different.  One important question to ask is: Are you ready to raise money? If you were doing the due diligence on your company, would you make that loan or investment? Need is not a qualification. Return of the funds or return on investment is what the lender or investor will be looking for.

 4.  IS IT TOO EASY? –   If your company is profitable and in good standing with your bank and/or has a history of EBITDA profitability for an investment, you’ll probably have more interest than you can deal with. But if you’ve been assigned to Special Assets or have a history of losses, then it’s going to take more work and perhaps some restructuring to get you there. It doesn’t mean it’s not possible; just don’t fall for the “sure thing” story.

 Do Not Be In A Hurry …

Make sure you do your homework when talking with a group that offers both fee for services and funding. And never take an expression of interest as a sure thing.  Keep talking to other people and don’t be in a hurry to proclaim the deal done to financial and business associates. It’s yours and your company’s credibility.   Make sure it’s not at risk.