plura Financial Blog

blog for plurafinancial.com, an online matchmaker between banks & small businesses

Archive for September 2012

Strategic vs. Financial Buyers (the pros & cons)

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If you’re thinking about buying or selling a business, it’s important to know the types of buyers.  Buyers are generally classified into the following two different categories, including the pros and cons of each:

  • Strategic Buyers:  These are companies that believe your business fits well within their existing business, and there is a strategic reason for them to buy that might go beyond monetary gain.
    • Pros
      • Typically offer a higher purchase price than “financial buyers”
      • There may be some competitive advantages from joining forces with another company, including increased purchasing power with suppliers, cross selling to customers, cheaper cost of capital, etc.
      • No immediate plans to flip/sell the company again.
    • Cons
      • Tend to include their company stock as part of the purchase price (instead of giving you all cash at close).
      • They’ll probably fire a bunch of people, including management, because so many positions will be redundant (duplicative).  Part of the reason they pay a higher price than “financial buyers” is because strategic buyers can immediately cut so many costs out of the business; no need for two regional managers at the same company covering the same region.  And every $1 of cost savings the buyer creates is worth $5-$7 due to the EBITDA multiple effect in corporate valuation (companies are generally sold for 5x-7x EBITDA).
  • Financial Buyers:  Investors that are purely interested in monetary gain.  Similar to flipping houses.
    • Pros
      • Most employees, including management, will likely keep their jobs
      • Likely an all cash offer (versus buyer’s stock being part of the purchase price)
    • Cons
      • Increased leverage.  Financial buyers typically use debt to finance up to ~75% of the purchase price, leaving the business saddled with a significant amount of new debt that might strangle the company’s cash flow and limit its financial flexibility.
      • Lower purchase price.  Financial buyers typically pay less for a company than strategic buyers because there are fewer “synergies” to be had that might otherwise justify paying a higher premium.

-Brandon Hinkle / www.pluraFinancial.com

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What is a Relationship Lender?

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I challenge you to find a bank that says they’re not a “Relationship Lender” these days.  When you think of the words “relationship lender”, does it conjure up images of your banker treating to a round of golf, buying expensive steak lunches, and giving you loan after loan at the lowest rate without regard for financial performance?  Think again.

Relationship Lender means the bank requires the company’s operating account in order to give you a loan (in addition to the standard credit criteria).  But the banker is not allowed to say this because of a federal law called “anti-tying” that says a bank cannot require you to sign up for one product (e.g. cash management) in exchange for receiving another (e.g. a business loan).  I’m not a lawyer, but that’s the explanation of tying given to me by our legal counsel when I worked at a bank.  Banks want your operating account (cash deposits) for two primary reasons: (1) if your loan is in default they probably have the right to “sweep” (take) all the cash in the checking account because it’s part of their loan collateral, and (2) banks are required to have a certain amount of cash for each $1 they lend.  The more cash people hoard at their bank, the more loans the bank can make and the more funds the bank can borrow from the Federal Reserve, etc.

Should you avoid “relationship lenders” when seeking a business loan?  Absolutely not; many of the most competitive banks also classify themselves as relationship lenders.   When a bank tells you they’re a relationship lender, should you ask what exactly that means?  Absolutely yes.  If nothing else, it will be an amusing conversation and a great way to start off your joyous relationship together!

Looking for a bank or business loan?  pluraFinancial.com creates relationships between banks & businesses online, or you can ask your local Small Business Development Center which bank might be best for your business.  Both are free ways to find the best bank for you & your business.

http://www.plurafinancial.com

Written by entrabanker

September 12, 2012 at 3:14 am

Growth Capex vs. Maintenance Capex vs. Internally Financed Capex

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Capital Expenditures

Growth Capex vs. Maintenance Capex vs. Internally Financed Capex

There are generally two reasons companies spend money on capital expenditures “capex”: to grow the business, and to maintain the business.  Once a company determines it needs to make a capex investment it must decide how to pay for the capex, either using company cash or debt.  Let’s explore each element of capex in more detail to get a better understanding:

  • Maintenance Capex: The necessary expenditures required to keep existing operations running smoothly.  Perhaps a new conveyor belt for the old machine, or new computers to replace the outdated technology.  These expenses don’t attract new customers or create the capacity for a bigger business; they just enable the company to keep running at status quo.
  • Growth Capex: The discretionary investments used to attract new customers or create the capacity for a bigger business.  Perhaps a new customer requires you upgrade your software before signing a contract, or maybe you need another machine to process all the upcoming orders from new customers.  These are the expenses/investments in additional assets to help facilitate growth.
  • Internally Financed Capital Expenditures: Spending internal cash (instead of debt) to pay for capex.  When banks are determining your credit-worthiness, they are evaluating all the sources & uses of cash.  Capital Expenditures (capex) is a big use (drain) of cash for many companies, particularly manufacturers.  The more cash is spent on capex, especially growth capex, the fewer funds are available for debt payments.  Capex financed with external cash (bank debt or owner equity) doesn’t reduce company’s cash flow, but capex financed with company cash does.  Internally Financed Capex is part of the FCCR, the ratio used to determine a company’s ability to repay its debt.  The bank often asks for an estimate of internally financed capex because that number won’t be included in any financial statement, but is necessary to calculate your company’s ability to repay debt!

If you have capital expenditures, it’s helpful to keep track of how much was spent to grow versus maintain your business, and how much was financed with company cash instead of bank debt!

-Brandon Hinkle/www.plurafinancial.com