A True CF “Woe” Story By Kevin Pearce

This is an absolutely true story.? Last summer, I was working on a project to source a working capital financing facility for a company that had just completed an acquisition.? The parent company, who put in the equity, was in New York as was the CFO, while the acquired company was in the west.

The CFO (we’ll call him “Steve”) contacted me the day after the acquisition was completed and we had a meeting to discuss why they needed a new working capital line for the new subsidiary (“Newco”).? The parent company was drawing on its own lines of credit in order to fund the initial phase of operations for the Newco, but needed to separately finance Newco, and at closing refund the parent’s projected $3 million in intercompany advances.

So I got to work immediately, working for a month to gather information and put together monthly P&L projections, balance sheet, and borrowing base projections, while he was negotiating another acquisition, which I also worked on in the context of a global deal.? In total, it would be a $50 million to $75 million combination working capital & acquisition financing engagement, and at 1.5% at closing, not a bad potential payday for a guy like me.

We got all the documents and projections properly prepared, and I screened the deal with several lenders that all had an interest in competing for the business, receiving very enthusiastic responses from all of them.? It was at that point I asked Steve to sign my engagement agreement so we could proceed.? He said he would right away, but days passed with no communication, as my lenders stood waiting in the wings.

Finally, a week or two later, he sent me back a markup of my agreement, completely upside-down, meaning he wanted me to disclose the lenders I would be bringing into the mix before he signed it, while he would be able to bring others to the table of his own choosing to which end I would not be paid.? I politely explained that it was not my business practice to limit who I could bring to the table, nor was it my business practice to allow for competition between me and my client or any number of brokers out there who they wanted to talk with.? Debt placement advisors like me need to lead the process , so I asked him to go back to the agreement I originally presented and start there.? He would not (he blamed his lawyer), so I explained I would not be working on the project anymore until he we had something I could agree to.? It was the first time I’ve been forced to reject a deal of that size.

A few months later, I was approached by the CEO of the parent.? Steve had been fired because he never got the financing deal done, the Newco was costing the parent $10 million in intercompany advances (over three times the original estimate), the Newco was on COD with all their vendors, and lo and behold, the other acquisition never happened (due to the financing not being taken care of).? Now the company has a new CFO, they have re-engaged me to finally run the financing process, and we are gathering multiple term sheets with a closing aimed for May.? Happy resolution for me, but not so much for Steve….

What are the lessons here?

1.??????? In specialized debt transactions, let the experts help you.? Don’t be pennywise & pound foolish or it will cost you!

2.??????? Let your CFO be a CFO, not a financing specialist.? Find a debt placement specialist (I don’t even care if it’s me), and let him do what he or she does best.

3.??????? Working capital is a business’ lifeline.? Be realistic about cost & structure and listen to your debt placement advisor – he knows the market. ?

4.??????? In case you haven’t talked with lenders recently, the days of near-free money are over, so be prepared.

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About the Author:

Kevin Pearce is a 30-year veteran of the commercial finance industry, a past board member for the Association for Corporate Growth (ACG), and current President of the Arizona Chapter of the Turnaround Management Association (TMA).? Kevin is also a Certified Management Accountant and Certified Financial Manager, and is the founder and CEO of Kaldes Financial , a boutique debt placement advisory firm.? Kaldes specializes in alternative financing solutions for special situations, unique borrowers, and for those companies in transition.