Pondering the search fund process.

When to Involve a Banker in Your Search Fund Process

When to Involve a Banker in Your Search Fund Process

A typical search fund will screen hundreds of potential deals over the course of the search phase. With so much work to do — and the eventual need for a bank loan on the horizon — the question of when to involve a banker in the search fund process is an important one. With the right approach, this element of the search can be used to help accumulate information from which to make a better final lender choice when your deal has an accepted letter of intent and is ready for the closing process.

Cultivating a Search-Lender Relationship

A lack of committed capital can make it difficult to secure bank funding (and even more difficult to engage a seller). Therefore, cultivating a relationship with a bank lender early is key — particularly with a banking professional who’s knowledgeable in financing lower- to middle-market company acquisitions using either a conventional loan or an SBA loan.

Ideally, search funders should ask their networks for referrals to lenders with a focus on this type of lending, rather than randomly selecting general commercial or SBA banks. A general commercial or SBA lender will likely be unaccustomed to the search fund model and the method of raising capital. Additionally, a lender typically won’t see a search fund deal as a good fit for his or her credit program.

A search funder will want a bank lender with a credit appetite centered on a company’s cash flow instead of collateral and asset coverage. A bank with a focus on cash flow for its loan criteria is a pre-requisite, but even here, it’s important to locate the right person within that bank. The best way to find the right bank and banker in the search fund process is through referrals and testimonials from the search fund community. There are far fewer cash flow lenders than asset-collateral focused lenders, so the list of good prospects will not be extensive.

An initial introductory call with the banker is customary after a referral introduction, but it can be hard knowing how many times to ask that banker questions (or to screen deals during the search process).

Building a relationship is important, as trust is foundational to success, but one does not want to wear out his or her welcome by presenting too many early stage deals to a banker. The banker must focus on a business with a good probability of eventually turning into a funded loan and, therefore, must be mindful of his or her time. Top bankers — which are usually the best to work with because of their experience — are spending a great deal of time on active deals under LOI and in various stages of closing.

The best time to work with a banker on pre-screening and pre-qualifying is just before or just after submitting an letter of intent or LOI. When a searcher has developed a relationship with a bank lender, he or she can pre-screen deals with the lender at this stage. The cycle time on pre-LOI analysis will start to improve after a few deals, and the searcher should then begin to show only deals to his or her banker that have a good probability of making the grade.

This process solidifies the relationship and allows the lender to become familiar with the searcher’s skills and talents. It also helps the searcher know the lender’s credit preferences and work style. These are all critical process details and information to understand before making the final lender selection. Searchers should choose lenders who are willing to put this work in, as it confirms commitment to the long-term success of searchers and their investors.

Bringing in the Bank

Finding an experienced bank to work with throughout the search fund process can be tricky. At the introductory stage, it may be wise to contact approximately five or six banks, prioritizing lenders with positive referrals from past searchers.

Once you’ve narrowed the field to a few possibilities, you can begin negotiating terms on a deal-by-deal basis. While loan terms and conditions can be very important criteria, most successful searchers will put certainty of closing at the top of their criteria. Additionally, they’ll make small compromises on other terms to work with a lender in whom they have the greatest confidence. This lender also communicates well with all parties throughout and demonstrates the ability to close the loan smoothly.

Banks, particularly those making decisions based on cash flow instead of assets, need a lot of information before they’ll close on an acquisition loan, but that comes as no surprise. This need for voluminous information makes the need to find a lender who’s organized, methodical, and thorough in his communication a very important factor.

An otherwise good deal can fall apart from “deal fatigue,” and sometimes, a lender with poor communication can be the cause. The specifics of what’s needed will shift depending on the business being presented, but when a search funder has a good relationship with his or her lender, the two can work together to understand and execute on the road map to the finish line.

Your Lender’s Network

Working with an experienced lender has several benefits. When a CEO searcher works with experienced lenders who are savvy in the search space, he or she will benefit not only from lenders’ deal-structuring acumen, but also from their entire network and introductions to other good vendors (for diligence and legal and other technical services).

Your credibility as a searcher is enhanced by the company you keep, and your experienced lender can help you present yourself well. Choosing the banker with the better network can have lasting benefits — well past the first successful acquisition.

Lisa Forrest is a Senior Vice President of sponsor finance at Live Oak Bank. Forrest, who lives in Seattle, is a 30-year industry veteran and focused on M&A in the lower-middle market for transactions up to $25 million in enterprise value. Live Oak’s sponsor finance lending team boasts extensive SBA and conventional expertise, targeting acquisition financing across the nation and industries.

Heather Endresen is a Senior Vice President of sponsor finance at Live Oak Bank. Endresen, who lives in Orange County, is a 25-year industry veteran and regular panelist at industry conferences focused on acquisitions of small companies. Endresen provides debt for small company acquisitions nationwide and is an expert in the use of both SBA and conventional bank credit vehicles.