With banks globally restricting new funding during COVID as recession bites, the US bank and non-bank lender market are of a scale that offers debt solutions in a competitive environment to mid-market sponsors.

Here’s the latest June 2020 Corporate Debt report from our New York office, SPP Capital:

1. Liquidity conditions in the US are steadily improving. Most private capital markets are actively processing new transactions. While the market is still a far cry from the competitive pricing and leverage metrics that characterized the early pre-COVID months of 2020, we are witnessing a definitive shift to lower spreads across the credit spectrum.
2. Most US lenders are actively competing for new business. Most US lenders have moved on from the “putting out fires” stage and making remedial modifications to legacy portfolio assets to actively competing for new business. Importantly, the market is becoming increasingly acclimated to a fully “virtual” deal process where transactions are reviewed, processed, completed due diligence, documented, and closed without the principals ever meeting face-to-face.
3. Transaction timing is also improving. During the height of the COVID crisis, closing timetables had extended from ~8-10 weeks to ~12-15 weeks; increasingly, timing for most “vanilla” financings have contracted to near pre-pandemic levels.
4. Normalised COVID-19 EBITDA. Almost every deal brought to market for the next few months will be “storied” in some way or another, and investors have already begun to discuss the concept of “Normalized EBITDA” (i.e. – pre-COVID-19 annualized EBITDA, or other creative approaches). Accordingly, if the “story” is simply the impact of COVID-19, there will be more than sufficient liquidity for most issuers except those in the truly most hard hit of sectors (hospitality, restaurants, brick and mortar retail, event planners, etc.).Liquidity for issuers that were already credit-challenged going into the COVID-19 onset will experience a different course and raising capital for these entities will be particularly burdensome. This does not mean that the markets will be closed or that liquidity will be unavailable; however, it is likely that the cost of capital will be high and, in many cases, will require some equity upside. 

There has been an abundance of capital raised for private market distressed financing over the course of the last three years in anticipation of a more traditional recession, and these funds combined with the influx of capital from traditional control equity sponsors now seeking minority positions will provide a much needed escape valve for issuers in need of liquidity.

If you have a current or prospective liquidity need, please book a call with any of our Private Debt team here.

Stefan Shaffer
Managing Partner and Principal

Stefan has over 30 years of experience in the private market includes hundreds of transactions in North America, Asia and Europe. Prior to becoming a principal at SPP Capital, Stefan was a Vice President in the Private Placement Group at Bankers Trust Company where he was responsible for origination, structuring and pricing of private placements for the Capital Markets Group, both nationally and internationally.

sshaffer@sppcapital.com
stefanshaffer@eatonsq.com
Ph: +61 412 778 807

Here is an example to amplify this issue. In the past when we would sit down as a family for we would all pretty much eat the same food. However, these days it seems that everyone has their own preferences that need to be catered for. Suddenly the straight forward task of preparing dinner has become terribly complicated by the individual tastes and philosophies of all the individual family members.

You can imagine then how difficult it is for a family business with layers of operational, financial and staff challenges to seamlessly introduce next-generation family members? Of course, there is no answer that will suit all family situations.  At the very least, the founders must invest heavily in educating, training and mentoring the next generation. That investment takes years. There needs to be agreed rules and principles that the founders and the next generation acknowledge and commit to. Equally imperative is that the next generation has a voice and that the founders are willing to listen.

Many families elect to sell their businesses and let the next generation focus on their business or other interests independently. However, this strategy requires careful planning. At Eaton Square, we see family businesses dealing with this challenge in many ways. Some sell at market price on normal commercial terms while others find varying models to transfer the firms to family members. Either way, it’s imperative for the family to prepare for the outcome that they wish to achieve before succession is forced upon them.

Transactions can be affected by impending elections, economic issues offshore and at home and other transactions in play at the same time. If the window of opportunity to sell a business is open, don’t assume that it will stay open forever and if it closes it could be 5+ years before it reopens.

Here are six tips to help you prepare for a sale:

1. Sell before the top of the cycle. Leave some growth on the table for the buyer
2. Create a competition. Research shows that competition between buyers is the most important factor for driving a higher price
3. Create an open and transparent process. Given different family members can have very different objectives, a transparent process can help to give everyone comfort that they are being treated equally
4. Look internationally. With global markets being so fluid often the best buyer strategically and financially is based outside your home country
5. Have your house in order. Deal preparation includes having all forecasts, strategies, material contracts and business plans and post-transaction management plans documented and in writing
6. Understand the nuances of each buyer. Every buyer is different and if you can align with their needs you will get a better deal. An offshore conglomerate will behave completely different from a neighbour during the process and there is no saying which would be the preferred buyer to deal with.

The execution of a decision to sell a family business or to introduce family members into a business is a challenging almost daunting endeavour of its own unrelated to the daily stresses and challenges of a running the business. Whichever pathway a family takes it should work with a professional to give themselves the best opportunity to succeed.

If you own a family business and would like to seek strategic advise, please don’t hesitate to send me an email.

Gary Papay
Managing Partner and Principal

Gary Papay is a Principal at Eaton Square. A professional intermediary and business appraiser specializing in the sale and transfer of privately held mid-market, heating oil, propane, and petroleum companies since 1976. Gary is the partner in charge of IBG’s Pennsylvania and North Carolina offices.

gary.papay@eatonsq.com
Ph: +1 (570) 584-6488