“Creating a Market” Can Help Businesses Maximize Value
Businesses seeking a capital solution should look to review multiple options before choosing a path forward
One of the best qualities of Oklahoma business owners is their loyalty to people who have done right by them. Their first intuition with contracts, lenders, capital providers, and service providers is to simply do business with the person who they have known the longest or whoever calls on them first. Often, they feel they are being disloyal or disingenuous by considering other lenders or capital providers. Similar to why a business won’t simply hire the first candidate interviewed for a job, a business is best served by “making a market”, or in other words, creating competition for the capital it is seeking. The following is an explanation of some of the benefits of making a market for a business seeking some form of equity, debt, or transition event.
Increasing the Likelihood of Closing
One benefit of making a market is maximizing the number of potentially interested parties, which in turn increases the likelihood of a successful transaction closing. For example, lenders sometimes have a high concentration of loans in a particular industry and bank regulators require them to be more diverse, so those lenders have to be more selective in the deals they pursue; whereas another bank may not have that problem. Additionally, one lender may look at a combination of factors such as the financial strength of the person guaranteeing the note, liquidation value of the assets, loan to value, historical cash flow of the business, etc., while another bank may look at a different combination of factors entirely.
A second benefit for making a market is capital providers have very different investment or purchasing criteria. For example, one private equity fund may be interested in investments in, or purchases of, distressed companies, while another fund may only be interested in healthy, growing healthcare companies. Another fund may only invest equity in businesses generating $2-$5MM in EBITDA (earnings before interest, taxes, depreciation and amortization), while another may be willing to invest in debt securities of companies that have revenue but do not make a lot of money. By casting the net to many lenders or capital providers at the same time, a business can significantly increase the likelihood that at least one party will be interested in the industry, size, offering type, level of profitability, etc. of a given business.
Getting a Better Deal
Another benefit of making a market is to get a better deal. Whatever the capital need may be, increasing the number of interested parties increases the likelihood of receiving multiple offers for that opportunity. When lenders, capital providers, and buyers know they are competing against other parties they are inherently more competitive than when they know they are the only party in negotiations. Furthermore, with multiple offers the odds are that some offers will contain elements that are favorable and some will contain elements that aren’t as favorable. By reviewing and understanding the broad array of options, the business will be in a better position to negotiate the ideal capital solution with the preferred capital partner.
Finding the Right Partner
Maybe the most important benefit of making a market is the ability to compare the way different organizations and people think and conduct themselves (often called “bedside manner”), as well as reviewing their investing or operating expertise. The right fit for a business is as important, if not more so, than the financial terms of the transaction. Interacting with multiple parties provides companies the opportunity to filter groups by these characteristics in order to determine what type of partner they could be. Frequently in the beginning stages of a relationship, companies seeking capital will be told things they want to hear, but by having multiple meetings, comparing and contrasting partners, and reference checking, a business can increase the certainty they are selecting the right partner for their capital needs.
About Infinity Capital Partners
Infinity offers a full-suite of investment banking services for small and middle-market businesses. Headquartered in Oklahoma City, OK, the company has established a reputation working with closely held businesses with the utmost integrity, discretion and professionalism. For more information about Infinity Capital Partners, including a list of current projects, please visit our website at www.infinitycappartners.com.
