Lately, headlines don’t paint a pretty picture of the banking industry. Financial
institutions are attempting to shy away from funding previously announced transactions and taking significant write-downs on
balance sheets to reflect diminished values of
loan portfolios, and — in many cases —
there’s less lending capacity for loans, as
banks are attempting to build up reserves.
Still, strong companies in a position to grow
can set themselves up for continued success
by assessing strategic and financial options.
“In times like this, the strong get stronger,”
says Steven S. Goykhberg, MBA, CBA, associate director, corporate finance for SS&G
Financial Services, Inc. “The best-prepared
business owners are knowledgeable; they
know what is going on in their marketplaces,
and as opportunities to gain market share or
to grow through acquisitions present themselves, they take advantage.”
Smart Business spoke with Goykhberg
about today’s lending environment and what
you can do to stay ahead of the game.
How is commercial banking responding to
financial stresses caused by consumer sub-prime lending and an uncertain economy?
In the last six months, the news has been
populated with stories about significant
deals collapsing because of problems obtaining financing. There have been situations
where consortiums of banks, committing to
finance a large transaction, have backed
down, citing changes in economic conditions as the cause. They are not readily lending money to private equity firms that power
many of these major transactions. In the
past, depending on collateral, we saw senior
lenders extending credit up to four times
adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization).
Today, lenders generally are not considering the notion of air ball (debt without sufficient collateral), and borrowers are forced to
bring more equity to the table. This is part of
the trickle-down effect from securitization,
which is the process of packaging cash-flow-producing assets into securities, commonly
called asset-backed securities (ABS), and
selling them to investors. The vast majority
of the recent credit crunch was caused by
ABS backed by alt-A loans, loans made to subprime mortgage borrowers. Now, financial institutions are taking write-downs on
their balance sheets to reflect the diminished
value of such securities.
All this considered, banks are more cautious in their lending practices. We are starting to see a significant slowdown in higher-dollar transactions — $100 million-plus
enterprise value deals, representing the market value of all security holders, debt holders,
preferred shareholders and common equity
holders — which in turn is affecting $5 million to $100 million enterprise value deals.
Will current market conditions prohibit
access to capital?
If you are a solid company with a proven
business model and a track record of financial performance, you will have opportunities
to access capital from banks to continue to
grow your business. During tough economic
times, stay with the bank with which you
have built a long-term relationship. Even if
the financial institution next door offers you
a lower rate, the last thing you should do is
jump ship. Your long-term banker, who has
seen your business through ups and downs,
is more likely to extend your credit. In fact, if your business is strong, now is the time to
gain market share or consider acquisitions
that will put you in an even better competitive position once the economy upturns.
What strategies will help successful companies take advantage of today’s marketplace?
In times like this, you should consider ways
to grow market share. First, you can acquire
a competitor or a company with services
and/or products that complement your own.
This can be a company located either in your
immediate area or in an area where you want
to extend your reach. If a competitor who
has a great portfolio of products or services is
struggling, now is the time to discuss a potential acquisition with your financial adviser.
On the other hand, if you have no interest in
acquiring a competitor but still want to
increase market share, you need to strategize
ways to encourage consumers to buy your
product rather than the competition’s. The
most obvious way to do this is to slightly lower your price but, generally speaking, this will
only work if you sell a commodity product.
These are two basic strategic ways of building muscle during times when the weak get
weaker. The point is to always be thinking
ahead. What can you do to grow even if the
rest of the market is at a standstill? How will
you use this time to push ahead?
How can you balance being aggressive in
tough times and just getting the job done?
The natural tendency for businesses during tough economic times is to maintain the
status quo. Keep your nose to the grindstone, concentrate on your core competencies and keep quality high so that you maintain longtime customers and preserve the
integrity of your brand. However, while
‘playing defense,’ you must also take an
offensive position and always be thinking,
‘what’s next?’ Your trusted advisers will help
direct you, and you should rely on your
CPA, attorney and banker to provide third-party insight into what moves will make
your business even stronger, no matter what
the headlines say.
STEVEN S. GOYKHBERG, MBA, CBA, is an associate director of corporate finance at SS&G Financial Services, Inc.
(www.SSandG.com). Reach him at (330) 668-9696 or [email protected].