Banking in the Merger/Acquisition Environment

Today’s merger/acquisition market is robust, the demand is higher than the supply, and the supply is great. With the prices for blue sky reaching all-time levels, banking relationships are more important than ever. With banks and financial institutions having plenty of money to deploy, the competition for business to lend money for acquisitions is also significant. Because of this, financial institutions, both banks and captive finance companies have been eager to lend money at low rates with high loan to value on real estate, blue sky, asset and capital loans.

Money rates range from LIBOR plus small percentages to Prime rate plus a couple points. The rates vary greatly based on the financial strength of the borrower and how the banks perceive the quality of the acquisition; and most importantly, the relationship between the lender and the borrower. And in some cases, the desire of the lender to establish a relationship with a strong borrower. Lenders look for quality of the balance sheet of the borrower and integrity of their management. It is important to put your best foot forward in both aspects.

For debt obligations that are under $20million, banks most likely will not require CPA prepared financial statement, and will want dealer statements and tax returns. It is important that any financial statement be pure and free of misleading information and that they are accurately prepared. For debt obligations in excess of $20 million, most traditional banks like to see Review level financial statements prepared by an independent CPA firm. Although rare, Audited financial statements can command lower interest rates and larger credit facilities. Bottom line, the higher quality financial statements and strong balance sheets equate to faster closings, lower rates and higher debt to value ratios.

Depending on the franchise to be acquired and the relationship with the financial instrument, it is not uncommon to see very high financings of blue sky if not 100 percent financing. For franchises of lower interest to the bank, blue sky financing may only be 50 percent, requiring more equity by the borrower, or some financing provided by the seller. In some cases, the financial institution may require a business valuation to support the blue sky value. To alleviate some financing concerns on blue sky, we are seeing more “creative” type transactions to move deals quicker as well. In many cases, some sellers are willing to hold notes to finance higher blue sky values, or perhaps participate to some extent in the anticipated growth of the dealership through “deferred” blue sky financing or partnering in the real estate.

Traditional banks are still requiring substantial equity in financing real estate. Typically, we are seeing 20 percent equity in the real estate, and perhaps more for dealerships that are not facility compliant with the manufacturer. However, there is a healthy appetite for facility improvement financing.

In all events, you owe it to yourself to explore the market. In a recent competitive situation, a longstanding relationship with a Captive Finance company was tested when a large bank was allowed to compete and offered a rate almost one half of that being proposed by the long standing relationship with the Captive Finance company. When presented with this fact, the Captive Finance Company miraculously offered a rate even lower to maintain the relationship.

In some instances, traditional banks strive to obtain a complete relationship with the dealer, including floorplan lines, real estate and other credit facilities, and maintain the basic banking relationship such as DDA and merchant services accounts. This can help in reducing interest rates and other costs and fees. However, “exploratory” new relationships can also result in lower rates without the requirements of complete banking relationships leaving the ability to work with a number of banks, if that is feasible as well.

To sum it up, the banking market is highly competitive. Rates can be negotiated for quality borrowers, so if entering the acquisition market, get your financial house in order. Make your financial statements accurate, clear and maintain a strong balance sheet. Keep open dialogues with your banking partners and meet with other members of the banking and financial community to see what is out there currently.

About the author: Ken Rosenfield is the founder of Rosenfield & Company PLLC, a regional CPA firm with one of the country’s largest automotive retail practices. His firm serves hundreds of dealerships nationwide.

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Ken Rosenfield
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC, a full service CPA firm with one of the largest Automotive Retail Practices in the country. Mr. Rosenfield is a frequent speaker at national conferences on many subjects in your industry. His firm has offices along the Eastern Seaboard of the US and represents clients across the Continental US and abroad.