Agenda. Traditional Financing

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1 Traditional Financing This session explores the traditional financing options that are available to allow you to build value in your business while you prepare for your exit 1 Agenda Benefits of Debt Types of Credit Facilities Traditional Senior Debt Specialized Facilities Amount of Credit Security Pricing Tenure Senior Lenders Preparing Your Balance Sheet for Sale Tips for Maximizing Leverage Questions 2 1

2 Benefits of Debt Reasonable Leverage: Enables Growth Capitalizes on Opportunities Working Capital Liquidity Monetized Equity 3 Traditional Senior Debt Operating Lines Financing A/R & Inventory Term Loans and Leasing Financing Fixed Assets Mortgages Financing Real Estate Canada Small Business Financing Program (up to $500,000 Gov t Guarantee) 4 2

3 Specialized Facilities Management or Leveraged Buyout Facilities Cashflow Based Lending limited or no tangible security Factoring and Asset Based Lending Facilities A/R & Inventory Trade Finance Documentary Credit, Standby LCs Specialized Asset Financing reserve based lending, automotive, project financing including Real Estate Construction Financing 5 Amount of Credit Optimum Leverage Industry Specific General Guidelines Financial Covenants Tangible Net Worth Debt/CF or EBITDA Banks vs Equity Stakeholders 6 3

4 Amount of Credit Traditional Bank Guidelines: Operating Lines 65%-80% of acceptable A/R + 50%-75% inventory (generally capped at 50%-60% of the line) Term Loans 50% 75% of lesser of purchase price or appraised value of equipment 80% of highly marketable new assets Leasing Up to 100% of Purchase Price of New Equipment 7 Amount of Credit Real Estate Mortgages Maximizing leverage within the Real Estate sector is dependent upon credit market liquidity, location and use of property Ranges from 60% - 80% of the lesser of purchase price or appraised value Large Commercial Real Estate Mortgages best financed by long term niche lenders (Life Co s, Pension Funds, etc) 8 4

5 Amount of Credit Canada Small Business Financing Program Financial Institutions deliver the program Up to $500,000 Federal Gov t Guarantee Applicable to small businesses with revenue less than $5,000,000 Fund 90% of cost of: purchasing real estate (land and buildings) purchasing leasehold improvements (up to $350,000) purchasing or improving new or used equipment 9 Canada Small Business Financing Program Cont d Will not cover: goodwill working capital inventories franchise fees research and development 10 5

6 Amount of Credit Management or Leveraged Buyout (LBO) Utilizes the assets of the company to finance the purchase Generally standard lending values apply with support from other sources (ie equity, vendor take back financing and other subordinate debt) Cashflow based lending (no direct attributable security values) larger companies with solid proven track records 11 Amount of Credit Cashflow Based Lending Revenues exceeding $20 million annually Minimum 3 years profitable operating history Leverage ratios within industry norm (Senior Debt/EBITDA) to be tested regularly 12 6

7 Amount of Credit Asset Based Lending (ABL) & Factoring Uniquely tailored to meet the needs of the business Higher Leverage Working Capital Loan Operating Lines: could be as high as 80%- 90% of acceptable A/R + 75%- 85% inventory (without a cap) Equipment Financing could be as high as 90% - 100% Invoice Discounting (Factoring) 13 Amount of Credit Trade Finance Facilitates imports and exports Documentary Credits Invoice Discounting Transactional Non-Recourse Financing up to 100% 14 7

8 Amount of Credit Specialized Asset Financing reserve based lending, automotive, project financing including real estate construction financing Tight guidelines Highly dependent upon market conditions Recommend lenders which are well known to finance the specific industry 15 Security Small to Mid Size Co s generally secured A/R, Inventory, Equipment, Real Estate The Business (as evidenced by an acceptable third party evaluation) Other: Marketable Securities Guarantees (Personal & Third Party Corporate) Receivable Insurance (EDC, Ex-Im and large international underwriters) 16 8

9 Personal Guarantees Relevant to new private companies (and new owners) Relevant to businesses without tangible assets Demonstrates commitment to your business Supported Personal Guarantees (tangible security backing guarantee) Last way out for lenders 17 Release of Personal Guarantees Once business and profitability are established typically 3 years All terms and conditions must be met 18 9

10 Pricing Lenders are using risked capital models to determine pricing Strong influence from Basel II (favored small business) Factors: facility size, utilization, tenure, nature of security, size and performance of borrower, access to alternate forms of capital, relationship Negotiable 19 Canada Small Business Financing Program Max P+3% or Fixed Rate Mtg + 3% 2% Front End Fee Fee and Spread shared with the Gov t 20 10

11 Tenures Uncommitted/Demand Loans vs Committed Term Loans/Leases: Amortization generally inline with the useful life of the asset financed Real Estate: Mortgages (1 5 year term and yr amortizations) Banks generally seek short to mid term amortizations 21 Senior Lenders 22 domestic banks, 26 foreign bank subsidiaries and 23 multi-service foreign bank branches and six foreign bank lending branches operating in Canada Schedule I (Canadian Ownership, Big 6, CWB) Schedule II (Foreign Banks authorized to accept deposits in Canada) Schedule III (Foreign Banks authorized to do business in Canada utilizing the parent bank s balance sheets very restrictive) 22 11

12 Other Senior Lenders Nonbank lenders: ATB, BDC, EDC, GE Capital, Credit Unions, Life Co s, Pension Funds EDC Risk Management Solutions to help Canadian exporters to finance international operations 23 Niche Lenders Commercial Real Estate Mortgages: Life Companies, Pension Funds, Credit Unions Equipment Financing & Leasing: GE Capital, Roynat, National Leasing Trade Finance: EDC, HSBC, Northstar Small Business: ATB, CWB ABL: US Bank s such as Bank of America 24 12

13 Preparing Balance Sheet For Sale Keep it Simple Clean up intercompany and non-arms length loans Clean up intangibles and obsolete assets Optimum D/E Permanent Debt (larger companies) Subordinated Debt may be considered equity by a senior lender Maximizing Liquidity (credit availability) **Consult a qualified tax accountant** 25 Tips for Maximizing Leverage Treat Banker as a Financial Partner Establish Trust Share information never too much information Share Long Term strategies including the sale of your company Regular Contact at least quarterly 26 13

14 Tips for Maximizing Leverage Prepare a clear and accurate business plan including: Bios of key principals and officers Historical accomplishments and financial performance Third Party Appraisals and Business Evaluations Industry Attributes and Competition Growth or Sustainable Strategy Reasonable Financial Projections (with the inclusion of new debt, if applicable) **Consult a professional (accountant or advisor)** 27 It is all about Management Demonstrate accomplishments Develop a relationship with your RM and Bank Executive Teach your banker about your industry Provide advance warnings Anticipate financial requirements Never Overdraw Accounts! 28 14

15 Stick to the knitting acquisitions should complement your business and stay within your expertise Primary Weak Links Financial Controls (CFO) Lack of Succession 29 Bankers Want Your Business Bankers Want a Relationship Relationship vs Transactional Cost savings More latitude in good and bad times Better terms and conditions Express your views to the Executive (good and bad) 30 15

16 Questions??? 31 16