Lender Relationships

In many owner-run businesses, the bank relationship is one of the owner's oldest and most valued. The owner and the branch manager have known each other for fifteen years. The manager understood the business when it was small, lent when others would not, and still picks up the phone. The relationship has been worth a great deal, and the owner is right to value it.

A buyer sees two weaknesses in it at once. It belongs to two people, and either can leave: the owner by selling, the manager by retiring or being moved. And the business has one lender, which knows it is the only one. When a maturity comes, or the manager changes, or the bank's appetite for the sector shifts, the business has no alternative, and the only person who can handle the crisis is the owner.

Lender Relationships is the driver that makes the relationship the company's. It moves free cash flow to equity by making net borrowing a decision the company can take without its owner: the finance lead owns the lender relationships, a second lender stands ready, and every maturity has a refinancing plan, so that refinancing risk does not discount the equity.

The finance lead owns the relationship

The finance lead prepares the lender pack and the compliance certificates and is the lender's day-to-day contact, with a named deputy, and the owner has stopped being the lender's working contact for long enough that the habit has broken on both sides.

The transfer happens in person, at a joint meeting where the owner tells the lender, with the finance lead in the room, that the finance lead now runs the relationship. After that the owner refers every lender contact to the finance lead, including the friendly calls from the old manager. The meeting is the easy part. For months afterwards the habit of calling the owner persists on both sides, and the owner has to keep redirecting it.

Then the relationship is written into the seat. The finance lead's job description and agreement name the lender relationship, the pack and the certificates. The deputy attends one lender meeting each quarter, so the lender knows a second person and the relationship survives a departure.

The owner can check the transfer with one question to the relationship manager: who do you call? If the answer is the owner's name, the transfer has not happened, whatever the organization chart says. When it is the finance lead's, the relationship will outlast the owner, and a buyer has one less reason to doubt the debt's durability.

A second lender, recently

A second lender should have issued an indication of terms within the last year, on the business's current figures.

Once a year the finance lead shares the lender pack with at least one other lender under confidentiality and asks for an indication. The pack already exists, so the exercise is modest, and it does two things. It gives the business a benchmark: at every renewal and refinancing, the current lender's terms can be compared with a recent, real alternative instead of the owner's sense of the market. And it changes the current lender's position. A lender that knows the business has another lender's indication on file prices its renewal accordingly. A lender that knows it is the only one has no reason to.

The indication has to be recent and on current figures. One from two years ago, on figures from before the facility, tells nobody what the business could borrow today. A current one shows that the debt could be replaced if the present lender withdrew.

Every near maturity covered

Every maturity coming up soon is covered by a committed refinancing or by cash on hand, and no single year carries too large a share of the total debt's maturities.

Each refinancing starts on a date recorded on the debt schedule at closing, well over a year before maturity, and uses the second lender's indication as its benchmark. That leaves time to run a proper process with more than one lender, and to wait out a bad quarter if one arrives at the wrong moment.

A maturity not yet committed by a set point before it falls due has cash set aside against it from free cash flow to equity until the refinancing is committed. The rule is there to force the refinancing to start early, and the illustration shows why.

In the illustration, a $900,000 maturity still uncommitted twelve months out would need $75,000 a month set aside to cover it, more than four times the owners' monthly cash in the first year of the facility. The business could not save its way to the maturity. It has to refinance, and the rule makes sure the refinancing is under way well before that point.

What the old relationship was worth, and what replaces it

The owner's relationship with the bank was worth a great deal, and it helps to be exact about what, because the driver has to replace that value as well as end the relationship.

A long relationship between an owner and a branch manager carries what lenders call soft information: the manager's personal sense of the owner's judgment, built over years, which lets the bank lend on less paperwork than it would ask of a stranger. For a small business with thin records that matters. It is also what does not survive the owner's departure, the manager's retirement, or a change in the bank's credit policy that moves decisions from the branch to a central committee.

The earlier bridges have been replacing soft information with hard. The lender pack, the covenant history, the levered forecast and its record, and the seasoning memo can each be read by any lender without knowing the owner. A business that has them no longer needs the friendship to borrow, which is what makes it safe to hand the relationship to the finance lead.

The owner does not vanish from it. Most well-run relationships include an annual meeting with the lender's senior people, where the owner speaks to strategy and leaves the numbers to the finance lead. What moves to the finance seat is the lender's working contact and the business's knowledge of its own borrowing.

What it does to value

Lender Relationships ranks tenth on the bridge. Its value is the fall in the probability of a failed refinancing, from covered maturities and a second lender's indication, multiplied by what a forced refinancing or sale would cost the owners. A failed refinancing is one of the more expensive things that can happen to a leveraged business, because a lender that will not renew, with no alternative ready, can force a sale at whatever price the market offers that month.

The second lender's interest also deepens the pool of buyers. That effect is real, and it is price: it is counted in the discount for illiquidity, as a narrower discount on the stake, and recorded in the price column, never as value of the business.

What has to be in place first

A relationship can only be transferred to someone who is already there, so the driver needs a finance lead in the seat, from Management Install on the second bridge. A second lender gives an indication on the business's history, so it needs a year of on-time lender packs from Lender Reporting. And the maturities being covered are the ones on the debt schedule, so it needs that schedule, with its refinancing dates, from Facility Close.

Knowing that it works

Each quarter the finance lead counts the lender contacts the owner handled, where the target is none. The pack shows the months since the last second-lender indication, against a year, and every month the share of near maturities that are covered.

The owner's own checks are to ask the relationship manager who they call, where hearing the owner's own name is the finding, and to read the refinancing plan for the next maturity and state when it starts, the benchmark terms and the fallback.

Why it slips, and what holds it

When a finance lead leaves, the lender's calls go to the only other person it knows, and the owner is back managing the bank. A named deputy and a current bank mandate keep a departure in the finance seat from handing the bank back to the owner.

A maturity can also arrive without a committed refinancing because nobody started it in time. The refinancing calendar in every monthly pack, with each maturity, its start date and its status, makes a late start visible while there is still time to recover.