Marketing a lender-owned company for a transaction is a different animal than a typical M&A or financing process. In the third article of a series, Jay Jacquin outlines key steps to overcoming bias and positioning the company to achieve the best execution.

All private credit lender portfolios have their “problem children,” and more often than not, a lender will end up in a situation where a tapped-out sponsor has walked away, and the lender must assume ownership of the business. Once taking up the mantle of the borrower, lenders are often initially faced with a few paths forward. They may endeavor to grow the business rather than immediately choosing to exit. Still, as unnatural long-term owners, they will eventually part ways with the business through a sale.

However, marketing a lender-owned company for a transaction is a different animal than a typical M&A or financing process. There is a larger and different hill to climb, as the market tends to naturally view lender-owned companies with skepticism. Lender-owners must overcome that negative predisposition in hopes of maximizing value — while simultaneously being open and honest about the company’s position and its history.

The following are key steps to overcoming that bias and positioning the company in order to achieve the best execution.

Honesty is the Best Policy

Possibly the most important note when beginning to market a lender-owned business is to avoid a cover-up job — do not hide the fact that the company is lender-owned. Of course, a banker marketing the lender-owned company should not “lead” with this fact. New investors will ask questions and underwrite the opportunity, and if positioned properly, this fact will simply be a data point in the new investor’s underwriting and valuation calculation.

Hiding a business’s past, or that the company is lender-owned, is a big mistake. Investors who are unaware of this but later uncover it during their diligence may become spooked, questioning other facts about the company and reducing the trust between parties that is essential for a successful closing.

Explain What Happened and What Has Been Done

As previously stated, it is unnatural for lenders to own businesses, so an explanation must be provided as to what happened. The banker marketing the lender-owned company must articulate the strategic, operational, and/or capital structure mistakes that led to the lender being tossed the keys.

However, the logical next step is explaining how those issues have been fixed and, furthermore, the sustainability of those repairs. The most important issue for an interested new investor is proving to themselves (and their investment committee) — “Why won’t the very same happen to us when we finance or own this company?”

To shore up confidence and assuage fears, the banker must explain in detail what the operational recovery plan was and how it played out. The specifics, of course, will vary on a case-by-case basis but tend to involve the following:

• New management team additions and/or replacements
• New customer onboarding/contracts
• Revised pricing regimes that enhance margin
• Changed input sourcing or labor rates that impact costs
• Expansion into new markets that have improved revenue
• Process improvements that reduce costs
• Technology/software/system changes that drive efficiency

Undoubtedly, multiple levers were pulled to improve performance, and the thorough articulation of the operating plan that pulled those levers and the demonstration that changes made are sustainable are critical to positioning the business to new investors.

Laying Out the Future

However, another critical element is demonstrating to buyers that work with the business is not yet complete. Many buyers want to know and understand that there are still elements that can be improved in the business, leaving a pathway open for future value creation for the next investor.

The banker accomplishes this by providing details on the next set of opportunities down the road, either through organic or inorganic growth, that would then justify future investment by the new owner. It is also important to present the future leadership of the business, as a few of the C-suite may want to move on now that the business has improved and is being sold, but others may want to stay and invest going forward.

Approaching the Right Contacts

As part of any sale process, it is prudent to engage with both financial and strategic buyers. However, with strategic parties that are owned by a private equity firm, the natural assumption is to approach the private equity firm — but depending on the company or situation, this may not be the best angle. While the private equity firm may show interest, contacting the management team at the portfolio company can engender a more powerful response. The operators that run the portfolio company buyer frequently have a better understanding of the strategic value and synergy opportunity afforded by purchasing the lender-owned company. Sponsors usually pay close attention when their portfolio company management teams get excited about a new acquisition opportunity, as they are the key underwriters of the associated value created by the purchase. Opening the dialogue with the portfolio company first can enable the management team to become vocal advocates for the transaction and provide the underwriting backbone to justify an attractive purchase price.

This approach underscores the need to demonstrate the operational plan of how the business has been stabilized and improved, as mentioned above. To that end, partnering with an investment bank with experience in marketing “storied” situations that require detailed explanations of a company’s operating and capital structure history is essential for achieving peak execution in the transaction.

In Conclusion

Marketing and positioning a lender-owned company for financing or sale is entirely different than a typical M&A or financing process. To achieve the best execution for the lender-owned company, lenders are wise to work with bankers capable of addressing the above factors when presenting the business to potential new investors. If this article has sparked any questions about the initial first steps for a lender when tossed the keys to a company or different transactions for lender-owned businesses, visit “Offense or Defense? A Playbook For Lender-Owned Businesses” and “Choosing the Right Path: Transactions Involving Lender-Owned Businesses“, respectively.

Configure Partners is a preeminent credit-oriented investment bank specializing in debt placement, special situations, and bespoke M&A advisory. Our team of bankers would be happy to discuss any of the above items further and answer any questions you may have concerning marketing and positioning a lender-owned business for sale.

Jay Jacquin brings over twenty-five years of investment banking and advisory experience at market-leading firms. Prior to joining Configure Partners, he established the Middle Market Special Situations practice at Guggenheim Securities. Before joining Guggenheim, he was a senior member of the Recapitalization & Restructuring Group at Morgan Joseph TriArtisan for approximately five years.

Previously, he was a Senior Director with Alvarez & Marsal Corporate Finance, prior to which he spent eight years in Houlihan Lokey’s Corporate Finance and Financial Restructuring practices.

Jay holds a bachelor’s degree in Commerce, with concentrations in finance and marketing, from the McIntire School of Commerce at the University of Virginia. He is a FINRA General Securities Registered Representative (Series 24, 7, 79, 63) and a Certified Insolvency and Restructuring Advisor (CIRA).