A new capital partner can be an exciting prospect for a business owner, as capital has the power to unlock untapped potential and deliver attractive returns to its owners.
Undoubtedly, a core focus in the decision to bring in private capital will be the cost and terms, however, there is an important question that also needs to be answered before the deal is done: “how is this new partnership going to work?”. A strong partnership will result in the business being able to harness the full potential of the capital provided, leading to more success for the business.
GCI’s Strategic Capital team provides credit to businesses in the Australian mid-market that are seeking to transform their business, typically driven by: (1) a desire to grow to capture market share or enter a new segment; or (2) to affect a turnaround after a period of underperformance. We have experience in navigating the challenges of providing credit in both circumstances, as they typically involve higher levels of complexity, and we have seen the power of a successful partnership to deliver on businesses objectives.
From our experience, a business should focus on the following factors to build a strong and fruitful partnership with their lender:
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- Align your goals and objectives
The private credit landscape encompasses a large variety of lenders and funds which have varying risk appetites, so it is important for the business to ensure that they have the right partner for their journey. Both parties should have a clear and shared understanding of the objectives, the business plan, and the potential challenges the business may face.
When GCI first met with Nomad Breads, a wholesale bakery that supplies product to major supermarkets in Australia, the business was seeking a creative capital solution to support the next phase of growth after a period of challenging trading conditions.
They required a lender that was able to think outside of the box, look past the challenges and create the flexibility to structure a facility designed to help them stabilise to support the next phase of growth.
In replacing several funders and becoming Nomad’s sole financier, GCI was able to shape the facility terms to meet Nomad’s objectives.
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- Communication is key
While loan agreements will have notice requirements for material events and reporting obligations, when should the management team pick up the phone to their credit partner? At the outset we typically say, “call us about bad news and send good news in the mail”.
It follows that there should be more communication when things aren’t going to plan or if the business is seeking to materially change their objectives. Open, honest, and timely communication builds trust and allows both parties to work together effectively to achieve the business’s objectives.
Recently we have seen our borrowers in the pharmacy sector proactively engage with us regarding the potential impact of proposed changes to dispensing timeframes. Despite the news being different to what was expected, the management teams were able to quickly outline how this change may impact their objectives and financial models. In addition, they were able to show us their ideas on how they would work through the changes.
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- Sound financial reporting provides stability
We have observed in many growing or challenged businesses that management’s time is consumed with running the business. As a result, internal financial reporting may be prepared on an ad hoc basis and cash management may not be as straight forward as envisaged.
As credit providers, we aren’t involved in the day-to-day operations of the business and we rely on financial reporting to understand what is going on – financial reports provide a window into your business. While businesses will always be obliged to provide financial reporting, the form, timing and standard of this information should be agreed upfront.
In some cases, the business may be required to improve their reporting processes or systems. When this has occurred, and it can take time, we have found the businesses gain greater insight into their own operations and have used this information to enhance profitability or improve their working capital cycle and risks.
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- Key decisions may require credit partner approval
When a business outlines its objectives, it is paramount that the credit partner provides flexibility and firepower to execute. Loan agreements typically include a list of decisions which cannot be undertaken by the business without the credit partner’s approval. This may include restrictions on the business taking on additional loans, prohibiting asset acquisitions above a certain value or selling a material part of the business.
The business should ensure this list aligns with their plan to execute the agreed objectives, and if those plans need to change that they communicate with their credit partner in a timely manner. The management team should not shy away from the fact they are typically industry experts, and they will have insights that the credit partner may not have.
In a recent transaction, GCI approved finance for several pre-agreed acquisitions. Shortly after the approval, regulatory delays meant these acquisitions could not proceed in the expected timeframe. As such, the business sought to bring forward other acquisitions which were outside the original approval.
GCI worked closely with the business to substitute these acquisitions on a “like for like” basis which resulted in minimal delays in the overall acquisition pipeline. By working with us, the business was able to tap into the full potential of their new flexible capital.
Choosing the right credit provider is crucial to the success of your business plan. With these four factors in the mind, take the time to assess your options and select a partner who not only provides capital, but also aligns with your vision and can contribute to your business’s growth in meaningful ways.
To read more about how we have helped a variety of businesses transform over the years, visit www.gcifunds.com/case-studies/
Authored by Hugh Selleck (Managing Director) and Daniel Schweickle (Investment Director)