What Today’s ESOP Lending Market Means for Owners, CFOs, and Trustees

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And this session we’re going

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to talk about the current ESOP

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financing conditions.

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This session is targeted towards

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business owners, CEOs, CFOs,

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trustees, ESOP committee members,

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and they’ll all hear something different.

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But there are some pretty key takeaways

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for each of those groups.

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Gilmore, our CEO is with me.

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I’m Ben Spadt.

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I’m the director of ESOP

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Strategy here at Menke

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And to kick it off.

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Trevor, I want to ask you

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what has changed in the last 12 months

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for ESOP companies

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that are either carrying a note

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or planning for a new transaction,

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and the biggest change in the past

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12 months,

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Ben, is

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the fact that

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so many more banks are into esops

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somehow, or credit committees in the past

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either love or hate it.

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Esops now it seems like all banks

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that are in the business

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of lending money to businesses.

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No esops and most of them love it.

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So Ben,

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I know you and I spent a lot of our time

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sourcing, financing,

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talking to those banks

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nationwide, big players,

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regional players or smaller players.

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And the appetite is certainly changed.

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It’s probably the best financing market

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I’ve seen

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since my time,

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and I been here since 2015.

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That’s no lie.

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I’ve been in the game

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for a while as well, and it’s it has.

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I’ve never seen as many players

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in, you know,

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lending to the in these instances.

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And also

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the terms are very favorable

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in a lot of these situations.

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You know the balance sheet

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an income statement.

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They have to back it up.

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But they are coming

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with some really good numbers.

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So that takes us to our agenda here.

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And I want

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to kind of outline some things.

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We’ve gone over introductions again

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I’m Ben Spade and with Trevor

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Gilmore here

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I will cover the current Esop

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financing conditions.

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We’ll talk about

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our recent capital raises

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and then we’ll talk about second stage

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what’s involved there

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and refinancing a seller note.

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So perhaps,

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you know you sold 100% right away.

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But we’re three years down the road.

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And perhaps we want to refinance

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for some reason,

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talk about other considerations.

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And then like I said alluded to earlier,

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we’ll have a question

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and answer portion

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if you didn’t know who we are,

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here is our information, please,

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you know, call email

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if you have questions

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that are beyond the scope

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of this conversation

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or you’re just curious about

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something you hear today.

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So let’s talk about current

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financing conditions.

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Trevor, I know that

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the current bank appetite for Esop

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credit is pretty strong.

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But you want to kick off

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what what you’re seeing right now.

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Yeah.

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So when you think about Esop

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financing conditions

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like to break it down between large

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national banks.

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So think the quote unquote TBD files

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and compare that to the regionals.

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So both of those have

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distinct credit appetites.

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They’re targeting different companies.

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Relationships always matter.

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You know,

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it always comes down to the relationship

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or there’s an existing relationship

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there, probably stretch

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and go further

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than they would on a new relationship

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and so on.

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But when we think nationwide,

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I like to break it down

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between the regionals,

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which are banks

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that just maybe in the US, a Bay area,

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southern California,

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Des Moines

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area, Chicago area,

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and so on, banks that you see in regions

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and large

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metros versus the the nationwide banks,

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what we’re seeing

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and when we talk

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to a lot of credit officers

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out there,

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a lot of credit teams,

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is that they’re increasingly viewing

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well-run esops

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as a lower credit risk compared to

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a normal M&A finance transaction.

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Absolutely.

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And I wanted to talk a little bit

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about those regional banks.

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We deal with some

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where one is responsible

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for only 11 counties.

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We’re also dealing with a neighborhood

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bank, I guess you could call it that,

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in a transaction in Hawaii

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that, you know,

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because they were the incumbent,

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they felt comfortable

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with the relationship

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and lending into that.

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So, you know, there

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there are players everywhere.

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The next bullet point we have

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here is need $2 million

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plus some EBITDA.

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Why is that or what what

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what’s the reasoning behind that trigger.

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And the focus of today’s discussion

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is the commercial senior market.

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So thank non

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SBA, SBA

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sometimes you see that going lower.

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That’s a whole other discussion.

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But for a senior term loan

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coming from a regional you’re

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probably going to see 2 million

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plus EBITDA requirement and EBITDA.

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What is that.

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It’s approximation of profit

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that these firms happen

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when you get larger.

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So for companies

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that are ten plus million

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but 20 plus,

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that is definitely

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where the national bank start playing

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and you start getting more

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the better terms, lower

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interest rates

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and also

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more flexible structures as well.

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But in terms of the

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overall senior market,

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meaning a bank

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coming in and

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lending on cash flows and not requiring

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a personal guarantee, basically coming in

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and taking a look

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at the financials, strengthen

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the balance sheet cash flows.

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And with these SOPs as well,

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the management team

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and the overall expertise in employees

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and so on that.

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So it’s was quantitative and qualitative.

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Those are aspects all combined

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for your 2 million plus profit company.

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A bank is going to want to lend

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your money.

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You know, all things equal.

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Assuming you know, clean balance sheet

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and so on.

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And just getting you to terms

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perhaps a little bit,

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you know, 5 to 7 years,

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that’s pretty common.

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But let’s talk about rates.

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You know previously you put senior Esop

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loans at Sofr plus about 1.5 to 2.5

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or roughly

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a high

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4% to 6%,

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depending on the company’s

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size and cash flow.

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Where are we now?

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So Prime is now 7% as of September 2026.

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Inflation’s kicking up and so on.

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Anyone who follows

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the news

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knows that

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that interest rates went up

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and didn’t go down.

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Were anyone’s guess where it’s headed.

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But what that means for Esop

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loans and loans in general is that

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loans and debt

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is more expensive than it was.

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So it is pressure on ratios and so on.

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On the flip side,

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we’re going to talk about this

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in a second.

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We’re seeing higher seller low

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interest rates as well. Right.

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Because that’s usually time

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tied towards prime on that piece.

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So a quarter point

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does that move

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the needle that

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when you look at cash flows

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and sensitivity analysis and ratios

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you know, can. Right.

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And you always don’t

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want to be

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right on the edge,

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you know,

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where you’re just barely passing ratios.

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And so with current

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bank shops we’re doing

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is the interest rate move factoring in,

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the way we view companies

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and the way we do our shop?

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Not too much.

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Quarter

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point is not going to make or break

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a deal for most esops out there

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that are trying to be more conservative

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on the senior bank side.

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And in the face of these

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rising interest rates, we do see some.

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I hate to use the word creative

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because when I think

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of creative accountants

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or creative bankers,

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those are the ones that end up in prison.

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But some of these

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more flexible structures, maybe

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where it’s not just the senior note,

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you know, that’s pretty traditional.

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That’s pretty tried and true,

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but we’re seeing, well,

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I can lend up to this

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much on a senior term note,

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but I’ll also increase your revolver

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or your line of credit

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so that perhaps there’s $6 million

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coming from a term note,

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$6 million from an extra large revolver

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to help fund this, or an accordion.

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Do you want to talk a little more

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about what

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you’re seeing in terms

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of flexible structures?

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Yes.

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It all comes down to

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when we present to the bank

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and have those discussions,

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and it is a process energy

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of numerous of these data room

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and a lot of discussions

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back and forth, discussions

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with the bankers,

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discussions with their credit team

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if they need to be looped in,

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and so on to understand the company and

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the structure of these. And,

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so once we

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clear that

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hurdle, then we need to

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then figure out a structure

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that makes sense.

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A lot of companies do go in

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with just a very simple structure.

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So they make a senior loan

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that is 5 to 7 year in term,

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and then the sellers carry the rest

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if it’s 100% Esop transaction.

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And then over time

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it gives the board

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and the leaders of that company

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the ability to refinance

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or sorry guys out

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using bank financing in the future.

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We have to slide on that

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in the and subsequent

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in today’s presentation.

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Now, the flexibility comes in

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when you take a look at the company’s

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needs right. And where is it it’s headed.

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So let’s say the company’s growing and

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backlog work in progress

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or whatever metric the company has

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proves that out.

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Then

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sometimes what we see

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as an accordion structure,

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where the bank will commit

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to lend X amount today

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to facilitate the transaction,

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and if the company meets

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certain covenants, will then draw down

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even more money in year one.

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So that’s what the accordion.

00:09:23:07 – 00:09:23:22
So think of that.

00:09:23:22 – 00:09:24:11
Like, you know,

00:09:24:11 – 00:09:25:10
the musical instrument,

00:09:25:10 – 00:09:27:10
you know, where it expands.

00:09:27:10 – 00:09:30:10
So we’re just waiting.

00:09:30:17 – 00:09:32:01
And if you hit those covenants,

00:09:32:01 – 00:09:33:23
we can grow to that big.

00:09:33:23 – 00:09:35:05
So to say 2 million.

00:09:35:05 – 00:09:36:16
6 million, something like that.

00:09:36:16 – 00:09:38:01
Yeah, exactly.

00:09:38:01 – 00:09:39:23
And it’s not even on large transactions.

00:09:39:23 – 00:09:41:15
We have seen that on

00:09:41:15 – 00:09:42:12
large, you know, 30,

00:09:42:12 – 00:09:44:23
$40 million bank raises.

00:09:44:23 – 00:09:45:15
We’ve even seen

00:09:45:15 – 00:09:47:06
that on the deals

00:09:47:06 – 00:09:48:10
that the banks coming in

00:09:48:10 – 00:09:49:18
lending five, 6 million

00:09:49:18 – 00:09:50:12
because the bank loves

00:09:50:12 – 00:09:52:08
the company loves that

00:09:52:08 – 00:09:53:02
the management team

00:09:53:02 – 00:09:54:09
believes in their future,

00:09:54:09 – 00:09:55:13
but says, hey,

00:09:55:13 – 00:09:57:02
I want to start in conservative

00:09:57:02 – 00:09:58:13
and build up the relationship.

00:09:58:13 – 00:10:00:04
So I’ll come in to learn 5

00:10:00:04 – 00:10:01:17
or 6 million today.

00:10:01:17 – 00:10:03:00
And if the company

00:10:03:00 – 00:10:05:11
meets these projections, basically

00:10:05:11 – 00:10:07:01
meets the the covenants,

00:10:07:01 – 00:10:08:14
then we’re going to allow

00:10:08:14 – 00:10:09:04
another 1

00:10:09:04 – 00:10:10:12
or 2 million drawdown

00:10:10:12 – 00:10:13:06
a year or two or whatever that period is.

00:10:13:06 – 00:10:15:08
You know, sometimes it’s after one year.

00:10:15:08 – 00:10:18:08
So that’s the what an accordion is.

00:10:18:08 – 00:10:20:12
We’re also seeing the Senior

00:10:20:12 – 00:10:22:13
Plus revolver that again, senior.

00:10:22:13 – 00:10:23:12
That’s just a normal low

00:10:23:12 – 00:10:24:15
and think like a mortgage.

00:10:24:15 – 00:10:24:22
You know,

00:10:24:22 – 00:10:27:22
those 5 or 7 years with the interest rate

00:10:28:09 – 00:10:28:22
that you’re paying

00:10:28:22 – 00:10:30:11
both principal and interest.

00:10:30:11 – 00:10:32:20
A revolver is basically a lot of credit.

00:10:32:20 – 00:10:35:06
And we’re seeing some regional banks

00:10:35:06 – 00:10:38:12
come in and offer flexible structures

00:10:38:19 – 00:10:40:14
where they’ll place,

00:10:40:14 – 00:10:43:14
say, two times Ebola on the senior,

00:10:44:00 – 00:10:45:16
and then they’ll allow the company

00:10:45:16 – 00:10:47:09
to go a bit higher

00:10:47:09 – 00:10:49:11
while still median covenants and ratios

00:10:49:11 – 00:10:51:14
and so on, to draw down the revolver.

00:10:51:14 – 00:10:52:20
And the beauty with that

00:10:52:20 – 00:10:54:11
is it’s just flexibility

00:10:54:11 – 00:10:56:02
because a company doesn’t need to do it,

00:10:56:02 – 00:10:57:22
but it has the option to,

00:10:57:22 – 00:10:59:12
you know, without going

00:10:59:12 – 00:11:00:18
through this whole process of

00:11:01:17 – 00:11:02:10
placing a new

00:11:02:10 – 00:11:04:15
loan, going through that whole process,

00:11:04:15 – 00:11:05:19
you already have it in place.

00:11:05:19 – 00:11:07:12
It just can be draw down.

00:11:07:12 – 00:11:08:17
And then as it’s paid

00:11:08:17 – 00:11:09:16
down in the future,

00:11:09:16 – 00:11:11:15
then you can draw down

00:11:11:15 – 00:11:13:01
more on the SA down and so on.

00:11:13:01 – 00:11:14:03
So we’re seeing

00:11:14:03 – 00:11:15:07
more of those structures out there.

00:11:15:07 – 00:11:16:06
And then to your point,

00:11:16:06 – 00:11:17:03
it’s not creative.

00:11:17:03 – 00:11:17:15
And we’re not talking

00:11:17:15 – 00:11:19:08
about creative financing.

00:11:19:08 – 00:11:21:11
You know all these are rooted in reality.

00:11:21:11 – 00:11:23:02
And it’s all tied to the company’s

00:11:23:02 – 00:11:25:22
operating performance. Absolutely.

00:11:25:22 – 00:11:27:01
But you hit on a one

00:11:27:01 – 00:11:28:05
good one thing

00:11:28:05 – 00:11:30:00
that will take us to our next

00:11:30:00 – 00:11:33:00
topic here that we conduct the shop,

00:11:33:08 – 00:11:34:20
help negotiate the terms

00:11:34:20 – 00:11:36:06
and the covenants.

00:11:36:06 – 00:11:38:15
And I think that’s an important aspect

00:11:38:15 – 00:11:40:17
to key in on, because,

00:11:40:17 – 00:11:41:03
you know,

00:11:41:03 – 00:11:41:21
we’ll make sure

00:11:41:21 – 00:11:42:20
that we’re

00:11:42:20 – 00:11:44:21
bringing the right players to the table

00:11:44:21 – 00:11:46:08
in order to make this happen

00:11:46:08 – 00:11:47:09
and make it

00:11:47:09 – 00:11:49:13
so that it makes sense for everybody.

00:11:49:13 – 00:11:53:19
And so if I go to our next slide here,

00:11:54:10 – 00:11:56:17
we’ll start in on our,

00:11:56:17 – 00:11:59:01
our recent capital raisers.

00:11:59:01 – 00:12:00:02
So this first one is

00:12:00:02 – 00:12:02:13
medical device manufacturer.

00:12:02:13 – 00:12:04:11
And you know, Trevor,

00:12:04:11 – 00:12:05:13
you want to talk about

00:12:05:13 – 00:12:07:20
how we, we got into that one

00:12:07:20 – 00:12:09:02
and what what

00:12:09:02 – 00:12:12:03
the, you know, terms and structures like.

00:12:13:00 – 00:12:13:06
Yeah.

00:12:13:06 – 00:12:14:07
So this company hired us

00:12:14:07 – 00:12:15:00
last year

00:12:15:00 – 00:12:17:02
to do a minority Esop transaction,

00:12:17:02 – 00:12:17:20
which I think

00:12:17:20 – 00:12:19:13
a lot of people listening to today

00:12:19:13 – 00:12:20:18
probably have done that

00:12:20:18 – 00:12:22:18
go down the minority path.

00:12:22:18 – 00:12:24:04
If they want to check out the Esop,

00:12:24:04 – 00:12:25:00
see if it’s right,

00:12:25:00 – 00:12:26:19
get some shareholder liquidity.

00:12:26:19 – 00:12:27:20
Company’s been in business

00:12:27:20 – 00:12:29:17
for 35 plus years.

00:12:29:17 – 00:12:31:05
And the controlling owner,

00:12:31:05 – 00:12:32:16
who was also the founder, saying,

00:12:32:16 – 00:12:33:18
hey, I want some liquidity.

00:12:33:18 – 00:12:35:22
And I also want to reward employees.

00:12:35:22 – 00:12:36:21
I don’t want to sell out

00:12:36:21 – 00:12:38:19
to private equity or a competitor,

00:12:38:19 – 00:12:40:15
which this company had the options to do.

00:12:40:15 – 00:12:41:05
So.

00:12:41:05 – 00:12:42:14
So we went down the minority

00:12:42:14 – 00:12:44:06
path and,

00:12:44:06 – 00:12:46:12
bank financing was an absolute must.

00:12:46:12 – 00:12:49:23
The company is growing quite well.

00:12:49:23 – 00:12:50:08
So

00:12:51:08 – 00:12:52:20
we did, what we call

00:12:52:20 – 00:12:54:16
a bank shop process.

00:12:54:16 – 00:12:56:20
We talked to five lenders,

00:12:56:20 – 00:12:57:16
company this size.

00:12:57:16 – 00:12:57:20
You know,

00:12:57:20 – 00:12:59:04
we talked to the Nationwide’s

00:12:59:04 – 00:13:01:18
and some sophisticated regionals.

00:13:01:18 – 00:13:03:18
And basically

00:13:03:18 – 00:13:04:19
through that whole process

00:13:04:19 – 00:13:06:02
found a winner.

00:13:06:02 – 00:13:09:10
And, the overall package was 30 million,

00:13:09:10 – 00:13:10:04
and it financed

00:13:10:04 – 00:13:11:11
the minorities up at home.

00:13:11:11 – 00:13:12:01
So there’s no

00:13:12:01 – 00:13:13:20
sour note attached to this at all.

00:13:13:20 – 00:13:16:14
The structure was a senior.

00:13:16:14 – 00:13:17:16
So the regular term loan

00:13:17:16 – 00:13:18:12
I mentioned earlier,

00:13:18:12 – 00:13:20:17
I think Mortgage Plus or revolver,

00:13:20:17 – 00:13:22:12
and it was all backed by the R

00:13:22:12 – 00:13:24:04
and assets of the company.

00:13:24:04 – 00:13:27:04
So no personal guarantee here.

00:13:27:11 – 00:13:28:14
Interest rate.

00:13:28:14 – 00:13:29:16
We were able to negotiate

00:13:29:16 – 00:13:31:07
and get a very competitive rate there.

00:13:31:07 – 00:13:33:21
So all in it was about a 5%.

00:13:33:21 – 00:13:35:19
I will highlight that it is floating

00:13:35:19 – 00:13:36:18
and it’s tied to Sofr,

00:13:36:18 – 00:13:38:03
which is an acronym.

00:13:38:03 – 00:13:39:16
Then you want to tell us

00:13:39:16 – 00:13:41:00
what’s the price?

00:13:41:00 – 00:13:41:11
Yeah.

00:13:41:11 – 00:13:42:06
It’s the

00:13:42:06 – 00:13:43:23
standard overnight

00:13:43:23 – 00:13:46:03
fed rate or financing rate.

00:13:46:03 – 00:13:47:09
And what that

00:13:47:09 – 00:13:49:20
establishes is sort of a base

00:13:49:20 – 00:13:52:09
for all other interest rates.

00:13:52:09 – 00:13:53:23
And it’s available,

00:13:53:23 – 00:13:55:08
you know, daily,

00:13:55:08 – 00:13:56:08
whereas others,

00:13:56:08 – 00:13:58:19
you have to wait month by month.

00:13:58:19 – 00:14:00:19
And so a bank can peg,

00:14:01:21 – 00:14:03:06
you know, a certain number of basis

00:14:03:06 – 00:14:05:21
points added on to sofr in this case over

00:14:05:21 – 00:14:07:09
plus one, 4 or 5.

00:14:07:09 – 00:14:08:21
So if we’re at five an interest now

00:14:08:21 – 00:14:10:05
and so for goes up a quarter,

00:14:10:05 – 00:14:13:20
a point will be at 5.25% interest.

00:14:14:15 – 00:14:15:14
And exactly.

00:14:15:14 – 00:14:17:12
And and in the terms that will determine

00:14:17:12 – 00:14:18:19
when they

00:14:18:19 – 00:14:20:06
look at that

00:14:20:06 – 00:14:21:19
sofr rate to change,

00:14:21:19 – 00:14:23:03
potentially change in interest.

00:14:23:03 – 00:14:26:23
It’s not daily but it is available daily.

00:14:27:09 – 00:14:27:17
Yeah.

00:14:27:17 – 00:14:29:04
So for it does vary

00:14:29:04 – 00:14:30:20
with interest rates of course.

00:14:30:20 – 00:14:32:21
And it replaced LIBOR for

00:14:32:21 – 00:14:34:08
those who remember that term LIBOR.

00:14:34:08 – 00:14:35:11
So most places.

00:14:35:11 – 00:14:36:15
So for now

00:14:36:15 – 00:14:38:18
so you see basically two

00:14:38:18 – 00:14:40:01
interest rate basis one.

00:14:40:01 – 00:14:41:13
And so for the other one either prime.

00:14:41:13 – 00:14:43:16
So first lower than prime but much lower.

00:14:43:16 – 00:14:45:11
So in this case it was floating.

00:14:45:11 – 00:14:48:11
But we were we were able to negotiate

00:14:48:12 – 00:14:49:05
you know cap.

00:14:49:05 – 00:14:50:17
And then also

00:14:50:17 – 00:14:52:04
we got an interest rate swap in there.

00:14:52:04 – 00:14:52:17
So in case

00:14:52:17 – 00:14:53:16
interest rates change,

00:14:53:16 – 00:14:55:17
the company can basically has a risk

00:14:55:17 – 00:14:56:12
that’s very common

00:14:56:12 – 00:14:59:01
with loans of this size.

00:14:59:01 – 00:14:59:22
The company itself

00:14:59:22 – 00:15:01:00
had a very strong balance sheet,

00:15:01:00 – 00:15:01:17
no long term debt.

00:15:01:17 – 00:15:02:13
And and we see that

00:15:02:13 – 00:15:04:02
with a lot of these companies,

00:15:04:02 – 00:15:07:02
companies go Esop often because companies

00:15:07:14 – 00:15:08:11
debt adverse

00:15:08:11 – 00:15:10:22
and the company’s better off independent

00:15:10:22 – 00:15:11:08
and so on.

00:15:11:08 – 00:15:13:05
And often this is the first time the

00:15:14:10 – 00:15:16:04
these companies are actually

00:15:16:04 – 00:15:17:10
using leverage.

00:15:17:10 – 00:15:18:19
You know going Esop

00:15:18:19 – 00:15:19:18
usually

00:15:19:18 – 00:15:21:07
we don’t see much debt out there

00:15:21:07 – 00:15:22:11
for the clients.

00:15:22:11 – 00:15:23:10
So same thing here.

00:15:23:10 – 00:15:24:08
The company had reviewed

00:15:24:08 – 00:15:25:14
financial statements

00:15:25:14 – 00:15:27:12
very strong management team.

00:15:27:12 – 00:15:28:15
And and as I said

00:15:28:15 – 00:15:29:23
they were still growing.

00:15:29:23 – 00:15:32:17
So they had incredible growth.

00:15:32:17 – 00:15:34:20
Both 2025 2026 and projected

00:15:34:20 – 00:15:35:21
over the next couple of years.

00:15:35:21 – 00:15:38:08
So part of this,

00:15:38:08 – 00:15:39:11
this whole process, you know, is

00:15:39:11 – 00:15:40:23
finding the right banking partner.

00:15:40:23 – 00:15:43:04
And, you know, some banks say no a lot to

00:15:43:04 – 00:15:45:02
that’s why you have to

00:15:45:02 – 00:15:46:08
conduct what we call a shop

00:15:46:08 – 00:15:47:04
to some say no.

00:15:47:04 – 00:15:48:04
And just because one says no,

00:15:48:04 – 00:15:49:09
it doesn’t mean the answers. Now.

00:15:49:09 – 00:15:50:02
No, there’s

00:15:50:02 – 00:15:50:12
there’s going to be

00:15:50:12 – 00:15:53:13
a player out there who no wants to learn.

00:15:53:13 – 00:15:55:00
So in this case,

00:15:55:00 – 00:15:56:14
we got no personal guarantee

00:15:56:14 – 00:15:58:13
even though was a minority transaction.

00:15:58:13 – 00:16:00:10
Also no quality of earnings.

00:16:00:10 – 00:16:02:10
Some banks were requiring it.

00:16:02:10 – 00:16:04:04
Others were confident

00:16:04:04 – 00:16:05:16
with the financial statements

00:16:05:16 – 00:16:06:12
and the growth

00:16:06:12 – 00:16:07:05
and then the strength

00:16:07:05 – 00:16:07:21
of the balance sheet

00:16:07:21 – 00:16:08:19
and the team

00:16:08:19 – 00:16:09:21
that they were fine

00:16:09:21 – 00:16:11:14
to close the loan without that.

00:16:11:14 – 00:16:12:12
And then also,

00:16:12:12 – 00:16:12:20
you know,

00:16:12:20 – 00:16:13:17
auto requirement

00:16:13:17 – 00:16:15:01
bank was okay

00:16:15:01 – 00:16:16:16
with reviewed statements moving forward.

00:16:16:16 – 00:16:19:04
So you think about the savings there and

00:16:19:04 – 00:16:21:15
5% interest, you know, versus Prime,

00:16:21:15 – 00:16:23:17
which at the time was 6.75.

00:16:23:17 – 00:16:24:20
You know that on 30 like

00:16:24:20 – 00:16:26:03
that’s that’s real savings.

00:16:26:03 – 00:16:26:13
You know.

00:16:26:13 – 00:16:30:19
So our our small fee is like not to brag.

00:16:30:19 – 00:16:31:05
But you know

00:16:31:05 – 00:16:32:13
I think we weren’t in there

00:16:32:13 – 00:16:33:15
saving the company a lot of money

00:16:33:15 – 00:16:35:00
and then also not having to go

00:16:35:00 – 00:16:35:16
through the process

00:16:35:16 – 00:16:38:00
of actually or audit as well.

00:16:38:00 – 00:16:39:04
So that saved them probably,

00:16:39:04 – 00:16:41:12
you know, 100 plus thousand right there.

00:16:41:12 – 00:16:43:23
So so that’s an example of what

00:16:43:23 – 00:16:44:15
we would consider

00:16:44:15 – 00:16:46:08
a middle market company.

00:16:46:08 – 00:16:47:14
And that’s an example.

00:16:47:14 – 00:16:48:17
What the the overall

00:16:48:17 – 00:16:50:00
financing package out

00:16:50:00 – 00:16:51:15
there is for companies

00:16:51:15 – 00:16:54:00
that, that fit that profile.

00:16:54:00 – 00:16:55:11
And I think you’re it’s important

00:16:55:11 – 00:16:56:15
to talk about

00:16:56:15 – 00:16:59:15
how those sneaky costs that would add

00:16:59:17 – 00:17:01:21
and maybe make and lower interest rate

00:17:01:21 – 00:17:02:19
not so attractive

00:17:02:19 – 00:17:03:19
if they

00:17:03:19 – 00:17:05:15
demand you switch from review to audit,

00:17:05:15 – 00:17:05:22
you know,

00:17:05:22 – 00:17:07:01
that’s increasing your

00:17:07:01 – 00:17:09:00
your accounting fees,

00:17:09:00 – 00:17:10:15
quality of earnings could cost.

00:17:10:15 – 00:17:12:17
The bank may charge you for that.

00:17:12:17 – 00:17:12:23
You know,

00:17:12:23 – 00:17:14:04
there are a lot of things in there

00:17:14:04 – 00:17:17:04
that can sort of death by a thousand cuts

00:17:17:05 – 00:17:18:09
when it’s all said and done.

00:17:18:09 – 00:17:19:05
So it’s important

00:17:19:05 – 00:17:21:05
to be critical of bills

00:17:21:05 – 00:17:22:12
and, and potentially,

00:17:22:12 – 00:17:24:05
negotiate those out

00:17:24:05 – 00:17:26:14
and see how willing they are to bend

00:17:26:14 – 00:17:27:19
in those situations.

00:17:27:19 – 00:17:29:01
And they at the bank.

00:17:29:01 – 00:17:30:05
I mean,

00:17:30:05 – 00:17:30:18
our second

00:17:30:18 – 00:17:31:17
example we’ve got

00:17:31:17 – 00:17:34:15
is a commercial general contractor here.

00:17:34:15 – 00:17:37:14
They did 20 million to partially finance

00:17:37:14 – 00:17:39:04
a 100% Esop.

00:17:39:04 – 00:17:40:06
So they sold the whole thing.

00:17:40:06 – 00:17:41:15
But they only wanted

00:17:41:15 – 00:17:43:01
or only needed

00:17:43:01 – 00:17:45:08
a certain portion up front.

00:17:45:08 – 00:17:47:00
Again, this was a senior note

00:17:47:00 – 00:17:48:21
plus a revolver backed

00:17:48:21 – 00:17:50:13
by their accounts receivable.

00:17:50:13 – 00:17:52:21
Their pipeline was pretty strong forever.

00:17:52:21 – 00:17:53:22
You want to give a little bit

00:17:53:22 – 00:17:55:17
of background into this situation.

00:17:56:16 – 00:17:57:00
Yeah.

00:17:57:00 – 00:17:59:01
So commercial general contractors

00:17:59:01 – 00:18:00:13
can be tricky on the banking front.

00:18:00:13 – 00:18:01:15
So often

00:18:01:15 – 00:18:03:16
the regionals are more interested

00:18:03:16 – 00:18:04:12
because they understand

00:18:04:12 – 00:18:06:03
the local projects they’re working on,

00:18:06:03 – 00:18:07:04
the understand the partners

00:18:07:04 – 00:18:08:06
they’re working with

00:18:08:06 – 00:18:09:18
and so on, and they just understand

00:18:09:18 – 00:18:11:08
the local economy.

00:18:11:08 – 00:18:14:00
Whereas the the large banks generally

00:18:14:00 – 00:18:14:13
shy away

00:18:14:13 – 00:18:16:14
from commercial general contractors.

00:18:16:14 – 00:18:17:05
Right now.

00:18:17:05 – 00:18:17:19
It depends.

00:18:17:19 – 00:18:19:13
Some say they’re into it, some not.

00:18:19:13 – 00:18:20:05
It depends.

00:18:20:05 – 00:18:20:21
And it changes like,

00:18:20:21 – 00:18:22:19
you know, every month basically.

00:18:22:19 – 00:18:24:03
So in this case commercial

00:18:24:03 – 00:18:25:01
the general contractor

00:18:25:01 – 00:18:27:02
been in business 35 plus years,

00:18:27:02 – 00:18:28:11
100% Esop.

00:18:28:11 – 00:18:30:07
For all those good reasons,

00:18:30:07 – 00:18:32:01
companies better off independent

00:18:32:01 – 00:18:34:04
a management team very strong.

00:18:34:04 – 00:18:37:02
And the owners were ready to oversee

00:18:37:02 – 00:18:38:16
that orderly transition.

00:18:38:16 – 00:18:39:20
And they didn’t want to sell out.

00:18:39:20 – 00:18:40:02
You know,

00:18:40:02 – 00:18:41:18
they wanted to stay independent.

00:18:41:18 – 00:18:43:19
So you looked at the options and,

00:18:43:19 – 00:18:45:18
you know, it’s really Esop and that’s it.

00:18:45:18 – 00:18:46:01
You know,

00:18:46:01 – 00:18:47:05
a company was

00:18:47:05 – 00:18:48:05
too large to,

00:18:48:05 – 00:18:49:14
try to go through some sort

00:18:49:14 – 00:18:53:00
of orderly asset sale and also too large

00:18:53:00 – 00:18:55:08
for the key management team to buy out

00:18:55:08 – 00:18:56:19
the owners.

00:18:56:19 – 00:18:58:05
That’s often not possible.

00:18:58:05 – 00:19:00:00
I basically Esop

00:19:00:00 – 00:19:02:16
with bank financing and and seller notes

00:19:02:16 – 00:19:03:23
and so on is possible.

00:19:03:23 – 00:19:06:01
So let’s talk about the

00:19:06:01 – 00:19:07:15
the actual financing package here.

00:19:07:15 – 00:19:10:04
So again we can talk to the shop.

00:19:10:04 – 00:19:12:10
Incumbent bank

00:19:12:10 – 00:19:15:03
sadly was not interested in implying here

00:19:15:03 – 00:19:16:14
which sometimes happens.

00:19:16:14 – 00:19:17:04
You know

00:19:17:04 – 00:19:19:06
they either know Esop or they don’t.

00:19:19:06 – 00:19:20:09
And it all comes down to the credit

00:19:20:09 – 00:19:21:19
committee and

00:19:21:19 – 00:19:23:04
and so on and their appetite.

00:19:23:04 – 00:19:24:12
So we conducted

00:19:24:12 – 00:19:26:10
what we call a limited chart.

00:19:26:10 – 00:19:28:13
And the ultimate player

00:19:28:13 – 00:19:30:04
who placed the financing

00:19:30:04 – 00:19:32:06
package here was, original Bank,

00:19:32:06 – 00:19:34:07
who was Esops

00:19:34:07 – 00:19:35:07
took a look at their work

00:19:35:07 – 00:19:37:13
in progress backlog new.

00:19:37:13 – 00:19:38:21
The projects they’re working on

00:19:38:21 – 00:19:39:16
knew the players,

00:19:39:16 – 00:19:41:09
the vendors they work with.

00:19:41:09 – 00:19:42:21
Also, all the various contractors

00:19:42:21 – 00:19:43:11
they work with.

00:19:43:11 – 00:19:43:18
You know, so

00:19:43:18 – 00:19:45:05
we got a lot of comfort

00:19:45:05 – 00:19:46:01
with the company,

00:19:46:01 – 00:19:47:13
its operating performance

00:19:47:13 – 00:19:49:03
and also understood

00:19:49:03 – 00:19:50:07
the cyclical nature there.

00:19:50:07 – 00:19:51:11
So because of that,

00:19:51:11 – 00:19:52:23
we had to come in with

00:19:54:01 – 00:19:56:01
more of a, flexible structure

00:19:56:01 – 00:19:57:00
versus just saying, hey,

00:19:57:00 – 00:19:59:19
we’re going to lever up the

00:19:59:19 – 00:20:00:11
balance sheet

00:20:00:11 – 00:20:02:22
with as much senior as possible.

00:20:02:22 – 00:20:04:06
So this was a combination senior

00:20:04:06 – 00:20:05:10
plus the revolver

00:20:05:10 – 00:20:07:03
that I talked about earlier.

00:20:07:03 – 00:20:08:23
The revolver is very flexible

00:20:08:23 – 00:20:11:23
and allows the company to use part of it

00:20:12:10 – 00:20:13:15
to pay down

00:20:13:15 – 00:20:15:03
each supplier notes over time,

00:20:15:03 – 00:20:17:10
and then also for operations.

00:20:17:10 – 00:20:18:22
And it’s also a long term revolver.

00:20:18:22 – 00:20:19:22
So it’s not a line of credit

00:20:19:22 – 00:20:21:01
that renews every year.

00:20:21:01 – 00:20:23:12
It’s a it’s a long term facility.

00:20:23:12 – 00:20:25:10
Bill Roth senior piece,

00:20:25:10 – 00:20:27:01
the loan was seven years.

00:20:27:01 – 00:20:27:20
And that’s very common

00:20:27:20 – 00:20:28:06
or generally

00:20:28:06 – 00:20:30:21
seen in 5 to 7 years these days.

00:20:30:21 – 00:20:32:12
And then the interest rate was fixed,

00:20:32:12 – 00:20:35:22
and Prime was just going up

00:20:35:22 – 00:20:37:04
when we were doing this one.

00:20:37:04 – 00:20:38:20
So we’re able to get a fixed rate,

00:20:38:20 – 00:20:40:09
you know, well below prime

00:20:40:09 – 00:20:40:23
and then again

00:20:40:23 – 00:20:42:21
afraid to go down in the future,

00:20:42:21 – 00:20:43:16
who knows where they’re headed.

00:20:43:16 – 00:20:44:10
And some people say, hey,

00:20:44:10 – 00:20:45:18
we’re in this high rate environment

00:20:45:18 – 00:20:46:14
because of inflation.

00:20:46:14 – 00:20:47:13
And government debt

00:20:47:13 – 00:20:49:00
and so on for a while.

00:20:49:00 – 00:20:50:00
Others

00:20:50:00 – 00:20:51:01
think of we have lower

00:20:51:01 – 00:20:52:05
rates, economic growth

00:20:52:05 – 00:20:53:18
and so on, or we’ll increase.

00:20:53:18 – 00:20:54:21
So we’ll see where that goes.

00:20:54:21 – 00:20:56:16
But if interest rates do swing,

00:20:56:16 – 00:20:58:22
the company can always refinance it down.

00:20:58:22 – 00:21:01:22
One thing I want to mention with all

00:21:02:11 – 00:21:03:21
control of these transactions

00:21:03:21 – 00:21:04:23
is that right now

00:21:04:23 – 00:21:06:01
we’re talking about senior

00:21:06:01 – 00:21:07:13
financing from banks,

00:21:07:13 – 00:21:10:00
meaning limited leverage banks

00:21:10:00 – 00:21:10:14
on a senior

00:21:10:14 – 00:21:12:12
basis will generally come in

00:21:12:12 – 00:21:15:02
somewhere 2 to 3 times EBITDA.

00:21:15:02 – 00:21:16:16
Three is a very high example

00:21:16:16 – 00:21:17:11
if the company is growing

00:21:17:11 – 00:21:20:09
and so on, generally 2 to 2 and a half

00:21:20:09 – 00:21:23:06
and the rest is financed by all or no.

00:21:23:06 – 00:21:24:16
There is an option out there

00:21:24:16 – 00:21:25:17
that some people probably heard

00:21:25:17 – 00:21:28:14
of called mezzanine financing. And

00:21:29:14 – 00:21:30:08
for most of you, such

00:21:30:08 – 00:21:31:08
transactions, you know,

00:21:31:08 – 00:21:32:12
we’re not seeing a lot of that

00:21:32:12 – 00:21:34:08
because it’s complex and very expensive.

00:21:34:08 – 00:21:35:18
So we’re talking about,

00:21:35:18 – 00:21:37:02
more of a straightforward

00:21:37:02 – 00:21:38:11
financing package approach.

00:21:38:11 – 00:21:39:21
We have two players, you know,

00:21:39:21 – 00:21:41:21
what is a senior bank

00:21:41:21 – 00:21:42:11
coming in

00:21:42:11 – 00:21:44:05
and giving an interest rate

00:21:44:05 – 00:21:47:22
that is somewhere around -2%.

00:21:47:22 – 00:21:49:03
You know, somewhere in that.

00:21:49:03 – 00:21:51:06
And then a seller carrying the rest.

00:21:51:06 – 00:21:52:21
The banks are always going to require

00:21:52:21 – 00:21:54:23
the seller notes to be supported to them.

00:21:54:23 – 00:21:55:21
So that basically means

00:21:55:21 – 00:21:59:04
that they’re higher up on the debt stack

00:21:59:04 – 00:22:00:09
and they get paid back first

00:22:00:09 – 00:22:01:17
if the company has cash flow issues

00:22:01:17 – 00:22:02:15
and so on.

00:22:02:15 – 00:22:04:14
So that’s a big distinction there.

00:22:04:14 – 00:22:06:16
And it is part of the covenants

00:22:06:16 – 00:22:09:07
and the negotiation we do in terms of

00:22:09:07 – 00:22:10:08
allowing in principal

00:22:10:08 – 00:22:12:01
and interest on the seller notes

00:22:12:01 – 00:22:14:10
in conjunction with the bank,

00:22:14:10 – 00:22:15:22
as usually the banks

00:22:15:22 – 00:22:18:22
allow interest on the seller notes

00:22:19:01 – 00:22:19:13
right away,

00:22:19:13 – 00:22:21:12
as long as covenants are being met.

00:22:21:12 – 00:22:22:21
Some say, hey, let’s

00:22:24:01 – 00:22:24:08
if it’s

00:22:24:08 – 00:22:25:23
a brand new relationship

00:22:25:23 – 00:22:27:01
and they feel like the

00:22:27:01 – 00:22:28:05
the ratios are tight,

00:22:28:05 – 00:22:29:16
some might say,

00:22:29:16 – 00:22:31:05
hey, the seller notes on standby

00:22:31:05 – 00:22:32:01
for the first year

00:22:32:01 – 00:22:33:11
or whatever that period is.

00:22:33:11 – 00:22:34:18
So in this case, we’re able

00:22:34:18 – 00:22:36:00
to default

00:22:36:00 – 00:22:36:17
principal and interest

00:22:36:17 – 00:22:37:23
on the seller notes

00:22:37:23 – 00:22:38:20
as long as they’re meeting

00:22:38:20 – 00:22:40:02
their quarterly covenants.

00:22:40:02 – 00:22:40:09
You know,

00:22:40:09 – 00:22:42:21
and if for some reason they’re not,

00:22:42:21 – 00:22:43:22
then it’s always a discussion

00:22:43:22 – 00:22:44:21
with the bank

00:22:44:21 – 00:22:47:08
that their CFO has with their

00:22:47:08 – 00:22:48:21
their banking partner,

00:22:48:21 – 00:22:50:19
and you’re describing what’s going on.

00:22:50:19 – 00:22:51:06
And, you know,

00:22:51:06 – 00:22:54:06
it’s always a discussion versus just no.

00:22:54:12 – 00:22:55:04
Absolutely.

00:22:55:04 – 00:22:55:13
And I

00:22:55:13 – 00:22:57:13
well, in some instances

00:22:57:13 – 00:22:58:15
and we’ve seen these long

00:22:58:15 – 00:22:59:07
term sheets

00:22:59:07 – 00:23:00:21
where not only will

00:23:00:21 – 00:23:02:09
they only allow interest

00:23:02:09 – 00:23:03:07
for the seller notes,

00:23:03:07 – 00:23:05:04
sometimes they’ll

00:23:05:04 – 00:23:06:19
allow only a certain percent.

00:23:06:19 – 00:23:08:15
So if the seller notes that,

00:23:08:15 – 00:23:10:19
you know, say four and a quarter,

00:23:10:19 – 00:23:13:04
they may say, well, you’re limited

00:23:13:04 – 00:23:13:23
in the first year

00:23:13:23 – 00:23:16:23
or two to a percent or 2%,

00:23:17:04 – 00:23:18:21
which, you know, kicks

00:23:18:21 – 00:23:20:00
the can down the road

00:23:20:00 – 00:23:22:23
and makes your interest payments

00:23:23:07 – 00:23:24:22
farther off into the rising,

00:23:24:22 – 00:23:27:03
as well as the principal payments.

00:23:27:03 – 00:23:27:23
So, you know, it’s

00:23:27:23 – 00:23:28:19
something to consider

00:23:28:19 – 00:23:31:00
in the total picture here

00:23:31:00 – 00:23:31:23
that, you know,

00:23:31:23 – 00:23:33:12
the rate isn’t everything,

00:23:33:12 – 00:23:36:05
the length of time isn’t everything.

00:23:36:05 – 00:23:37:05
There are other covenants

00:23:37:05 – 00:23:39:16
that we have to, or other terms.

00:23:39:16 – 00:23:42:16
We have to really be critical of.

00:23:42:22 – 00:23:43:11
Yeah.

00:23:43:11 – 00:23:45:15
For if we go back to,

00:23:45:15 – 00:23:47:05
one additional aspect

00:23:47:05 – 00:23:47:23
I want to highlight here

00:23:47:23 – 00:23:49:06
is this financing

00:23:49:06 – 00:23:50:16
package was backed by R,

00:23:50:16 – 00:23:53:16
and basically a backlog work in progress.

00:23:54:04 – 00:23:55:19
So no personal guarantee here as well.

00:23:56:22 – 00:23:59:04
And again a 100% controlled transaction.

00:23:59:04 – 00:24:00:23
We would expect that.

00:24:00:23 – 00:24:02:04
But some banks would certainly come in

00:24:02:04 – 00:24:02:19
and ask for that.

00:24:02:19 – 00:24:04:16
You know right off the bat.

00:24:04:16 – 00:24:05:22
And most sellers

00:24:05:22 – 00:24:07:12
that they’re selling 100% to the Esop.

00:24:07:12 – 00:24:08:03
And and they also don’t

00:24:08:03 – 00:24:09:00
want to guarantee that

00:24:09:00 – 00:24:10:21
and also have exposure

00:24:10:21 – 00:24:11:17
at the seller and out.

00:24:11:17 – 00:24:13:21
So control transactions

00:24:13:21 – 00:24:16:21
be very rare to also offer a portfolio

00:24:16:23 – 00:24:18:01
to the to the bank.

00:24:18:01 – 00:24:19:04
And then there’s some other covenants

00:24:19:04 – 00:24:20:00
in there as well.

00:24:20:00 – 00:24:20:23
You know, in this

00:24:20:23 – 00:24:22:15
we’re just giving you the highlights

00:24:22:15 – 00:24:24:11
on how this whole financing

00:24:24:11 – 00:24:25:04
package works.

00:24:25:04 – 00:24:27:11
And we can move on to the next example.

00:24:27:11 – 00:24:29:00
You know,

00:24:29:00 – 00:24:33:10
so this one is, marketing consultancy.

00:24:33:23 – 00:24:37:02
And again, this was a 100% sale,

00:24:37:02 – 00:24:40:02
but only partial finance,

00:24:40:12 – 00:24:41:10
kind of similar.

00:24:41:10 – 00:24:43:02
But there are some key differences here

00:24:43:02 – 00:24:44:02
to where you want to outline

00:24:44:02 – 00:24:46:14
what’s happening in this situation.

00:24:46:14 – 00:24:46:21
Yeah.

00:24:46:21 – 00:24:48:20
So marketing consultancy

00:24:48:20 – 00:24:50:14
company going 100% Esop.

00:24:50:14 – 00:24:52:16
And we were able to raise 10 million.

00:24:52:16 – 00:24:55:05
And again as a senior in a revolver

00:24:55:05 – 00:24:56:04
backed by R.

00:24:56:04 – 00:24:57:16
So no no personal guarantee

00:24:57:16 – 00:24:59:07
and company like this

00:24:59:07 – 00:25:00:16
doesn’t have a lot of assets

00:25:00:16 – 00:25:01:05
on the balance sheet

00:25:01:05 – 00:25:02:19
to collateralize either. You know.

00:25:02:19 – 00:25:04:07
So it’s really R and that’s right.

00:25:04:07 – 00:25:05:00
The, the,

00:25:05:00 – 00:25:05:15
the business

00:25:05:15 – 00:25:06:20
strength of the cash flows

00:25:06:20 – 00:25:08:22
and strength of the management team.

00:25:08:22 – 00:25:11:06
So for this one we got 6.5%

00:25:11:06 – 00:25:13:03
fixed interest for five years.

00:25:13:03 – 00:25:16:14
Interest rates were just going up and 6.5

00:25:16:14 – 00:25:18:03
all n was was a win

00:25:18:03 – 00:25:19:10
because Prime is now seven.

00:25:19:10 – 00:25:21:18
So it’s below prime.

00:25:21:18 – 00:25:24:18
And with this particular company

00:25:24:18 – 00:25:26:04
they’re still growing.

00:25:26:04 – 00:25:27:03
Which is great

00:25:27:03 – 00:25:28:10
because as

00:25:28:10 – 00:25:29:14
a great place to be when you go

00:25:29:14 – 00:25:31:11
Esop the bank,

00:25:31:11 – 00:25:31:23
at the end of the day

00:25:31:23 – 00:25:33:07
it’s a new relationship as well.

00:25:33:07 – 00:25:36:07
So the existing bank for this client

00:25:36:18 – 00:25:38:05
did not understand Esop

00:25:38:05 – 00:25:40:04
and initially thought

00:25:40:04 – 00:25:41:04
that they were going to come in

00:25:41:04 – 00:25:42:06
and provide financing,

00:25:42:06 – 00:25:43:14
but they weren’t at the end of the day.

00:25:43:14 – 00:25:45:20
So this is a new relationship.

00:25:45:20 – 00:25:46:18
And again,

00:25:46:18 – 00:25:48:10
this is one of the larger

00:25:48:10 – 00:25:49:20
regionals here too.

00:25:49:20 – 00:25:50:18
So they can,

00:25:50:18 – 00:25:51:10
you know, up and down

00:25:51:10 – 00:25:52:05
West Coast

00:25:52:05 – 00:25:53:17
where the spade plays

00:25:53:17 – 00:25:54:08
as they took

00:25:54:08 – 00:25:56:03
a look at ended their own bottle.

00:25:56:03 – 00:25:56:07
I mean,

00:25:56:07 – 00:25:58:00
they look at ours but they stress test

00:25:58:00 – 00:26:00:01
and do their own at the end of the day.

00:26:00:01 – 00:26:01:12
And they said hey,

00:26:02:11 – 00:26:04:12
we need this are not us, be subordinated

00:26:04:12 – 00:26:07:05
and will allow interest on the saw notes

00:26:07:05 – 00:26:08:08
for the first two years.

00:26:08:08 – 00:26:10:05
So no principal pay down.

00:26:10:05 – 00:26:12:02
So the seller will collect interest

00:26:12:02 – 00:26:14:00
for two years

00:26:14:00 – 00:26:15:22
and then assuming everything’s good,

00:26:15:22 – 00:26:16:14
then we’re going to allow

00:26:16:14 – 00:26:17:21
principal payment on that.

00:26:17:21 – 00:26:21:06
The seller note the flexibility here is

00:26:21:06 – 00:26:23:13
they started off a bit conservative,

00:26:23:13 – 00:26:25:10
which can make sense.

00:26:25:10 – 00:26:26:22
If it’s a new relationship,

00:26:26:22 – 00:26:28:22
the bank will probably want to refinance

00:26:28:22 – 00:26:29:20
or seller notes out

00:26:29:20 – 00:26:32:08
in, I would say probably 2 or 3 years.

00:26:32:08 – 00:26:34:03
Once they get 2 to 3 years

00:26:34:03 – 00:26:35:07
under their belt,

00:26:35:07 – 00:26:36:20
improving performance,

00:26:36:20 – 00:26:39:00
then they can refinance

00:26:39:00 – 00:26:40:12
both the senior piece,

00:26:40:12 – 00:26:42:02
get that refinance out

00:26:42:02 – 00:26:43:02
depending where rates are.

00:26:43:02 – 00:26:43:17
I mean,

00:26:43:17 – 00:26:44:12
if rates are much higher

00:26:44:12 – 00:26:46:22
than it might not make sense to do that,

00:26:46:22 – 00:26:48:07
that in 2 to 3 years.

00:26:48:07 – 00:26:50:12
But all things equal,

00:26:50:12 – 00:26:52:23
if rates just kind of stay the same then

00:26:52:23 – 00:26:53:10
the seller,

00:26:53:10 – 00:26:54:15
they get a higher interest rate.

00:26:54:15 – 00:26:56:11
So and this are probably does

00:26:56:11 – 00:26:58:17
want to be paid out sooner than that.

00:26:58:17 – 00:26:59:22
Long seller note.

00:26:59:22 – 00:27:01:10
So the company has that option

00:27:01:10 – 00:27:03:08
and the bank is going to want to do that.

00:27:03:08 – 00:27:04:00
You know that’s that’s

00:27:04:00 – 00:27:06:09
where they operate is in this situation.

00:27:06:09 – 00:27:08:20
And start off a bit more conservative,

00:27:08:20 – 00:27:10:04
be a good partner.

00:27:10:04 – 00:27:12:23
And then prove out performance

00:27:12:23 – 00:27:13:09
and then,

00:27:13:09 – 00:27:14:18
you know, come in and refinance

00:27:14:18 – 00:27:17:08
more in a couple of years. Absolutely.

00:27:17:08 – 00:27:19:08
And I’m seeing a few questions come in

00:27:19:08 – 00:27:20:15
that are related to the

00:27:20:15 – 00:27:22:14
these capital raised examples

00:27:22:14 – 00:27:23:04
we’ve given.

00:27:23:04 – 00:27:24:20
So if you don’t mind I’m going to ask

00:27:24:20 – 00:27:25:15
a couple of these.

00:27:25:15 – 00:27:27:06
One, can you explain

00:27:27:06 – 00:27:28:05
who a bank will ask

00:27:28:05 – 00:27:31:05
for personal guarantees to a 100% Esop

00:27:31:07 – 00:27:32:13
when the selling shareholders

00:27:32:13 – 00:27:33:23
are out of the business.

00:27:33:23 – 00:27:34:20
So basically yeah,

00:27:34:20 – 00:27:37:20
who’s who’s the person to guarantee.

00:27:37:20 – 00:27:39:00
So I’ve seen board members

00:27:39:00 – 00:27:40:09
or the entire board.

00:27:40:09 – 00:27:41:00
Trevor,

00:27:41:00 – 00:27:43:19
have you seen any other individuals

00:27:43:19 – 00:27:47:04
that have been named as a on the PGA yet?

00:27:47:04 – 00:27:48:23
The seller shareholders are the business

00:27:48:23 – 00:27:50:12
that I would say

00:27:50:12 – 00:27:53:12
talk to us offline 100% Esop.

00:27:53:15 – 00:27:56:08
The bank should not be asking for a BJ.

00:27:56:08 – 00:27:57:00
Yeah.

00:27:57:00 – 00:28:01:00
You know, that’s so it would be a really

00:28:01:16 – 00:28:04:09
rare situation that existing executive,

00:28:04:09 – 00:28:06:05
not a former selling shareholder,

00:28:06:05 – 00:28:07:20
would come in and offer a PG,

00:28:07:20 – 00:28:08:17
and if so, then they need

00:28:08:17 – 00:28:10:14
to be compensated for that risk.

00:28:10:14 – 00:28:11:05
You know as well

00:28:11:05 – 00:28:12:16
that that would be something

00:28:12:16 – 00:28:15:09
I think would be a nonstarter

00:28:15:09 – 00:28:17:00
for most situations.

00:28:17:00 – 00:28:18:00
But yeah, I’d like to understand

00:28:18:00 – 00:28:19:11
more background facts there.

00:28:19:11 – 00:28:20:18
We have seen limited PGS,

00:28:20:18 – 00:28:21:05
but again,

00:28:21:05 – 00:28:22:21
usually it’s the same shareholders

00:28:22:21 – 00:28:25:03
where it kills off after 1 or 2 years,

00:28:26:05 – 00:28:28:07
especially with a new bacon relationship.

00:28:28:07 – 00:28:29:01
And you see you

00:28:29:01 – 00:28:29:22
sometimes see that

00:28:29:22 – 00:28:31:03
and that’s more on the minority side.

00:28:31:03 – 00:28:31:13
Now, you know,

00:28:31:13 – 00:28:34:13
if it’s 100%, that’s, rare.

00:28:34:15 – 00:28:36:23
That’s not market per se, you know.

00:28:36:23 – 00:28:38:00
So again,

00:28:38:00 – 00:28:38:17
I don’t understand

00:28:38:17 – 00:28:40:15
facts and circumstances more there.

00:28:40:15 – 00:28:42:21
But would you be able to explain the pros

00:28:42:21 – 00:28:44:20
and cons of an interest rate swap,

00:28:44:20 – 00:28:46:06
as well as the reason

00:28:46:06 – 00:28:48:22
the bank insists on these?

00:28:48:22 – 00:28:51:18
It’s yeah, it’s a negotiation.

00:28:51:18 – 00:28:52:14
At the end of the day,

00:28:52:14 – 00:28:55:19
part of the term sheet and banks

00:28:55:19 – 00:28:57:01
like the interest rate swap does,

00:28:57:01 – 00:28:58:02
it protects them

00:28:58:02 – 00:29:00:08
with movements of interest rates.

00:29:00:08 – 00:29:02:11
Same thing with the company as well.

00:29:02:11 – 00:29:04:20
And you can spend a bunch of time,

00:29:04:20 – 00:29:06:08
you know, on the pros

00:29:06:08 – 00:29:07:10
cons of interest rate swap.

00:29:07:10 – 00:29:09:12
But you know big picture.

00:29:09:12 – 00:29:10:14
It’s basically a hedge.

00:29:10:14 – 00:29:12:12
You know. So for both parties.

00:29:12:12 – 00:29:12:15
Yeah.

00:29:12:15 – 00:29:14:05
So you can model it out and show

00:29:14:05 – 00:29:15:19
okay if rates go up,

00:29:15:19 – 00:29:17:11
what does that movement

00:29:17:11 – 00:29:18:20
and interest rate cost look like.

00:29:18:20 – 00:29:20:20
And then if rates go down,

00:29:20:20 – 00:29:22:01
by banks overall

00:29:22:01 – 00:29:23:04
they like these because

00:29:23:04 – 00:29:25:06
especially if the pricing is very thin,

00:29:25:06 – 00:29:26:07
they’re going to start

00:29:26:07 – 00:29:27:18
then asking for that.

00:29:27:18 – 00:29:29:07
So they’re the pricing.

00:29:29:07 – 00:29:30:12
Isn’t that mean

00:29:30:12 – 00:29:32:07
they’re getting so for a plus,

00:29:32:07 – 00:29:32:15
you know,

00:29:32:15 – 00:29:34:20
212 is certainly that,

00:29:34:20 – 00:29:36:09
you know, then interest rate swap.

00:29:36:09 – 00:29:38:01
Probably not going to see that.

00:29:38:01 – 00:29:39:04
But when the price is very thin

00:29:39:04 – 00:29:41:05
then you do see that come in.

00:29:41:05 – 00:29:42:07
And then again, it

00:29:42:07 – 00:29:43:01
depends too

00:29:43:01 – 00:29:45:07
on the other aspects

00:29:45:07 – 00:29:46:08
of the banking relationship.

00:29:46:08 – 00:29:47:20
So and most of these banks

00:29:47:20 – 00:29:50:02
are going to require the company to be,

00:29:50:02 – 00:29:52:11
had their primary banking with the bank

00:29:52:11 – 00:29:54:03
providing the senior loan.

00:29:54:03 – 00:29:55:16
So the, the company is

00:29:57:06 – 00:29:59:22
selling significant amount of

00:29:59:22 – 00:30:02:02
revenue, you know, whatever goods

00:30:02:02 – 00:30:03:19
they sell, consulting, etc..

00:30:03:19 – 00:30:04:14
The revenues are high.

00:30:04:14 – 00:30:06:01
All that money flowing to the bank too.

00:30:06:01 – 00:30:07:14
So that comes into the discussion

00:30:07:14 – 00:30:08:21
with these banks

00:30:08:21 – 00:30:10:01
as you take a look

00:30:10:01 – 00:30:10:21
at the overall Treasury

00:30:10:21 – 00:30:12:22
relationship as well.

00:30:12:22 – 00:30:14:23
And then finally our revolver rates

00:30:14:23 – 00:30:16:14
the same as senior rates.

00:30:16:14 – 00:30:18:03
They can be.

00:30:18:03 – 00:30:19:05
But also you have to think

00:30:19:05 – 00:30:20:09
that the term is

00:30:20:09 – 00:30:22:06
significantly shorter usually.

00:30:22:06 – 00:30:23:20
So, you know, in the example

00:30:23:20 – 00:30:25:15
that’s on the screen in a five year

00:30:25:15 – 00:30:26:09
senior note,

00:30:26:09 – 00:30:28:14
if there was revolver as well,

00:30:28:14 – 00:30:31:09
that’s probably going to be 24 months.

00:30:31:09 – 00:30:34:09
So they could both share that 6.5%

00:30:34:12 – 00:30:35:21
interest rate.

00:30:35:21 – 00:30:38:19
But that revolver will need to

00:30:38:19 – 00:30:39:19
you’ll essentially

00:30:39:19 – 00:30:42:19
need to engage in a new revolver

00:30:42:19 – 00:30:43:20
after 24 months

00:30:43:20 – 00:30:45:10
if you still need it,

00:30:45:10 – 00:30:48:09
upon which interest rates can change.

00:30:48:09 – 00:30:49:15
But usually

00:30:49:15 – 00:30:51:12
they’re a little bit different.

00:30:51:12 – 00:30:54:03
Yeah, we’ve seen that rate.

00:30:54:03 – 00:30:56:07
Yeah, it depends on the revolver.

00:30:56:07 – 00:30:57:22
If it’s being used for the transaction.

00:30:57:22 – 00:30:59:14
You always want to say that today.

00:31:01:01 – 00:31:01:19
If not, if it’s

00:31:01:19 – 00:31:02:09
just hey,

00:31:02:09 – 00:31:03:04
we’re going to do a senior

00:31:03:04 – 00:31:05:22
loan to finance

00:31:05:22 – 00:31:07:02
part of the transaction

00:31:07:02 – 00:31:08:18
and then bring a revolver on

00:31:08:18 – 00:31:10:14
for just normal company operations,

00:31:10:14 – 00:31:11:17
then a that fact pattern,

00:31:11:17 – 00:31:13:09
then they might be different.

00:31:13:09 – 00:31:15:22
Revolver tends to be priced around Prime.

00:31:15:22 – 00:31:17:10
I’ve seen crazy rates and revolvers

00:31:17:10 – 00:31:18:08
actually that’s

00:31:18:08 – 00:31:20:11
sometimes they come in as 910%.

00:31:20:11 – 00:31:22:03
That’s way too high right.

00:31:22:03 – 00:31:25:03
But sometimes you see that, generally

00:31:25:03 – 00:31:26:08
a revolver for a company

00:31:26:08 – 00:31:28:06
with a good balance sheet,

00:31:28:06 – 00:31:29:22
good financials, good cash flow,

00:31:29:22 – 00:31:31:03
you know, it should be no one of them,

00:31:31:03 – 00:31:32:17
you know, should be in that ballpark.

00:31:32:17 – 00:31:33:14
Excellent.

00:31:33:14 – 00:31:34:07
I think that’s fine.

00:31:34:07 – 00:31:35:21
One or to hear that ask me

00:31:35:21 – 00:31:37:21
about the transaction.

00:31:37:21 – 00:31:40:13
You so in a leveraged Esop transaction

00:31:40:13 – 00:31:41:16
have you seen situations

00:31:41:16 – 00:31:44:16
where retaining existing preferred equity

00:31:44:23 – 00:31:46:01
rather than redeeming it

00:31:46:01 – 00:31:48:04
through additional seller debt,

00:31:48:04 – 00:31:49:02
made the transaction

00:31:49:02 – 00:31:51:19
more financially sustainable?

00:31:51:19 – 00:31:52:11
How do lenders

00:31:52:11 – 00:31:53:13
and Esop trustees

00:31:53:13 – 00:31:55:23
typically evaluate that approach?

00:31:55:23 – 00:31:56:05
Okay.

00:31:56:05 – 00:31:57:06
So saw kind of warrants

00:31:57:06 – 00:31:58:10
right a little bit.

00:31:58:10 – 00:32:00:00
This is kind of a similar thing.

00:32:00:00 – 00:32:01:12
So lenders

00:32:01:12 – 00:32:02:11
and you saw trustees

00:32:02:11 – 00:32:03:23
evaluate that approach. So

00:32:05:01 – 00:32:06:08
yeah

00:32:06:08 – 00:32:06:15
I would

00:32:06:15 – 00:32:07:09
say it depends

00:32:07:09 – 00:32:09:16
on both the preferred equity

00:32:09:16 – 00:32:12:14
and you know how much seller you know

00:32:12:14 – 00:32:14:06
basically both the equity

00:32:14:06 – 00:32:15:04
and debt components.

00:32:15:04 – 00:32:15:21
And,

00:32:15:21 – 00:32:17:02
and if we’re

00:32:17:02 – 00:32:19:08
eating our covenants and meeting ratios.

00:32:19:08 – 00:32:21:19
But I don’t know I don’t I never

00:32:21:19 – 00:32:23:04
you could probably speak more

00:32:23:04 – 00:32:23:22
better to this,

00:32:23:22 – 00:32:25:03
but I’ve never seen

00:32:25:03 – 00:32:28:01
retaining it as a preferable option

00:32:28:01 – 00:32:29:00
I guess.

00:32:29:00 – 00:32:30:20
Or if a preferred

00:32:30:20 – 00:32:32:09
is paying out something guarantee,

00:32:32:09 – 00:32:33:22
then banks are going to like that.

00:32:33:22 – 00:32:34:21
That’s the company

00:32:34:21 – 00:32:36:00
that’s going to come into ratios.

00:32:36:00 – 00:32:36:20
And so on.

00:32:36:20 – 00:32:38:13
If if it’s a structure

00:32:38:13 – 00:32:41:01
where the seller is carrying warrants

00:32:41:01 – 00:32:42:17
and a lower interest rate,

00:32:42:17 – 00:32:44:01
then banks love that

00:32:44:01 – 00:32:46:08
because you’re basically then tying the

00:32:46:08 – 00:32:47:21
the feature warrant equity

00:32:47:21 – 00:32:49:23
payout to the future value of a company

00:32:49:23 – 00:32:51:00
that’s lowering their risk

00:32:51:00 – 00:32:51:22
because making the ratios

00:32:51:22 – 00:32:53:11
look better as well

00:32:53:11 – 00:32:55:21
for the overall sustainability of the

00:32:55:21 – 00:32:56:20
Esop transaction.

00:32:56:20 – 00:32:58:02
But retaining the existing

00:32:58:02 – 00:32:59:13
preferred equity, I understand why.

00:32:59:13 – 00:33:01:19
What’s the rationale for retaining it,

00:33:01:19 – 00:33:03:19
especially if it’s a, like

00:33:03:19 – 00:33:05:12
we said, lovers use all transactions

00:33:05:12 – 00:33:06:18
that could be

00:33:06:18 – 00:33:09:10
technically anything up to 100%.

00:33:09:10 – 00:33:13:06
But, yeah, that’s nuance question

00:33:13:06 – 00:33:13:19
for sure.

00:33:13:19 – 00:33:15:05
Just depends on the attributes

00:33:15:05 – 00:33:17:01
of the preferred equity.

00:33:17:01 – 00:33:18:19
Yeah. The fact pattern’s important.

00:33:18:19 – 00:33:19:22
And also,

00:33:19:22 – 00:33:22:11
yeah, just the nature of both components

00:33:22:11 – 00:33:25:05
the equity and debt. Good question.

00:33:25:05 – 00:33:26:05
Very good.

00:33:26:05 – 00:33:26:17
All right.

00:33:26:17 – 00:33:28:23
Our final segment is on

00:33:28:23 – 00:33:31:00
second stage transactions and seller

00:33:31:00 – 00:33:32:03
not refinance.

00:33:32:03 – 00:33:34:03
And I guess this is a good time

00:33:34:03 – 00:33:34:20
for a plug.

00:33:34:20 – 00:33:36:00
We have a second stage

00:33:36:00 – 00:33:38:12
transaction webinars as well

00:33:38:12 – 00:33:39:15
that’s available to view

00:33:39:15 – 00:33:41:00
if you want to get deeper into

00:33:41:00 – 00:33:43:03
what is all involved in that.

00:33:43:03 – 00:33:46:14
But here was second stage, deals.

00:33:46:14 – 00:33:47:20
We’re just talking about

00:33:48:20 – 00:33:49:19
debt.

00:33:49:19 – 00:33:51:04
So they’re

00:33:51:04 – 00:33:52:21
essentially the same opportunity

00:33:52:21 – 00:33:54:14
as new formations.

00:33:54:14 – 00:33:56:23
We’re utilizing the same procedures

00:33:56:23 – 00:33:58:01
methodology.

00:33:58:01 – 00:34:00:08
There’s the ability to refinance

00:34:00:08 – 00:34:01:15
existing bank loans.

00:34:01:15 – 00:34:03:03
Perhaps there’s better terms today

00:34:03:03 – 00:34:05:09
than in late 22 to 24.

00:34:05:09 – 00:34:07:22
So band second stage all.

00:34:07:22 – 00:34:08:10
Yeah.

00:34:08:10 – 00:34:09:17
Wait wait a second. Yeah.

00:34:09:17 – 00:34:10:09
So second stage,

00:34:10:09 – 00:34:11:16
one big thing with the second stage

00:34:11:16 – 00:34:14:04
is the fact that you already have

00:34:14:04 – 00:34:15:21
proven Esop concept.

00:34:15:21 – 00:34:17:09
So, you’ve done a first stage

00:34:17:09 – 00:34:19:05
Esop transaction often some minority.

00:34:19:05 – 00:34:22:00
So something less than 50%,

00:34:22:00 – 00:34:24:13
that debt is probably repaid

00:34:24:13 – 00:34:26:14
and you’ve already proven

00:34:26:14 – 00:34:27:17
that the company can operate

00:34:27:17 – 00:34:29:04
as a new company,

00:34:29:04 – 00:34:30:19
take on that debt, pay it down.

00:34:30:19 – 00:34:32:11
You already have a trusted team in place.

00:34:32:11 – 00:34:33:21
You already have the valuation fact

00:34:33:21 – 00:34:35:01
pattern in place.

00:34:35:01 – 00:34:35:19
You already have

00:34:35:19 – 00:34:36:23
a management team in place

00:34:36:23 – 00:34:38:08
that is starting to understand.

00:34:38:08 – 00:34:40:00
Esops obviously, Esops

00:34:40:00 – 00:34:41:03
you know that business model

00:34:41:03 – 00:34:41:21
pretty complex.

00:34:41:21 – 00:34:43:20
There’s a lot of learning and so on.

00:34:43:20 – 00:34:44:23
Second stage deals.

00:34:44:23 – 00:34:46:08
Banks love those

00:34:46:08 – 00:34:47:03
because you’ve already

00:34:47:03 – 00:34:48:14
proved a lot of their

00:34:48:14 – 00:34:50:03
their risk concerns.

00:34:50:03 – 00:34:51:04
You’ve already prove that out.

00:34:51:04 – 00:34:52:18
So at second stage

00:34:52:18 – 00:34:54:02
still we do finance

00:34:54:02 – 00:34:55:08
hey we’re doing one right now.

00:34:55:08 – 00:34:57:16
Take it a company to 100%.

00:34:57:16 – 00:34:59:00
And yeah I’ll say

00:34:59:00 – 00:35:00:14
the bank it’s still process

00:35:00:14 – 00:35:01:06
so the end of the day.

00:35:01:06 – 00:35:02:19
But it’s a bit easier

00:35:02:19 – 00:35:03:21
because there’s

00:35:03:21 – 00:35:06:07
a lot more comfort out there that

00:35:06:07 – 00:35:09:01
this company can survive as an Esop.

00:35:09:01 – 00:35:10:09
So we want to plant that seed.

00:35:10:09 – 00:35:12:03
That second stage deals

00:35:12:03 – 00:35:13:18
often are very attractive to banks.

00:35:13:18 – 00:35:15:02
And also for sellers too,

00:35:15:02 – 00:35:17:00
because if they

00:35:17:00 – 00:35:18:03
already went through the process,

00:35:18:03 – 00:35:20:03
whatever it was three, five,

00:35:20:03 – 00:35:20:23
six years ago,

00:35:20:23 – 00:35:22:13
they are truly ready to be cashed out.

00:35:22:13 – 00:35:23:23
At that point.

00:35:23:23 – 00:35:24:19
And then the idea

00:35:24:19 – 00:35:25:19
of carrying a seller note

00:35:25:19 – 00:35:28:00
for another five, seven, nine,

00:35:28:00 – 00:35:29:16
maybe even ten years,

00:35:29:16 – 00:35:30:21
you know, might not be a billion,

00:35:30:21 – 00:35:32:22
especially if they’re doing 1042

00:35:32:22 – 00:35:34:08
or whatever their own

00:35:34:08 – 00:35:35:15
personal reinvestment

00:35:35:15 – 00:35:38:14
cash flow needs are and so on for them,

00:35:38:14 – 00:35:41:01
their family, etc..

00:35:41:01 – 00:35:41:21
Often

00:35:42:21 – 00:35:44:00
that all that

00:35:44:00 – 00:35:45:07
gets to, a

00:35:45:07 – 00:35:46:02
second stage,

00:35:46:02 – 00:35:47:13
you saw a financing solution

00:35:47:13 – 00:35:48:14
that comes in

00:35:48:14 – 00:35:49:11
and is a bit

00:35:49:11 – 00:35:51:12
more smooth than the first one.

00:35:51:12 – 00:35:52:17
So that’s my pitch on the

00:35:52:17 – 00:35:54:21
the second stage financing

00:35:54:21 – 00:35:57:03
that’s important there.

00:35:57:03 – 00:35:58:13
And then the second bullet

00:35:58:13 – 00:36:01:12
there is refinancing existing bank loans.

00:36:01:20 – 00:36:03:22
There may be better terms today

00:36:03:22 – 00:36:04:22
than there have been.

00:36:04:22 – 00:36:07:07
Or there could be other reasons

00:36:07:07 – 00:36:08:18
for doing that,

00:36:08:18 – 00:36:11:01
some of which might just be, you know,

00:36:11:01 – 00:36:13:12
taking a second bite at the, seller note,

00:36:13:12 – 00:36:16:04
you know, helping to buy that down.

00:36:16:04 – 00:36:16:18
Yeah.

00:36:16:18 – 00:36:18:23
And the reason why we put out there

00:36:18:23 – 00:36:20:15
late 2022 to 2024,

00:36:20:15 – 00:36:21:14
because that was the area

00:36:21:14 – 00:36:22:16
where rates were higher

00:36:22:16 – 00:36:23:11
than they were today.

00:36:23:11 – 00:36:27:03
So we were placing loans back then Prime

00:36:27:03 – 00:36:28:05
was, what, eight and a half.

00:36:28:05 – 00:36:29:12
And some of the loans

00:36:29:12 – 00:36:31:02
we place were in the eight. Yeah.

00:36:31:02 – 00:36:33:06
And we often negotiate

00:36:33:06 – 00:36:35:09
the prepayment penalties away on these.

00:36:35:09 – 00:36:38:00
So people are stuck in that

00:36:38:00 – 00:36:40:22
vintage senior loan situation.

00:36:40:22 – 00:36:41:14
It’s a great time

00:36:41:14 – 00:36:42:10
to refinance it out

00:36:42:10 – 00:36:43:14
and save

00:36:43:14 – 00:36:45:21
1 or 2 percentage points on the interest.

00:36:45:21 – 00:36:47:09
So take

00:36:47:09 – 00:36:48:07
if you did

00:36:48:07 – 00:36:49:08
any sort of transaction

00:36:49:08 – 00:36:50:05
during that time, you know,

00:36:50:05 – 00:36:51:03
take a look at the terms,

00:36:51:03 – 00:36:51:17
you know, and say,

00:36:51:17 – 00:36:54:01
hey, is this competitive? You know, today

00:36:55:03 – 00:36:56:22
and reach out to us to

00:36:56:22 – 00:36:58:02
we can quickly tell you,

00:36:58:02 – 00:36:58:22
you know, yes it is.

00:36:58:22 – 00:37:00:20
Or you know, you can probably do better.

00:37:00:20 – 00:37:01:23
And easiest

00:37:01:23 – 00:37:03:05
place is always to work with the,

00:37:03:05 – 00:37:04:20
you know, existing financial institution,

00:37:04:20 – 00:37:05:19
existing bank

00:37:05:19 – 00:37:07:04
to see if they’re interested

00:37:07:04 – 00:37:08:22
in refinancing that out,

00:37:08:22 – 00:37:11:00
if they’re not part of us,

00:37:11:00 – 00:37:12:17
that absolutely.

00:37:12:17 – 00:37:13:19
And then when it comes to seller

00:37:13:19 – 00:37:16:11
note refinancing, I mean, it’s

00:37:16:11 – 00:37:17:19
these are the instances

00:37:17:19 – 00:37:20:13
where the term vintage is not cool

00:37:20:13 – 00:37:23:13
because your rates could be unfavorable

00:37:23:13 – 00:37:25:00
or there could,

00:37:25:00 – 00:37:25:18
you know,

00:37:25:18 – 00:37:26:17
it’s just time

00:37:26:17 – 00:37:28:03
you’ve been sitting on the balance sheet

00:37:28:03 – 00:37:28:16
long enough.

00:37:28:16 – 00:37:31:16
So if you refinance the seller note

00:37:31:21 – 00:37:34:06
you’re buying down more of that principal

00:37:34:06 – 00:37:36:23
selling shareholder gets more of

00:37:36:23 – 00:37:39:23
their initial, transaction price

00:37:40:02 – 00:37:41:15
paid to them minutes.

00:37:41:15 – 00:37:42:03
Attractive

00:37:42:03 – 00:37:43:23
if they do want to be cashed out

00:37:43:23 – 00:37:46:07
if their goal is, you know,

00:37:46:07 – 00:37:48:05
perhaps at the outset was seven years.

00:37:48:05 – 00:37:49:00
Oh, yeah, that’s fine.

00:37:49:00 – 00:37:50:01
That’s okay.

00:37:50:01 – 00:37:53:01
But maybe plans change, visions change.

00:37:53:07 – 00:37:57:05
And so to to buy that down or completely

00:37:57:05 – 00:37:59:09
satisfy the seller note

00:37:59:09 – 00:38:01:19
is sometimes very attractive.

00:38:01:19 – 00:38:04:02
But then there are some caveats there

00:38:04:02 – 00:38:04:22
with interest rate

00:38:04:22 – 00:38:07:15
arbitrage and warrant considerations.

00:38:07:15 – 00:38:07:22
Trevor,

00:38:07:22 – 00:38:10:01
you want to talk us through those.

00:38:10:01 – 00:38:10:04
Yeah.

00:38:10:04 – 00:38:11:00
So rates in the early

00:38:11:00 – 00:38:12:12
2020s were still very low.

00:38:12:12 – 00:38:14:16
So if you have a seller note that

00:38:14:16 – 00:38:16:21
let’s say it was priced at

00:38:18:06 – 00:38:19:06
AFR.

00:38:19:06 – 00:38:20:07
Applicable federal rate.

00:38:20:07 – 00:38:21:11
You know back then

00:38:21:11 – 00:38:23:00
you know we’re talking about low low

00:38:23:00 – 00:38:24:01
single digit rates.

00:38:24:01 – 00:38:26:13
So, you have to take a look at

00:38:26:13 – 00:38:28:15
that versus the current rates,

00:38:28:15 – 00:38:29:23
what a bank would offer, finance it out.

00:38:29:23 – 00:38:31:17
And you know it’s pro cons, right.

00:38:31:17 – 00:38:33:01
The company

00:38:33:01 – 00:38:33:17
in that case

00:38:33:17 – 00:38:34:04
like let’s say

00:38:34:04 – 00:38:36:03
there’s still 3 or 4 years left on that.

00:38:36:03 – 00:38:36:15
No.

00:38:36:15 – 00:38:37:12
Oh the company is going to be

00:38:37:12 – 00:38:38:22
paying more interest.

00:38:38:22 – 00:38:39:16
Plus side, you know,

00:38:39:16 – 00:38:41:06
the seller does get paid out.

00:38:41:06 – 00:38:42:13
And you know

00:38:42:13 – 00:38:44:08
sometimes the seller is ready

00:38:44:08 – 00:38:45:02
at that point to

00:38:45:02 – 00:38:47:03
especially if they’ve been on the board

00:38:47:03 – 00:38:47:20
a few years

00:38:47:20 – 00:38:50:15
and are truly ready to be out, then,

00:38:50:15 – 00:38:51:14
you have to weigh

00:38:51:14 – 00:38:52:14
the pros and cons there.

00:38:52:14 – 00:38:54:07
So that’s what we mean by interest rate

00:38:54:07 – 00:38:57:01
arbitrage is take a look at the existing

00:38:57:01 – 00:38:59:12
SA note package and what that rate was.

00:38:59:12 – 00:39:01:22
And compared to the cost of refinancing.

00:39:01:22 – 00:39:03:10
And and see if it makes sense.

00:39:03:10 – 00:39:04:20
Even if it’s a slightly different rate

00:39:04:20 – 00:39:05:23
you can still make sense,

00:39:05:23 – 00:39:07:21
you know for different reasons.

00:39:07:21 – 00:39:09:03
And then also

00:39:09:03 – 00:39:09:16
the warrant

00:39:09:16 – 00:39:11:13
considerations, a lot of the SA note

00:39:11:13 – 00:39:13:18
packages do have warrants

00:39:13:18 – 00:39:15:21
and some of those get called on that

00:39:15:21 – 00:39:16:22
SA notes pain.

00:39:16:22 – 00:39:18:14
So if that’s the case

00:39:18:14 – 00:39:20:05
and the SA notes refinance out.

00:39:20:05 – 00:39:21:04
And for,

00:39:21:04 – 00:39:22:11
then you could be in a situation

00:39:22:11 – 00:39:23:21
where the warrant is, you know

00:39:23:21 – 00:39:25:18
called in cash out at that point too.

00:39:25:18 – 00:39:27:14
And that could be sooner than

00:39:27:14 – 00:39:28:08
you and the company

00:39:28:08 – 00:39:29:07
originally planned for.

00:39:29:07 – 00:39:30:21
So, you know, again,

00:39:30:21 – 00:39:33:00
the cash flow modeling.

00:39:33:00 – 00:39:34:08
Well, we’ll prove this out.

00:39:34:08 – 00:39:36:00
But those are some points I know.

00:39:36:00 – 00:39:37:03
We’ll talk more

00:39:38:03 – 00:39:39:12
later here in a few minutes

00:39:39:12 – 00:39:41:11
about additional considerations.

00:39:41:11 – 00:39:43:11
But the bottom line here is expect

00:39:43:11 – 00:39:45:12
competitive terms in this

00:39:45:12 – 00:39:46:18
and no personal guarantee.

00:39:46:18 – 00:39:47:10
Like Trevor said,

00:39:47:10 – 00:39:47:16
you know

00:39:47:16 – 00:39:50:10
we don’t ever like to see that in

00:39:50:10 – 00:39:53:10
and especially with a 100% transaction.

00:39:53:10 – 00:39:54:05
And then the components

00:39:54:05 – 00:39:55:16
are tailored to your business,

00:39:55:16 – 00:39:56:02
you know,

00:39:56:02 – 00:39:57:05
rather

00:39:57:05 – 00:39:58:18
making sure that

00:39:58:18 – 00:39:59:20
there are things you can meet.

00:39:59:20 – 00:40:02:13
They’re not too far of a stretch.

00:40:02:13 – 00:40:03:23
And at the end of the day,

00:40:03:23 – 00:40:05:21
you know, these banks want to lend,

00:40:05:21 – 00:40:07:21
so they want to

00:40:07:21 – 00:40:09:06
find opportunities,

00:40:09:06 – 00:40:10:22
that they can make it happen.

00:40:10:22 – 00:40:11:21
So these

00:40:11:21 – 00:40:12:15
these terms are a lot

00:40:12:15 – 00:40:14:05
better than they used to be.

00:40:14:05 – 00:40:15:06
And I’ll give an example

00:40:15:06 – 00:40:16:16
of having it’s tailored to the business.

00:40:16:16 – 00:40:18:04
So current deal

00:40:18:04 – 00:40:19:10
we’re working on a company

00:40:19:10 – 00:40:21:00
wants to acquire another company.

00:40:21:00 – 00:40:22:13
It’s a second stage transaction.

00:40:22:13 – 00:40:23:19
So we’re taking them to 100%.

00:40:23:19 – 00:40:26:08
They paid off their earlier tranches

00:40:26:08 – 00:40:28:00
so fast with the banks

00:40:28:00 – 00:40:29:17
that came in and place capital

00:40:29:17 – 00:40:30:23
and they are eyeing

00:40:30:23 – 00:40:33:18
a possible acquisition next year.

00:40:33:18 – 00:40:35:09
So they want the covenants

00:40:35:09 – 00:40:37:03
to be tailored for that, you know.

00:40:37:03 – 00:40:40:03
So, with an acquisition that comes

00:40:40:05 – 00:40:41:16
the need for cash, right.

00:40:41:16 – 00:40:44:03
And the ability to do it.

00:40:44:03 – 00:40:46:06
So the banks that are serious

00:40:46:06 – 00:40:47:05
here are working with us

00:40:47:05 – 00:40:48:17
to tailor

00:40:48:17 – 00:40:49:21
those covenants and say, okay,

00:40:49:21 – 00:40:50:22
we understand you’re going to do this

00:40:50:22 – 00:40:52:16
Q1 transaction.

00:40:52:16 – 00:40:54:18
This is what’s needed for that.

00:40:54:18 – 00:40:55:15
And even though we’re doing this,

00:40:55:15 – 00:40:56:15
you thought, now

00:40:56:15 – 00:40:58:04
we need a plan around that.

00:40:58:04 – 00:40:59:10
And and again,

00:40:59:10 – 00:41:01:00
banks don’t like surprises.

00:41:01:00 – 00:41:01:07
You know.

00:41:01:07 – 00:41:01:20
And that’s when you have

00:41:01:20 – 00:41:03:21
the best overall package

00:41:03:21 – 00:41:05:06
is is when you’re pretty clear

00:41:05:06 – 00:41:06:13
with where the companies are today

00:41:06:13 – 00:41:07:05
and then

00:41:07:05 – 00:41:08:06
also where it’s headed

00:41:08:06 – 00:41:10:10
over the next year. Absolutely.

00:41:10:10 – 00:41:13:14
So baking that in now versus in Q1,

00:41:13:18 – 00:41:14:10
you know, is

00:41:14:10 – 00:41:17:05
is making this whole thing possible. Yes.

00:41:17:05 – 00:41:19:10
Let’s that’s very important point.

00:41:19:10 – 00:41:19:23
Let’s talk about

00:41:19:23 – 00:41:21:15
some other considerations.

00:41:21:15 – 00:41:23:03
Number one being you know,

00:41:23:03 – 00:41:23:23
your balance sheet

00:41:23:23 – 00:41:24:22
and cash flow strength.

00:41:24:22 – 00:41:27:17
We’ve talked a lot about ratios.

00:41:27:17 – 00:41:28:22
But as it relates

00:41:28:22 – 00:41:30:16
to the financial statements

00:41:30:16 – 00:41:32:02
what do you mean Trevor.

00:41:32:02 – 00:41:32:09
Yeah.

00:41:32:09 – 00:41:34:22
So taking a look at the balance sheet,

00:41:34:22 – 00:41:35:14
at the end of the day,

00:41:35:14 – 00:41:36:18
that’s the story of the strength,

00:41:36:18 – 00:41:37:17
right, of the company.

00:41:37:17 – 00:41:39:05
And for those out there

00:41:39:05 – 00:41:41:16
that have leveraged Esops

00:41:41:16 – 00:41:42:23
showing up on the balance sheet already,

00:41:42:23 – 00:41:43:22
you have to

00:41:43:22 – 00:41:45:09
basically take out that internal loan

00:41:45:09 – 00:41:46:19
because it makes the equity

00:41:46:19 – 00:41:47:13
look pretty ugly.

00:41:47:13 – 00:41:48:20
You know, in terms of the bank

00:41:48:20 – 00:41:50:10
like that becomes an in and out right.

00:41:50:10 – 00:41:51:16
To adjust that back.

00:41:51:16 – 00:41:52:04
But we’re probably

00:41:52:04 – 00:41:53:17
want to take a look at the cash flow.

00:41:53:17 – 00:41:56:05
And you need to understand

00:41:56:05 – 00:41:57:12
what it can truly support.

00:41:57:12 – 00:41:58:16
Let’s stress test as well.

00:41:58:16 – 00:42:01:00
And again this is stuff we do.

00:42:01:00 – 00:42:03:00
And I know a lot of people out there

00:42:03:00 – 00:42:04:00
do this on their own too.

00:42:04:00 – 00:42:05:20
A lot of CFOs, listening,

00:42:05:20 – 00:42:07:08
VP, finance, etc.

00:42:07:08 – 00:42:09:10
controllers are probably going to

00:42:09:10 – 00:42:10:13
play around in Excel

00:42:10:13 – 00:42:11:09
and build your own model.

00:42:11:09 – 00:42:12:07
That basically is stress

00:42:12:07 – 00:42:13:06
testing to say, okay,

00:42:13:06 – 00:42:16:06
if the company had a a down year,

00:42:16:08 – 00:42:18:23
could it still meet that debt obligation?

00:42:20:00 – 00:42:21:03
So that’s very strong.

00:42:21:03 – 00:42:22:01
I should say.

00:42:22:01 – 00:42:23:02
That’s very

00:42:23:02 – 00:42:24:13
that’s a key consideration here

00:42:24:13 – 00:42:26:09
to have a relatively strong

00:42:26:09 – 00:42:27:14
balance sheet and strong

00:42:27:14 – 00:42:28:19
cash flows there.

00:42:28:19 – 00:42:29:21
Absolutely.

00:42:29:21 – 00:42:31:21
And reviewed statement.

00:42:31:21 – 00:42:33:06
So financial statement quality.

00:42:33:06 – 00:42:34:09
So this comes up a lot.

00:42:34:09 – 00:42:35:17
So a lot of companies are going down

00:42:35:17 – 00:42:38:12
the easy path have internal financials.

00:42:38:12 – 00:42:41:13
And unless they have an already existing

00:42:41:13 – 00:42:43:04
requirement for reviewed

00:42:43:04 – 00:42:44:17
or audited statements.

00:42:44:17 – 00:42:45:07
And often

00:42:45:07 – 00:42:48:07
if they’re a government contractor or

00:42:48:07 – 00:42:49:16
commercial general contractor

00:42:49:16 – 00:42:50:13
or subcontractors

00:42:50:13 – 00:42:52:03
that are usually for bonding,

00:42:52:03 – 00:42:53:09
you need reviewed statements

00:42:53:09 – 00:42:54:00
or maybe audit,

00:42:54:00 – 00:42:55:21
depending on the size of your projects.

00:42:55:21 – 00:42:57:06
Others don’t necessarily

00:42:57:06 – 00:42:58:09
have that requirement.

00:42:58:09 – 00:43:01:09
Banks love to see reviewed statements.

00:43:02:17 – 00:43:05:11
Usually they start asking for that

00:43:05:11 – 00:43:06:20
when they land somewhere

00:43:06:20 – 00:43:09:07
in the high single digit millions.

00:43:09:07 – 00:43:11:02
And it is a negotiation point.

00:43:11:02 – 00:43:12:21
It all comes down to the strength

00:43:12:21 – 00:43:14:09
of the operating team.

00:43:14:09 – 00:43:15:15
You know, there’s,

00:43:15:15 – 00:43:18:01
a CFO or comptroller who is a CPA.

00:43:18:01 – 00:43:18:07
You know,

00:43:18:07 – 00:43:20:12
that kind of gives more credibility

00:43:20:12 – 00:43:22:22
than if there’s not, you know, so on

00:43:22:22 – 00:43:23:21
banks lending 20

00:43:23:21 – 00:43:25:04
plus million generally

00:43:25:04 – 00:43:26:12
audited statements are

00:43:27:11 – 00:43:28:07
always required.

00:43:28:07 – 00:43:29:19
And I gave that example earlier

00:43:29:19 – 00:43:32:02
where we got more where was it.

00:43:32:02 – 00:43:33:09
And now it’s just

00:43:33:09 – 00:43:35:02
because of the company’s relationships,

00:43:35:02 – 00:43:36:20
strength of the cash flows, the team

00:43:36:20 – 00:43:37:22
and so on.

00:43:37:22 – 00:43:41:08
So that can become, I don’t know,

00:43:41:09 – 00:43:43:01
say, a roadblock, but a surprise,

00:43:43:01 – 00:43:44:11
you know, with, with companies

00:43:44:11 – 00:43:45:13
who are

00:43:45:13 – 00:43:48:11
traditionally used to having outside

00:43:48:11 – 00:43:50:07
CPA review their audit statements,

00:43:50:07 – 00:43:51:23
you know, then going down this bank path,

00:43:51:23 – 00:43:54:00
seen that come up often,

00:43:54:00 – 00:43:55:05
they give you time though.

00:43:55:05 – 00:43:56:08
So it’s not necessarily

00:43:56:08 – 00:43:57:14
something that has to be done

00:43:57:14 – 00:44:00:00
before the loan funds.

00:44:00:00 – 00:44:01:07
Sometimes it’s the year after.

00:44:01:07 – 00:44:04:07
So a loan closes today.

00:44:05:08 – 00:44:06:08
You know that bank term sheet.

00:44:06:08 – 00:44:07:04
If it was a requirement

00:44:07:04 – 00:44:09:01
they would say okay starting with

00:44:09:01 – 00:44:12:03
2026 we required reviewed statements.

00:44:12:09 – 00:44:14:00
And then basically what that means is

00:44:14:00 – 00:44:14:23
the CPA does

00:44:14:23 – 00:44:15:18
a review,

00:44:15:18 – 00:44:15:23
you know,

00:44:15:23 – 00:44:18:02
probably sometime in early 2027.

00:44:18:02 – 00:44:21:04
And IT banks really do like these

00:44:21:04 – 00:44:22:16
because it’s another party,

00:44:22:16 – 00:44:24:19
another independent party saying

00:44:24:19 – 00:44:25:17
signing off

00:44:25:17 – 00:44:26:20
essentially that yes,

00:44:26:20 – 00:44:28:23
these things are true.

00:44:28:23 – 00:44:29:22
The balance sheet and cash

00:44:29:22 – 00:44:31:00
flow strength that we spoke

00:44:31:00 – 00:44:32:22
about in the bullet point above,

00:44:32:22 – 00:44:34:02
these things are true.

00:44:34:02 – 00:44:35:08
And, you know,

00:44:35:08 – 00:44:38:08
I remember from studying for the CPA exam

00:44:38:08 – 00:44:39:18
that a reviewed statement

00:44:39:18 – 00:44:41:15
is substantially less in scope

00:44:41:15 – 00:44:44:00
than an audited financial statement.

00:44:44:00 – 00:44:45:18
And so it’s just levels of

00:44:46:17 – 00:44:47:10
individuals

00:44:47:10 – 00:44:49:01
testing and verifying

00:44:49:01 – 00:44:50:13
and signing off on things.

00:44:50:13 – 00:44:52:04
And so we’ve got a company

00:44:52:04 – 00:44:53:06
purporting that, hey,

00:44:53:06 – 00:44:54:12
my balance sheet is strong.

00:44:54:12 – 00:44:57:12
My cash flow can make this happen.

00:44:57:20 – 00:44:59:04
But like you said, Trevor,

00:44:59:04 – 00:45:00:10
if it’s just the internals,

00:45:00:10 – 00:45:03:10
if it’s just, internally prepared,

00:45:03:15 – 00:45:04:15
that’s the company saying it.

00:45:04:15 – 00:45:05:12
That’s one party.

00:45:05:12 – 00:45:06:16
Now we’ve got a second

00:45:06:16 – 00:45:09:04
and especially independent party

00:45:09:04 – 00:45:10:13
saying that the company,

00:45:10:13 – 00:45:11:15
what the company is saying

00:45:11:15 – 00:45:12:17
is actually true.

00:45:12:17 – 00:45:14:23
And I think that’s why banks really

00:45:14:23 – 00:45:15:13
like those

00:45:15:13 – 00:45:16:18
and like to lean on them

00:45:16:18 – 00:45:19:02
when it comes to lent.

00:45:19:02 – 00:45:20:20
And when it comes time to lend,

00:45:20:20 – 00:45:22:21
they look also at your capital needs

00:45:22:21 – 00:45:24:06
and not just now, but,

00:45:24:06 – 00:45:25:16
you know, into the future.

00:45:25:16 – 00:45:27:15
And if, like I say,

00:45:27:15 – 00:45:29:01
your capital needs include

00:45:29:01 – 00:45:31:02
a lot of machinery, equipment.

00:45:31:02 – 00:45:31:20
Well, let’s say you’re building

00:45:31:20 – 00:45:33:21
a, you know, I data center one,

00:45:33:21 – 00:45:35:09
these are going to be very high. Right.

00:45:35:09 – 00:45:36:05
And that needs

00:45:36:05 – 00:45:37:17
to be baked into the forecast

00:45:37:17 – 00:45:39:04
because even though it looks like today

00:45:39:04 – 00:45:41:07
cash flows will support a senior

00:45:41:07 – 00:45:42:05
loan at X.

00:45:42:05 – 00:45:43:16
You know we need to prove it out.

00:45:43:16 – 00:45:44:09
And make sure the company

00:45:44:09 – 00:45:45:06
is not going to be starved

00:45:45:06 – 00:45:46:22
and has capital

00:45:46:22 – 00:45:48:14
so that it can continue to operate,

00:45:48:14 – 00:45:50:00
continue to grow acquisitions,

00:45:50:00 – 00:45:50:14
same thing.

00:45:50:14 – 00:45:51:03
You know, that’s

00:45:51:03 – 00:45:52:10
if the board

00:45:52:10 – 00:45:54:07
is seriously considering acquisitions,

00:45:54:07 – 00:45:56:01
then understanding

00:45:56:01 – 00:45:57:21
the profile of the company

00:45:57:21 – 00:45:58:18
that might be acquired

00:45:58:18 – 00:46:00:11
and then also how that has financed,

00:46:00:11 – 00:46:02:09
that has to be part of this whole

00:46:02:09 – 00:46:03:23
financing package or purchase

00:46:03:23 – 00:46:05:20
obligation and phantom and warrant

00:46:05:20 – 00:46:06:17
warrant payouts.

00:46:06:17 – 00:46:08:05
We talked about that earlier.

00:46:08:05 – 00:46:09:16
That needs to be baked into.

00:46:09:16 – 00:46:09:23
And again,

00:46:09:23 – 00:46:11:11
that’s all cash flow components.

00:46:11:11 – 00:46:12:11
Let’s talk about the board

00:46:12:11 – 00:46:13:08
and trustee roles.

00:46:13:08 – 00:46:15:01
We haven’t talked about this.

00:46:15:01 – 00:46:15:09
Yeah.

00:46:15:09 – 00:46:17:15
They do play a very important role in

00:46:19:03 – 00:46:20:18
in

00:46:20:18 – 00:46:21:17
the financing especially

00:46:21:17 – 00:46:23:04
on second stage.

00:46:23:04 – 00:46:24:03
And then we’re financing

00:46:24:03 – 00:46:26:13
existing seller debt. Right.

00:46:26:13 – 00:46:29:17
So the let’s say the board proposes

00:46:29:17 – 00:46:32:06
refinancing to the trustee

00:46:32:06 – 00:46:33:05
and the trustee reviews

00:46:33:05 – 00:46:34:11
the new debt terms,

00:46:34:11 – 00:46:37:01
the prepayment price, and who benefits.

00:46:37:01 – 00:46:38:05
Let’s talk a little bit.

00:46:38:05 – 00:46:39:11
You know, what analysis does

00:46:39:11 – 00:46:41:07
the trustee want.

00:46:41:07 – 00:46:43:04
What does it need to own.

00:46:43:04 – 00:46:44:16
Need its own advisors

00:46:44:16 – 00:46:46:14
to do to review the terms?

00:46:46:14 – 00:46:46:19
Yes.

00:46:46:19 – 00:46:48:01
The board of the company

00:46:48:01 – 00:46:49:20
is going to approve the financing,

00:46:49:20 – 00:46:51:16
and the trustee will need to be looped in

00:46:51:16 – 00:46:52:13
and approve it as well.

00:46:52:13 – 00:46:53:04
The trustee is going

00:46:53:04 – 00:46:55:06
to want to see the terms term sheet,

00:46:55:06 – 00:46:56:05
maybe some modeling

00:46:56:05 – 00:46:58:12
to see how this whole new package,

00:46:58:12 – 00:47:00:01
whether it’s a second stage

00:47:00:01 – 00:47:02:02
or so not refinancing,

00:47:02:02 – 00:47:03:01
you know, what that looks like,

00:47:03:01 – 00:47:04:16
how it impacts the company,

00:47:04:16 – 00:47:06:05
the cash flows, you know, so on.

00:47:06:05 – 00:47:07:13
So they both need to be looped in.

00:47:07:13 – 00:47:09:15
You know, I know independent trustees

00:47:09:15 – 00:47:11:12
surely don’t want to be surprised.

00:47:11:12 – 00:47:12:07
You know,

00:47:12:07 – 00:47:12:22
they’re told, oh, hey,

00:47:12:22 – 00:47:14:19
we refinance the seller note out.

00:47:14:19 – 00:47:15:05
And the

00:47:15:05 – 00:47:16:16
company took on this,

00:47:16:16 – 00:47:19:01
large new debt facility,

00:47:19:01 – 00:47:20:12
you know, without being looped in.

00:47:20:12 – 00:47:22:02
So, you know, it’s collaborative.

00:47:22:02 – 00:47:23:18
Of course. Esops always are.

00:47:23:18 – 00:47:24:00
Yeah.

00:47:24:00 – 00:47:25:01
So again,

00:47:25:01 – 00:47:27:16
the board is going to vote

00:47:27:16 – 00:47:28:13
whether to proceed,

00:47:28:13 – 00:47:29:07
you know, then part of

00:47:29:07 – 00:47:32:06
that is getting trustee approval,

00:47:32:09 – 00:47:33:16
second stage transactions.

00:47:33:16 – 00:47:35:02
I mean, those always have to be financed

00:47:35:02 – 00:47:35:17
one way or another.

00:47:35:17 – 00:47:36:11
Anyways, so

00:47:36:11 – 00:47:37:17
our notes are bank

00:47:37:17 – 00:47:40:12
trustee and their financial advisor,

00:47:40:12 – 00:47:41:10
meaning their appraiser.

00:47:41:10 – 00:47:42:12
They’re going to want to see the terms

00:47:42:12 – 00:47:43:07
and the term sheet.

00:47:43:07 – 00:47:44:01
Of course,

00:47:44:01 – 00:47:46:14
part of that second stage negotiation

00:47:46:14 – 00:47:47:18
or finances are notes.

00:47:47:18 – 00:47:49:08
That’s where

00:47:49:08 – 00:47:50:16
it can become more of a gray area.

00:47:50:16 – 00:47:52:21
And we always recommend

00:47:52:21 – 00:47:53:17
we’ve been the trustee.

00:47:53:17 – 00:47:54:02
And and that’s

00:47:54:02 – 00:47:54:18
what we do as well

00:47:54:18 – 00:47:55:23
for involved in the process.

00:47:55:23 – 00:47:58:10
You know. So not everyone’s aligned.

00:47:58:10 – 00:47:59:22
Everyone is on the same page

00:47:59:22 – 00:48:01:15
and there’s no surprises.

00:48:01:15 – 00:48:02:08
Yeah.

00:48:02:08 – 00:48:03:04
You got to think about what

00:48:03:04 – 00:48:04:20
the trustees responsible for.

00:48:04:20 – 00:48:06:21
They’re making decisions

00:48:06:21 – 00:48:09:01
for all the, Esop shareholders.

00:48:09:01 – 00:48:10:02
And so if you’re entering

00:48:10:02 – 00:48:11:11
into this new debt agreement,

00:48:11:11 – 00:48:12:22
that could potentially depress

00:48:12:22 – 00:48:14:03
the share price

00:48:14:03 – 00:48:16:10
for temporarily, hopefully,

00:48:16:10 – 00:48:18:22
you know, they need to be critical about

00:48:20:00 – 00:48:21:18
why, you know, and

00:48:21:18 – 00:48:23:09
what the terms that are involved.

00:48:23:09 – 00:48:25:19
So I think it’s it’s very important.

00:48:25:19 – 00:48:27:03
And because it’s

00:48:27:03 – 00:48:29:11
got to be to the benefit of all the,

00:48:29:11 – 00:48:31:15
all the Esop shareholders.

00:48:31:15 – 00:48:34:04
And so that being said, our role

00:48:34:04 – 00:48:36:18
in this whole thing as advisors

00:48:36:18 – 00:48:38:12
is to find you the best terms

00:48:38:12 – 00:48:40:22
and the best partner for your business

00:48:40:22 – 00:48:42:09
just because they’re great terms.

00:48:42:09 – 00:48:43:18
Perhaps the bank’s

00:48:43:18 – 00:48:45:15
too small for your other needs.

00:48:45:15 – 00:48:46:09
Operationally,

00:48:46:09 – 00:48:49:09
maybe your large enough that this small,

00:48:49:19 – 00:48:51:14
neighborhood or regional bank

00:48:51:14 – 00:48:54:03
just doesn’t have what we want there.

00:48:54:03 – 00:48:56:17
It may be a credit card offering

00:48:56:17 – 00:48:57:18
that you get at your

00:48:57:18 – 00:48:59:06
you’re at the incumbent bank,

00:48:59:06 – 00:49:00:07
but not at this one.

00:49:00:07 – 00:49:01:04
So it does not

00:49:01:04 – 00:49:02:00
necessarily need

00:49:02:00 – 00:49:05:00
to be related to the, transaction.

00:49:05:00 – 00:49:06:16
But we are certainly

00:49:06:16 – 00:49:07:19
looking out to make sure

00:49:07:19 – 00:49:09:23
that this is successful

00:49:09:23 – 00:49:12:11
and that that everybody, you know,

00:49:12:11 – 00:49:14:03
feels like they

00:49:14:03 – 00:49:15:11
got the best deal out of it,

00:49:15:11 – 00:49:17:11
out of the transaction

00:49:17:11 – 00:49:19:00
or the the refinance.

00:49:19:00 – 00:49:20:10
So in this Q&A

00:49:20:10 – 00:49:21:23
we’ve had on a bunch before,

00:49:21:23 – 00:49:24:21
but those were related to that one topic.

00:49:24:21 – 00:49:27:02
We have some others here.

00:49:27:02 – 00:49:29:14
So let’s talk about

00:49:29:14 – 00:49:30:13
how much of that seller

00:49:30:13 – 00:49:31:05
note trouble

00:49:31:05 – 00:49:33:19
can be refinanced at one time.

00:49:33:19 – 00:49:35:20
It all depends that the company

00:49:35:20 – 00:49:37:18
has no existing debt.

00:49:37:18 – 00:49:40:05
Just from a conservative posture

00:49:40:05 – 00:49:41:15
here, I would say two times

00:49:43:00 – 00:49:45:20
EBITDA as a starting point.

00:49:45:20 – 00:49:46:21
So let’s say the company’s

00:49:46:21 – 00:49:48:07
all these offer six out of it.

00:49:48:07 – 00:49:49:23
A bank came in added two.

00:49:49:23 – 00:49:50:15
That’s paid off.

00:49:50:15 – 00:49:52:03
And you want to bring on another try

00:49:52:03 – 00:49:53:11
to refinance our notes.

00:49:53:11 – 00:49:54:01
They’re probably going

00:49:54:01 – 00:49:55:13
to take out another two.

00:49:55:13 – 00:49:57:12
If the company’s growing then maybe more

00:49:57:12 – 00:49:57:18
you know.

00:49:57:18 – 00:49:59:03
But generally two

00:49:59:03 – 00:49:59:20
at today’s rates

00:49:59:20 – 00:50:00:14
that’s going to cash flow.

00:50:00:14 – 00:50:02:12
Nice. Banks are going to be happy.

00:50:02:12 – 00:50:03:09
The company’s not going to be

00:50:03:09 – 00:50:05:01
stressed on cash flow.

00:50:05:01 – 00:50:06:13
And this question

00:50:06:13 – 00:50:07:07
kind of relates to

00:50:07:07 – 00:50:09:05
when you were talking about

00:50:09:05 – 00:50:12:05
those 2022 to 2024 interest rates of

00:50:12:16 – 00:50:14:09
Prime being at 8%.

00:50:14:09 – 00:50:17:09
If I refinance part of my seller, no.

00:50:17:14 – 00:50:20:14
What happens to my interest income

00:50:21:01 – 00:50:24:01
tax and my warrants.

00:50:24:01 – 00:50:25:21
Yeah. So and I’m assuming it’s a taxable.

00:50:25:21 – 00:50:28:04
So let’s answer 1042

00:50:28:04 – 00:50:30:00
you know any tax implication as well.

00:50:30:00 – 00:50:31:00
You’re not going to be interested in

00:50:31:00 – 00:50:31:11
any more.

00:50:31:11 – 00:50:33:04
You’re getting a big pile of cash.

00:50:33:04 – 00:50:35:03
So let’s assume it’s a taxable sale.

00:50:35:03 – 00:50:35:17
Bank comes in

00:50:35:17 – 00:50:36:23
and refinance is your seller no doubt.

00:50:36:23 – 00:50:37:18
Well that’s a big chunk

00:50:37:18 – 00:50:38:23
that’s just got paid down.

00:50:38:23 – 00:50:40:01
It’s you’re going to make capital gains

00:50:40:01 – 00:50:40:09
on that.

00:50:40:09 – 00:50:41:07
Your interest income

00:50:41:07 – 00:50:43:23
then is going to go down, which okay,

00:50:43:23 – 00:50:46:02
depending on how much interest income

00:50:46:02 – 00:50:47:23
you’re getting, that’s taxable and so on.

00:50:47:23 – 00:50:48:08
So you

00:50:48:08 – 00:50:49:17
a nice pile of cash

00:50:49:17 – 00:50:50:10
probably outweighs

00:50:50:10 – 00:50:52:05
that because you can reinvest in.

00:50:52:05 – 00:50:53:15
And do you know what to do with that.

00:50:53:15 – 00:50:56:15
And and as far as warrants go,

00:50:57:00 – 00:50:58:05
it all depends

00:50:58:05 – 00:50:59:22
on the term of the warrants.

00:50:59:22 – 00:51:00:14
A lot of them say

00:51:00:14 – 00:51:02:06
that the company can call once the,

00:51:02:06 – 00:51:03:18
after a period of time,

00:51:03:18 – 00:51:04:15
but usually it’s one

00:51:04:15 – 00:51:06:14
the seller debt is fully repaid.

00:51:06:14 – 00:51:07:07
So we’re talking about

00:51:07:07 – 00:51:08:16
refinancing seller debt,

00:51:08:16 – 00:51:10:04
and we’re paying it off in full.

00:51:10:04 – 00:51:11:23
Then the warrant could be called.

00:51:11:23 – 00:51:13:18
And it all depends on the value

00:51:13:18 – 00:51:15:03
at that point in time and so on.

00:51:15:03 – 00:51:15:20
And of course he saw

00:51:15:20 – 00:51:17:16
values to deduct debt.

00:51:17:16 – 00:51:19:07
So it could be a sub off to more

00:51:19:07 – 00:51:20:18
warrant answer

00:51:20:18 – 00:51:23:06
by refinancing the entire sell or not out

00:51:23:06 – 00:51:24:13
versus waiting until the

00:51:24:13 – 00:51:25:18
the debt is fully repaid.

00:51:25:18 – 00:51:27:15
And then the equity value is

00:51:27:15 – 00:51:29:16
as rebound and ideally much higher.

00:51:29:16 – 00:51:30:22
So that’s a nuance one.

00:51:30:22 – 00:51:31:19
And again

00:51:31:19 – 00:51:33:11
model needs to be made

00:51:33:11 – 00:51:34:12
and modeling out

00:51:34:12 – 00:51:35:18
what that impact looks like.

00:51:35:18 – 00:51:37:20
So people make the best

00:51:37:20 – 00:51:38:19
educated decision.

00:51:38:19 – 00:51:40:14
They’re absolutely

00:51:40:14 – 00:51:43:11
we’re running close on time.

00:51:43:11 – 00:51:45:03
So I’ll hit one more.

00:51:45:03 – 00:51:46:14
Does refinancing change

00:51:46:14 – 00:51:49:08
how shares are released to participants?

00:51:49:08 – 00:51:50:06
And that’s a good question

00:51:50:06 – 00:51:52:06
because I don’t want to confuse.

00:51:52:06 – 00:51:54:09
And it’s easy to confuse.

00:51:54:09 – 00:51:54:23
We’re talking about

00:51:54:23 – 00:51:56:23
all the outside loans.

00:51:56:23 – 00:51:58:19
So this is the company,

00:51:58:19 – 00:52:00:07
between you know,

00:52:00:07 – 00:52:01:20
this is a loan between the company

00:52:01:20 – 00:52:03:11
and a bank or the company and the seller.

00:52:04:11 – 00:52:06:00
The loan that

00:52:06:00 – 00:52:07:07
this is referring

00:52:07:07 – 00:52:09:02
to is called the inside loan,

00:52:09:02 – 00:52:11:08
or the loan between the company

00:52:11:08 – 00:52:13:04
and the Esop trust

00:52:13:04 – 00:52:14:11
for that initial transfer

00:52:14:11 – 00:52:15:18
tranche of shares.

00:52:15:18 – 00:52:17:07
And that’s the one where it puts

00:52:17:07 – 00:52:19:03
these shares on a shelf

00:52:19:03 – 00:52:20:11
that are released over time

00:52:20:11 – 00:52:22:19
with the retirement contributions,

00:52:22:19 – 00:52:24:07
that’s unaffected

00:52:24:07 – 00:52:26:02
by what’s happening here.

00:52:26:02 – 00:52:28:05
The only time that might change

00:52:28:05 – 00:52:30:16
is the second stage transaction

00:52:30:16 – 00:52:33:07
where new shares are introduced.

00:52:33:07 – 00:52:36:02
We may have a second loan now

00:52:36:02 – 00:52:38:21
inside loan, but when we’re refinancing,

00:52:38:21 – 00:52:40:10
that largely does not change

00:52:40:10 – 00:52:42:01
how shares are released.

00:52:42:01 – 00:52:43:17
It does change company cash flows.

00:52:43:17 – 00:52:45:04
It does change the balance sheet.

00:52:45:04 – 00:52:47:11
A lot is happening on the company side,

00:52:47:11 – 00:52:48:18
but it does not necessarily

00:52:48:18 – 00:52:51:05
affect the Esop

00:52:51:05 – 00:52:52:15
in terms of the share release.

00:52:52:15 – 00:52:53:13
It does in other ways,

00:52:53:13 – 00:52:55:19
but in terms of the share release.

00:52:55:19 – 00:52:57:23
So with these last few moments,

00:52:57:23 – 00:52:58:19
I want to,

00:52:58:19 – 00:53:01:04
ask you to connect with us on email

00:53:01:04 – 00:53:03:03
if you have other questions.

00:53:03:03 – 00:53:04:07
Does it make you.com?

00:53:04:07 – 00:53:06:01
There’s a whole wealth of information

00:53:06:01 – 00:53:07:04
there literature,

00:53:07:04 – 00:53:09:03
videos, things like that.

00:53:09:03 – 00:53:11:21
Check out Trevor or myself on LinkedIn,

00:53:11:21 – 00:53:12:20
follow our Esop

00:53:12:20 – 00:53:15:07
radio podcast on Apple, Spotify

00:53:15:07 – 00:53:16:16
or YouTube.

00:53:16:16 – 00:53:17:15
Do you want to be on?

00:53:17:15 – 00:53:18:16
Do you want to be a guest?

00:53:18:16 – 00:53:19:20
We have other,

00:53:19:20 – 00:53:21:19
founders, business owners,

00:53:21:19 – 00:53:24:19
current Esop parties on.

00:53:24:22 – 00:53:26:13
Shoot us an email.

00:53:26:13 – 00:53:28:16
We’ll try to set something up.

00:53:28:16 – 00:53:30:03
Otherwise

00:53:30:03 – 00:53:31:15
I don’t see any other questions.

00:53:31:15 – 00:53:33:23
So thanks for joining us today again.

00:53:33:23 – 00:53:34:17
I’m Ben Spade,

00:53:34:17 – 00:53:35:14
director of Esop

00:53:35:14 – 00:53:37:14
strategy here at Menke

00:53:37:14 – 00:53:39:16
and I’m with Trevor Gilmore, CEO.

00:53:39:16 – 00:53:41:10
Trevor, any final words?

00:53:41:10 – 00:53:42:18
Thanks everyone for joining us today.

00:53:42:18 – 00:53:44:15
Reach out if you have any questions.

00:53:44:15 – 00:53:46:01
Have an awesome day

00:00:04:06 – 00:00:05:08
And this session we’re going

00:00:05:08 – 00:00:07:15
to talk about the current ESOP

00:00:07:15 – 00:00:09:03
financing conditions.

00:00:09:03 – 00:00:11:23
This session is targeted towards

00:00:11:23 – 00:00:15:19
business owners, CEOs, CFOs,

00:00:15:19 – 00:00:18:18
trustees, ESOP committee members,

00:00:18:18 – 00:00:21:05
and they’ll all hear something different.

00:00:21:05 – 00:00:23:14
But there are some pretty key takeaways

00:00:23:14 – 00:00:26:02
for each of those groups.

00:00:26:02 – 00:00:27:22
Gilmore, our CEO is with me.

00:00:27:22 – 00:00:28:18
I’m Ben Spadt.

00:00:28:18 – 00:00:30:12
I’m the director of ESOP

00:00:30:12 – 00:00:33:12
Strategy here at Menke

00:00:36:11 – 00:00:37:03
And to kick it off.

00:00:37:03 – 00:00:38:16
Trevor, I want to ask you

00:00:38:16 – 00:00:42:02
what has changed in the last 12 months

00:00:42:02 – 00:00:43:06
for ESOP companies

00:00:43:06 – 00:00:46:06
that are either carrying a note

00:00:46:08 – 00:00:49:08
or planning for a new transaction,

00:00:49:18 – 00:00:51:02
and the biggest change in the past

00:00:51:02 – 00:00:51:14
12 months,

00:00:51:14 – 00:00:52:07
Ben, is

00:00:52:07 – 00:00:53:04
the fact that

00:00:53:04 – 00:00:56:04
so many more banks are into esops

00:00:56:09 – 00:00:59:04
somehow, or credit committees in the past

00:00:59:04 – 00:01:00:00
either love or hate it.

00:01:00:00 – 00:01:03:00
Esops now it seems like all banks

00:01:03:14 – 00:01:04:19
that are in the business

00:01:04:19 – 00:01:06:20
of lending money to businesses.

00:01:06:20 – 00:01:08:19
No esops and most of them love it.

00:01:08:19 – 00:01:09:18
So Ben,

00:01:09:18 – 00:01:11:23
I know you and I spent a lot of our time

00:01:11:23 – 00:01:13:02
sourcing, financing,

00:01:13:02 – 00:01:14:06
talking to those banks

00:01:14:06 – 00:01:16:03
nationwide, big players,

00:01:16:03 – 00:01:18:05
regional players or smaller players.

00:01:18:05 – 00:01:20:13
And the appetite is certainly changed.

00:01:20:13 – 00:01:22:21
It’s probably the best financing market

00:01:22:21 – 00:01:23:21
I’ve seen

00:01:23:21 – 00:01:24:20
since my time,

00:01:24:20 – 00:01:27:05
and I been here since 2015.

00:01:27:05 – 00:01:27:22
That’s no lie.

00:01:27:22 – 00:01:28:16
I’ve been in the game

00:01:28:16 – 00:01:31:10
for a while as well, and it’s it has.

00:01:31:10 – 00:01:34:20
I’ve never seen as many players

00:01:35:03 – 00:01:36:05
in, you know,

00:01:36:05 – 00:01:38:06
lending to the in these instances.

00:01:38:06 – 00:01:39:10
And also

00:01:39:10 – 00:01:41:19
the terms are very favorable

00:01:41:19 – 00:01:43:05
in a lot of these situations.

00:01:43:05 – 00:01:44:10
You know the balance sheet

00:01:44:10 – 00:01:45:03
an income statement.

00:01:45:03 – 00:01:46:01
They have to back it up.

00:01:46:01 – 00:01:47:20
But they are coming

00:01:47:20 – 00:01:49:00
with some really good numbers.

00:01:49:00 – 00:01:52:16
So that takes us to our agenda here.

00:01:52:16 – 00:01:54:02
And I want

00:01:54:02 – 00:01:56:17
to kind of outline some things.

00:01:56:17 – 00:01:58:18
We’ve gone over introductions again

00:01:58:18 – 00:02:00:11
I’m Ben Spade and with Trevor

00:02:00:11 – 00:02:01:22
Gilmore here

00:02:01:22 – 00:02:03:13
I will cover the current Esop

00:02:03:13 – 00:02:05:10
financing conditions.

00:02:05:10 – 00:02:06:00
We’ll talk about

00:02:06:00 – 00:02:08:13
our recent capital raises

00:02:08:13 – 00:02:11:07
and then we’ll talk about second stage

00:02:11:07 – 00:02:13:03
what’s involved there

00:02:13:03 – 00:02:14:22
and refinancing a seller note.

00:02:14:22 – 00:02:15:16
So perhaps,

00:02:15:16 – 00:02:18:12
you know you sold 100% right away.

00:02:18:12 – 00:02:20:06
But we’re three years down the road.

00:02:20:06 – 00:02:22:03
And perhaps we want to refinance

00:02:22:03 – 00:02:24:08
for some reason,

00:02:24:08 – 00:02:25:23
talk about other considerations.

00:02:25:23 – 00:02:28:16
And then like I said alluded to earlier,

00:02:28:16 – 00:02:29:09
we’ll have a question

00:02:29:09 – 00:02:30:22
and answer portion

00:02:30:22 – 00:02:33:06
if you didn’t know who we are,

00:02:33:06 – 00:02:35:19
here is our information, please,

00:02:35:19 – 00:02:37:12
you know, call email

00:02:37:12 – 00:02:39:01
if you have questions

00:02:39:01 – 00:02:40:01
that are beyond the scope

00:02:40:01 – 00:02:41:10
of this conversation

00:02:41:10 – 00:02:43:00
or you’re just curious about

00:02:43:00 – 00:02:44:03
something you hear today.

00:02:45:14 – 00:02:46:13
So let’s talk about current

00:02:46:13 – 00:02:49:13
financing conditions.

00:02:49:14 – 00:02:51:18
Trevor, I know that

00:02:51:18 – 00:02:54:21
the current bank appetite for Esop

00:02:54:21 – 00:02:56:04
credit is pretty strong.

00:02:56:04 – 00:02:57:09
But you want to kick off

00:02:57:09 – 00:02:59:23
what what you’re seeing right now.

00:02:59:23 – 00:03:00:05
Yeah.

00:03:00:05 – 00:03:02:00
So when you think about Esop

00:03:02:00 – 00:03:03:01
financing conditions

00:03:03:01 – 00:03:05:16
like to break it down between large

00:03:05:16 – 00:03:06:18
national banks.

00:03:06:18 – 00:03:08:23
So think the quote unquote TBD files

00:03:08:23 – 00:03:11:09
and compare that to the regionals.

00:03:11:09 – 00:03:12:16
So both of those have

00:03:12:16 – 00:03:14:12
distinct credit appetites.

00:03:14:12 – 00:03:16:01
They’re targeting different companies.

00:03:16:01 – 00:03:17:10
Relationships always matter.

00:03:17:10 – 00:03:17:20
You know,

00:03:17:20 – 00:03:19:12
it always comes down to the relationship

00:03:19:12 – 00:03:21:00
or there’s an existing relationship

00:03:21:00 – 00:03:22:01
there, probably stretch

00:03:22:01 – 00:03:22:23
and go further

00:03:22:23 – 00:03:24:06
than they would on a new relationship

00:03:24:06 – 00:03:24:16
and so on.

00:03:24:16 – 00:03:26:10
But when we think nationwide,

00:03:26:10 – 00:03:27:08
I like to break it down

00:03:27:08 – 00:03:29:01
between the regionals,

00:03:29:01 – 00:03:29:18
which are banks

00:03:29:18 – 00:03:32:06
that just maybe in the US, a Bay area,

00:03:32:06 – 00:03:33:23
southern California,

00:03:33:23 – 00:03:34:10
Des Moines

00:03:34:10 – 00:03:35:17
area, Chicago area,

00:03:35:17 – 00:03:38:23
and so on, banks that you see in regions

00:03:38:23 – 00:03:39:17
and large

00:03:39:17 – 00:03:42:17
metros versus the the nationwide banks,

00:03:42:20 – 00:03:43:14
what we’re seeing

00:03:43:14 – 00:03:44:02
and when we talk

00:03:44:02 – 00:03:46:01
to a lot of credit officers

00:03:46:01 – 00:03:46:09
out there,

00:03:46:09 – 00:03:47:20
a lot of credit teams,

00:03:47:20 – 00:03:49:11
is that they’re increasingly viewing

00:03:49:11 – 00:03:50:22
well-run esops

00:03:50:22 – 00:03:53:17
as a lower credit risk compared to

00:03:53:17 – 00:03:56:16
a normal M&A finance transaction.

00:03:56:16 – 00:03:57:10
Absolutely.

00:03:57:10 – 00:03:58:16
And I wanted to talk a little bit

00:03:58:16 – 00:03:59:21
about those regional banks.

00:03:59:21 – 00:04:00:14
We deal with some

00:04:00:14 – 00:04:02:09
where one is responsible

00:04:02:09 – 00:04:04:09
for only 11 counties.

00:04:04:09 – 00:04:06:23
We’re also dealing with a neighborhood

00:04:06:23 – 00:04:09:02
bank, I guess you could call it that,

00:04:09:02 – 00:04:10:18
in a transaction in Hawaii

00:04:10:18 – 00:04:11:17
that, you know,

00:04:11:17 – 00:04:12:23
because they were the incumbent,

00:04:12:23 – 00:04:14:02
they felt comfortable

00:04:14:02 – 00:04:15:07
with the relationship

00:04:15:07 – 00:04:16:13
and lending into that.

00:04:16:13 – 00:04:19:03
So, you know, there

00:04:19:03 – 00:04:20:09
there are players everywhere.

00:04:21:09 – 00:04:22:13
The next bullet point we have

00:04:22:13 – 00:04:25:02
here is need $2 million

00:04:25:02 – 00:04:26:20
plus some EBITDA.

00:04:26:20 – 00:04:29:02
Why is that or what what

00:04:29:02 – 00:04:31:02
what’s the reasoning behind that trigger.

00:04:31:02 – 00:04:34:02
And the focus of today’s discussion

00:04:34:04 – 00:04:36:09
is the commercial senior market.

00:04:36:09 – 00:04:37:19
So thank non

00:04:37:19 – 00:04:39:00
SBA, SBA

00:04:39:00 – 00:04:40:09
sometimes you see that going lower.

00:04:40:09 – 00:04:42:11
That’s a whole other discussion.

00:04:42:11 – 00:04:45:11
But for a senior term loan

00:04:45:15 – 00:04:47:05
coming from a regional you’re

00:04:47:05 – 00:04:48:09
probably going to see 2 million

00:04:48:09 – 00:04:50:05
plus EBITDA requirement and EBITDA.

00:04:50:05 – 00:04:50:15
What is that.

00:04:50:15 – 00:04:52:14
It’s approximation of profit

00:04:52:14 – 00:04:54:06
that these firms happen

00:04:54:06 – 00:04:55:08
when you get larger.

00:04:55:08 – 00:04:56:07
So for companies

00:04:56:07 – 00:04:57:13
that are ten plus million

00:04:57:13 – 00:04:59:02
but 20 plus,

00:04:59:02 – 00:04:59:22
that is definitely

00:04:59:22 – 00:05:01:15
where the national bank start playing

00:05:01:15 – 00:05:03:00
and you start getting more

00:05:03:00 – 00:05:04:04
the better terms, lower

00:05:04:04 – 00:05:04:22
interest rates

00:05:04:22 – 00:05:05:19
and also

00:05:05:19 – 00:05:07:23
more flexible structures as well.

00:05:07:23 – 00:05:09:10
But in terms of the

00:05:09:10 – 00:05:10:21
overall senior market,

00:05:10:21 – 00:05:11:13
meaning a bank

00:05:11:13 – 00:05:13:00
coming in and

00:05:13:00 – 00:05:16:06
lending on cash flows and not requiring

00:05:16:06 – 00:05:18:04
a personal guarantee, basically coming in

00:05:18:04 – 00:05:18:20
and taking a look

00:05:18:20 – 00:05:20:10
at the financials, strengthen

00:05:20:10 – 00:05:22:11
the balance sheet cash flows.

00:05:22:11 – 00:05:24:03
And with these SOPs as well,

00:05:24:03 – 00:05:25:05
the management team

00:05:25:05 – 00:05:28:07
and the overall expertise in employees

00:05:28:07 – 00:05:29:23
and so on that.

00:05:29:23 – 00:05:32:03
So it’s was quantitative and qualitative.

00:05:32:03 – 00:05:33:20
Those are aspects all combined

00:05:33:20 – 00:05:36:13
for your 2 million plus profit company.

00:05:36:13 – 00:05:37:17
A bank is going to want to lend

00:05:37:17 – 00:05:38:07
your money.

00:05:38:07 – 00:05:39:19
You know, all things equal.

00:05:39:19 – 00:05:42:10
Assuming you know, clean balance sheet

00:05:42:10 – 00:05:43:12
and so on.

00:05:43:12 – 00:05:45:18
And just getting you to terms

00:05:45:18 – 00:05:46:19
perhaps a little bit,

00:05:46:19 – 00:05:48:09
you know, 5 to 7 years,

00:05:48:09 – 00:05:50:12
that’s pretty common.

00:05:50:12 – 00:05:51:18
But let’s talk about rates.

00:05:51:18 – 00:05:55:12
You know previously you put senior Esop

00:05:55:12 – 00:05:59:07
loans at Sofr plus about 1.5 to 2.5

00:05:59:16 – 00:06:00:21
or roughly

00:06:00:21 – 00:06:01:05
a high

00:06:01:05 – 00:06:02:22
4% to 6%,

00:06:02:22 – 00:06:03:21
depending on the company’s

00:06:03:21 – 00:06:04:22
size and cash flow.

00:06:05:21 – 00:06:07:04
Where are we now?

00:06:07:04 – 00:06:10:14
So Prime is now 7% as of September 2026.

00:06:10:22 – 00:06:12:13
Inflation’s kicking up and so on.

00:06:12:13 – 00:06:13:06
Anyone who follows

00:06:13:06 – 00:06:14:04
the news

00:06:14:04 – 00:06:14:18
knows that

00:06:14:18 – 00:06:16:02
that interest rates went up

00:06:16:02 – 00:06:17:09
and didn’t go down.

00:06:17:09 – 00:06:19:13
Were anyone’s guess where it’s headed.

00:06:19:13 – 00:06:21:19
But what that means for Esop

00:06:21:19 – 00:06:24:04
loans and loans in general is that

00:06:24:04 – 00:06:25:06
loans and debt

00:06:25:06 – 00:06:27:01
is more expensive than it was.

00:06:27:01 – 00:06:30:06
So it is pressure on ratios and so on.

00:06:30:09 – 00:06:31:00
On the flip side,

00:06:31:00 – 00:06:31:19
we’re going to talk about this

00:06:31:19 – 00:06:32:22
in a second.

00:06:32:22 – 00:06:34:11
We’re seeing higher seller low

00:06:34:11 – 00:06:35:19
interest rates as well. Right.

00:06:35:19 – 00:06:37:07
Because that’s usually time

00:06:37:07 – 00:06:40:07
tied towards prime on that piece.

00:06:40:15 – 00:06:41:21
So a quarter point

00:06:41:21 – 00:06:42:09
does that move

00:06:42:09 – 00:06:42:23
the needle that

00:06:42:23 – 00:06:44:05
when you look at cash flows

00:06:44:05 – 00:06:46:06
and sensitivity analysis and ratios

00:06:46:06 – 00:06:47:07
you know, can. Right.

00:06:47:07 – 00:06:48:19
And you always don’t

00:06:48:19 – 00:06:49:11
want to be

00:06:49:11 – 00:06:50:12
right on the edge,

00:06:50:12 – 00:06:50:20
you know,

00:06:50:20 – 00:06:53:19
where you’re just barely passing ratios.

00:06:53:19 – 00:06:55:03
And so with current

00:06:55:03 – 00:06:56:10
bank shops we’re doing

00:06:56:10 – 00:06:59:10
is the interest rate move factoring in,

00:06:59:13 – 00:07:01:02
the way we view companies

00:07:01:02 – 00:07:02:07
and the way we do our shop?

00:07:02:07 – 00:07:03:06
Not too much.

00:07:03:06 – 00:07:03:13
Quarter

00:07:03:13 – 00:07:05:08
point is not going to make or break

00:07:05:08 – 00:07:07:13
a deal for most esops out there

00:07:07:13 – 00:07:09:15
that are trying to be more conservative

00:07:09:15 – 00:07:11:14
on the senior bank side.

00:07:11:14 – 00:07:13:04
And in the face of these

00:07:13:04 – 00:07:16:06
rising interest rates, we do see some.

00:07:16:20 – 00:07:18:08
I hate to use the word creative

00:07:18:08 – 00:07:19:01
because when I think

00:07:19:01 – 00:07:20:01
of creative accountants

00:07:20:01 – 00:07:21:04
or creative bankers,

00:07:21:04 – 00:07:23:10
those are the ones that end up in prison.

00:07:23:10 – 00:07:24:01
But some of these

00:07:24:01 – 00:07:26:10
more flexible structures, maybe

00:07:26:10 – 00:07:29:10
where it’s not just the senior note,

00:07:29:10 – 00:07:31:06
you know, that’s pretty traditional.

00:07:31:06 – 00:07:33:04
That’s pretty tried and true,

00:07:33:04 – 00:07:34:04
but we’re seeing, well,

00:07:34:04 – 00:07:35:06
I can lend up to this

00:07:35:06 – 00:07:37:21
much on a senior term note,

00:07:37:21 – 00:07:39:23
but I’ll also increase your revolver

00:07:39:23 – 00:07:41:22
or your line of credit

00:07:41:22 – 00:07:44:08
so that perhaps there’s $6 million

00:07:44:08 – 00:07:45:22
coming from a term note,

00:07:45:22 – 00:07:49:13
$6 million from an extra large revolver

00:07:50:00 – 00:07:51:21
to help fund this, or an accordion.

00:07:51:21 – 00:07:53:00
Do you want to talk a little more

00:07:53:00 – 00:07:53:17
about what

00:07:53:17 – 00:07:54:15
you’re seeing in terms

00:07:54:15 – 00:07:56:20
of flexible structures?

00:07:56:20 – 00:07:57:02
Yes.

00:07:57:02 – 00:07:58:23
It all comes down to

00:07:58:23 – 00:08:00:18
when we present to the bank

00:08:00:18 – 00:08:02:08
and have those discussions,

00:08:02:08 – 00:08:03:19
and it is a process energy

00:08:03:19 – 00:08:06:05
of numerous of these data room

00:08:06:05 – 00:08:07:14
and a lot of discussions

00:08:07:14 – 00:08:08:21
back and forth, discussions

00:08:08:21 – 00:08:10:14
with the bankers,

00:08:10:14 – 00:08:12:04
discussions with their credit team

00:08:12:04 – 00:08:13:23
if they need to be looped in,

00:08:13:23 – 00:08:16:01
and so on to understand the company and

00:08:16:01 – 00:08:17:06
the structure of these. And,

00:08:18:09 – 00:08:19:11
so once we

00:08:19:11 – 00:08:19:22
clear that

00:08:19:22 – 00:08:21:10
hurdle, then we need to

00:08:21:10 – 00:08:22:08
then figure out a structure

00:08:22:08 – 00:08:23:22
that makes sense.

00:08:23:22 – 00:08:25:05
A lot of companies do go in

00:08:25:05 – 00:08:26:21
with just a very simple structure.

00:08:26:21 – 00:08:29:06
So they make a senior loan

00:08:29:06 – 00:08:31:12
that is 5 to 7 year in term,

00:08:31:12 – 00:08:33:19
and then the sellers carry the rest

00:08:33:19 – 00:08:36:20
if it’s 100% Esop transaction.

00:08:36:20 – 00:08:38:04
And then over time

00:08:38:04 – 00:08:39:12
it gives the board

00:08:39:12 – 00:08:40:15
and the leaders of that company

00:08:40:15 – 00:08:41:22
the ability to refinance

00:08:41:22 – 00:08:42:20
or sorry guys out

00:08:42:20 – 00:08:45:19
using bank financing in the future.

00:08:45:19 – 00:08:47:10
We have to slide on that

00:08:47:10 – 00:08:49:16
in the and subsequent

00:08:49:16 – 00:08:51:09
in today’s presentation.

00:08:51:09 – 00:08:52:21
Now, the flexibility comes in

00:08:52:21 – 00:08:54:04
when you take a look at the company’s

00:08:54:04 – 00:08:56:08
needs right. And where is it it’s headed.

00:08:56:08 – 00:08:59:08
So let’s say the company’s growing and

00:08:59:20 – 00:09:01:07
backlog work in progress

00:09:01:07 – 00:09:03:06
or whatever metric the company has

00:09:05:02 – 00:09:05:23
proves that out.

00:09:05:23 – 00:09:06:21
Then

00:09:06:21 – 00:09:07:18
sometimes what we see

00:09:07:18 – 00:09:08:23
as an accordion structure,

00:09:08:23 – 00:09:10:14
where the bank will commit

00:09:10:14 – 00:09:12:19
to lend X amount today

00:09:12:19 – 00:09:14:15
to facilitate the transaction,

00:09:14:15 – 00:09:16:06
and if the company meets

00:09:16:06 – 00:09:18:22
certain covenants, will then draw down

00:09:18:22 – 00:09:21:22
even more money in year one.

00:09:22:04 – 00:09:23:07
So that’s what the accordion.

00:09:23:07 – 00:09:23:22
So think of that.

00:09:23:22 – 00:09:24:11
Like, you know,

00:09:24:11 – 00:09:25:10
the musical instrument,

00:09:25:10 – 00:09:27:10
you know, where it expands.

00:09:27:10 – 00:09:30:10
So we’re just waiting.

00:09:30:17 – 00:09:32:01
And if you hit those covenants,

00:09:32:01 – 00:09:33:23
we can grow to that big.

00:09:33:23 – 00:09:35:05
So to say 2 million.

00:09:35:05 – 00:09:36:16
6 million, something like that.

00:09:36:16 – 00:09:38:01
Yeah, exactly.

00:09:38:01 – 00:09:39:23
And it’s not even on large transactions.

00:09:39:23 – 00:09:41:15
We have seen that on

00:09:41:15 – 00:09:42:12
large, you know, 30,

00:09:42:12 – 00:09:44:23
$40 million bank raises.

00:09:44:23 – 00:09:45:15
We’ve even seen

00:09:45:15 – 00:09:47:06
that on the deals

00:09:47:06 – 00:09:48:10
that the banks coming in

00:09:48:10 – 00:09:49:18
lending five, 6 million

00:09:49:18 – 00:09:50:12
because the bank loves

00:09:50:12 – 00:09:52:08
the company loves that

00:09:52:08 – 00:09:53:02
the management team

00:09:53:02 – 00:09:54:09
believes in their future,

00:09:54:09 – 00:09:55:13
but says, hey,

00:09:55:13 – 00:09:57:02
I want to start in conservative

00:09:57:02 – 00:09:58:13
and build up the relationship.

00:09:58:13 – 00:10:00:04
So I’ll come in to learn 5

00:10:00:04 – 00:10:01:17
or 6 million today.

00:10:01:17 – 00:10:03:00
And if the company

00:10:03:00 – 00:10:05:11
meets these projections, basically

00:10:05:11 – 00:10:07:01
meets the the covenants,

00:10:07:01 – 00:10:08:14
then we’re going to allow

00:10:08:14 – 00:10:09:04
another 1

00:10:09:04 – 00:10:10:12
or 2 million drawdown

00:10:10:12 – 00:10:13:06
a year or two or whatever that period is.

00:10:13:06 – 00:10:15:08
You know, sometimes it’s after one year.

00:10:15:08 – 00:10:18:08
So that’s the what an accordion is.

00:10:18:08 – 00:10:20:12
We’re also seeing the Senior

00:10:20:12 – 00:10:22:13
Plus revolver that again, senior.

00:10:22:13 – 00:10:23:12
That’s just a normal low

00:10:23:12 – 00:10:24:15
and think like a mortgage.

00:10:24:15 – 00:10:24:22
You know,

00:10:24:22 – 00:10:27:22
those 5 or 7 years with the interest rate

00:10:28:09 – 00:10:28:22
that you’re paying

00:10:28:22 – 00:10:30:11
both principal and interest.

00:10:30:11 – 00:10:32:20
A revolver is basically a lot of credit.

00:10:32:20 – 00:10:35:06
And we’re seeing some regional banks

00:10:35:06 – 00:10:38:12
come in and offer flexible structures

00:10:38:19 – 00:10:40:14
where they’ll place,

00:10:40:14 – 00:10:43:14
say, two times Ebola on the senior,

00:10:44:00 – 00:10:45:16
and then they’ll allow the company

00:10:45:16 – 00:10:47:09
to go a bit higher

00:10:47:09 – 00:10:49:11
while still median covenants and ratios

00:10:49:11 – 00:10:51:14
and so on, to draw down the revolver.

00:10:51:14 – 00:10:52:20
And the beauty with that

00:10:52:20 – 00:10:54:11
is it’s just flexibility

00:10:54:11 – 00:10:56:02
because a company doesn’t need to do it,

00:10:56:02 – 00:10:57:22
but it has the option to,

00:10:57:22 – 00:10:59:12
you know, without going

00:10:59:12 – 00:11:00:18
through this whole process of

00:11:01:17 – 00:11:02:10
placing a new

00:11:02:10 – 00:11:04:15
loan, going through that whole process,

00:11:04:15 – 00:11:05:19
you already have it in place.

00:11:05:19 – 00:11:07:12
It just can be draw down.

00:11:07:12 – 00:11:08:17
And then as it’s paid

00:11:08:17 – 00:11:09:16
down in the future,

00:11:09:16 – 00:11:11:15
then you can draw down

00:11:11:15 – 00:11:13:01
more on the SA down and so on.

00:11:13:01 – 00:11:14:03
So we’re seeing

00:11:14:03 – 00:11:15:07
more of those structures out there.

00:11:15:07 – 00:11:16:06
And then to your point,

00:11:16:06 – 00:11:17:03
it’s not creative.

00:11:17:03 – 00:11:17:15
And we’re not talking

00:11:17:15 – 00:11:19:08
about creative financing.

00:11:19:08 – 00:11:21:11
You know all these are rooted in reality.

00:11:21:11 – 00:11:23:02
And it’s all tied to the company’s

00:11:23:02 – 00:11:25:22
operating performance. Absolutely.

00:11:25:22 – 00:11:27:01
But you hit on a one

00:11:27:01 – 00:11:28:05
good one thing

00:11:28:05 – 00:11:30:00
that will take us to our next

00:11:30:00 – 00:11:33:00
topic here that we conduct the shop,

00:11:33:08 – 00:11:34:20
help negotiate the terms

00:11:34:20 – 00:11:36:06
and the covenants.

00:11:36:06 – 00:11:38:15
And I think that’s an important aspect

00:11:38:15 – 00:11:40:17
to key in on, because,

00:11:40:17 – 00:11:41:03
you know,

00:11:41:03 – 00:11:41:21
we’ll make sure

00:11:41:21 – 00:11:42:20
that we’re

00:11:42:20 – 00:11:44:21
bringing the right players to the table

00:11:44:21 – 00:11:46:08
in order to make this happen

00:11:46:08 – 00:11:47:09
and make it

00:11:47:09 – 00:11:49:13
so that it makes sense for everybody.

00:11:49:13 – 00:11:53:19
And so if I go to our next slide here,

00:11:54:10 – 00:11:56:17
we’ll start in on our,

00:11:56:17 – 00:11:59:01
our recent capital raisers.

00:11:59:01 – 00:12:00:02
So this first one is

00:12:00:02 – 00:12:02:13
medical device manufacturer.

00:12:02:13 – 00:12:04:11
And you know, Trevor,

00:12:04:11 – 00:12:05:13
you want to talk about

00:12:05:13 – 00:12:07:20
how we, we got into that one

00:12:07:20 – 00:12:09:02
and what what

00:12:09:02 – 00:12:12:03
the, you know, terms and structures like.

00:12:13:00 – 00:12:13:06
Yeah.

00:12:13:06 – 00:12:14:07
So this company hired us

00:12:14:07 – 00:12:15:00
last year

00:12:15:00 – 00:12:17:02
to do a minority Esop transaction,

00:12:17:02 – 00:12:17:20
which I think

00:12:17:20 – 00:12:19:13
a lot of people listening to today

00:12:19:13 – 00:12:20:18
probably have done that

00:12:20:18 – 00:12:22:18
go down the minority path.

00:12:22:18 – 00:12:24:04
If they want to check out the Esop,

00:12:24:04 – 00:12:25:00
see if it’s right,

00:12:25:00 – 00:12:26:19
get some shareholder liquidity.

00:12:26:19 – 00:12:27:20
Company’s been in business

00:12:27:20 – 00:12:29:17
for 35 plus years.

00:12:29:17 – 00:12:31:05
And the controlling owner,

00:12:31:05 – 00:12:32:16
who was also the founder, saying,

00:12:32:16 – 00:12:33:18
hey, I want some liquidity.

00:12:33:18 – 00:12:35:22
And I also want to reward employees.

00:12:35:22 – 00:12:36:21
I don’t want to sell out

00:12:36:21 – 00:12:38:19
to private equity or a competitor,

00:12:38:19 – 00:12:40:15
which this company had the options to do.

00:12:40:15 – 00:12:41:05
So.

00:12:41:05 – 00:12:42:14
So we went down the minority

00:12:42:14 – 00:12:44:06
path and,

00:12:44:06 – 00:12:46:12
bank financing was an absolute must.

00:12:46:12 – 00:12:49:23
The company is growing quite well.

00:12:49:23 – 00:12:50:08
So

00:12:51:08 – 00:12:52:20
we did, what we call

00:12:52:20 – 00:12:54:16
a bank shop process.

00:12:54:16 – 00:12:56:20
We talked to five lenders,

00:12:56:20 – 00:12:57:16
company this size.

00:12:57:16 – 00:12:57:20
You know,

00:12:57:20 – 00:12:59:04
we talked to the Nationwide’s

00:12:59:04 – 00:13:01:18
and some sophisticated regionals.

00:13:01:18 – 00:13:03:18
And basically

00:13:03:18 – 00:13:04:19
through that whole process

00:13:04:19 – 00:13:06:02
found a winner.

00:13:06:02 – 00:13:09:10
And, the overall package was 30 million,

00:13:09:10 – 00:13:10:04
and it financed

00:13:10:04 – 00:13:11:11
the minorities up at home.

00:13:11:11 – 00:13:12:01
So there’s no

00:13:12:01 – 00:13:13:20
sour note attached to this at all.

00:13:13:20 – 00:13:16:14
The structure was a senior.

00:13:16:14 – 00:13:17:16
So the regular term loan

00:13:17:16 – 00:13:18:12
I mentioned earlier,

00:13:18:12 – 00:13:20:17
I think Mortgage Plus or revolver,

00:13:20:17 – 00:13:22:12
and it was all backed by the R

00:13:22:12 – 00:13:24:04
and assets of the company.

00:13:24:04 – 00:13:27:04
So no personal guarantee here.

00:13:27:11 – 00:13:28:14
Interest rate.

00:13:28:14 – 00:13:29:16
We were able to negotiate

00:13:29:16 – 00:13:31:07
and get a very competitive rate there.

00:13:31:07 – 00:13:33:21
So all in it was about a 5%.

00:13:33:21 – 00:13:35:19
I will highlight that it is floating

00:13:35:19 – 00:13:36:18
and it’s tied to Sofr,

00:13:36:18 – 00:13:38:03
which is an acronym.

00:13:38:03 – 00:13:39:16
Then you want to tell us

00:13:39:16 – 00:13:41:00
what’s the price?

00:13:41:00 – 00:13:41:11
Yeah.

00:13:41:11 – 00:13:42:06
It’s the

00:13:42:06 – 00:13:43:23
standard overnight

00:13:43:23 – 00:13:46:03
fed rate or financing rate.

00:13:46:03 – 00:13:47:09
And what that

00:13:47:09 – 00:13:49:20
establishes is sort of a base

00:13:49:20 – 00:13:52:09
for all other interest rates.

00:13:52:09 – 00:13:53:23
And it’s available,

00:13:53:23 – 00:13:55:08
you know, daily,

00:13:55:08 – 00:13:56:08
whereas others,

00:13:56:08 – 00:13:58:19
you have to wait month by month.

00:13:58:19 – 00:14:00:19
And so a bank can peg,

00:14:01:21 – 00:14:03:06
you know, a certain number of basis

00:14:03:06 – 00:14:05:21
points added on to sofr in this case over

00:14:05:21 – 00:14:07:09
plus one, 4 or 5.

00:14:07:09 – 00:14:08:21
So if we’re at five an interest now

00:14:08:21 – 00:14:10:05
and so for goes up a quarter,

00:14:10:05 – 00:14:13:20
a point will be at 5.25% interest.

00:14:14:15 – 00:14:15:14
And exactly.

00:14:15:14 – 00:14:17:12
And and in the terms that will determine

00:14:17:12 – 00:14:18:19
when they

00:14:18:19 – 00:14:20:06
look at that

00:14:20:06 – 00:14:21:19
sofr rate to change,

00:14:21:19 – 00:14:23:03
potentially change in interest.

00:14:23:03 – 00:14:26:23
It’s not daily but it is available daily.

00:14:27:09 – 00:14:27:17
Yeah.

00:14:27:17 – 00:14:29:04
So for it does vary

00:14:29:04 – 00:14:30:20
with interest rates of course.

00:14:30:20 – 00:14:32:21
And it replaced LIBOR for

00:14:32:21 – 00:14:34:08
those who remember that term LIBOR.

00:14:34:08 – 00:14:35:11
So most places.

00:14:35:11 – 00:14:36:15
So for now

00:14:36:15 – 00:14:38:18
so you see basically two

00:14:38:18 – 00:14:40:01
interest rate basis one.

00:14:40:01 – 00:14:41:13
And so for the other one either prime.

00:14:41:13 – 00:14:43:16
So first lower than prime but much lower.

00:14:43:16 – 00:14:45:11
So in this case it was floating.

00:14:45:11 – 00:14:48:11
But we were we were able to negotiate

00:14:48:12 – 00:14:49:05
you know cap.

00:14:49:05 – 00:14:50:17
And then also

00:14:50:17 – 00:14:52:04
we got an interest rate swap in there.

00:14:52:04 – 00:14:52:17
So in case

00:14:52:17 – 00:14:53:16
interest rates change,

00:14:53:16 – 00:14:55:17
the company can basically has a risk

00:14:55:17 – 00:14:56:12
that’s very common

00:14:56:12 – 00:14:59:01
with loans of this size.

00:14:59:01 – 00:14:59:22
The company itself

00:14:59:22 – 00:15:01:00
had a very strong balance sheet,

00:15:01:00 – 00:15:01:17
no long term debt.

00:15:01:17 – 00:15:02:13
And and we see that

00:15:02:13 – 00:15:04:02
with a lot of these companies,

00:15:04:02 – 00:15:07:02
companies go Esop often because companies

00:15:07:14 – 00:15:08:11
debt adverse

00:15:08:11 – 00:15:10:22
and the company’s better off independent

00:15:10:22 – 00:15:11:08
and so on.

00:15:11:08 – 00:15:13:05
And often this is the first time the

00:15:14:10 – 00:15:16:04
these companies are actually

00:15:16:04 – 00:15:17:10
using leverage.

00:15:17:10 – 00:15:18:19
You know going Esop

00:15:18:19 – 00:15:19:18
usually

00:15:19:18 – 00:15:21:07
we don’t see much debt out there

00:15:21:07 – 00:15:22:11
for the clients.

00:15:22:11 – 00:15:23:10
So same thing here.

00:15:23:10 – 00:15:24:08
The company had reviewed

00:15:24:08 – 00:15:25:14
financial statements

00:15:25:14 – 00:15:27:12
very strong management team.

00:15:27:12 – 00:15:28:15
And and as I said

00:15:28:15 – 00:15:29:23
they were still growing.

00:15:29:23 – 00:15:32:17
So they had incredible growth.

00:15:32:17 – 00:15:34:20
Both 2025 2026 and projected

00:15:34:20 – 00:15:35:21
over the next couple of years.

00:15:35:21 – 00:15:38:08
So part of this,

00:15:38:08 – 00:15:39:11
this whole process, you know, is

00:15:39:11 – 00:15:40:23
finding the right banking partner.

00:15:40:23 – 00:15:43:04
And, you know, some banks say no a lot to

00:15:43:04 – 00:15:45:02
that’s why you have to

00:15:45:02 – 00:15:46:08
conduct what we call a shop

00:15:46:08 – 00:15:47:04
to some say no.

00:15:47:04 – 00:15:48:04
And just because one says no,

00:15:48:04 – 00:15:49:09
it doesn’t mean the answers. Now.

00:15:49:09 – 00:15:50:02
No, there’s

00:15:50:02 – 00:15:50:12
there’s going to be

00:15:50:12 – 00:15:53:13
a player out there who no wants to learn.

00:15:53:13 – 00:15:55:00
So in this case,

00:15:55:00 – 00:15:56:14
we got no personal guarantee

00:15:56:14 – 00:15:58:13
even though was a minority transaction.

00:15:58:13 – 00:16:00:10
Also no quality of earnings.

00:16:00:10 – 00:16:02:10
Some banks were requiring it.

00:16:02:10 – 00:16:04:04
Others were confident

00:16:04:04 – 00:16:05:16
with the financial statements

00:16:05:16 – 00:16:06:12
and the growth

00:16:06:12 – 00:16:07:05
and then the strength

00:16:07:05 – 00:16:07:21
of the balance sheet

00:16:07:21 – 00:16:08:19
and the team

00:16:08:19 – 00:16:09:21
that they were fine

00:16:09:21 – 00:16:11:14
to close the loan without that.

00:16:11:14 – 00:16:12:12
And then also,

00:16:12:12 – 00:16:12:20
you know,

00:16:12:20 – 00:16:13:17
auto requirement

00:16:13:17 – 00:16:15:01
bank was okay

00:16:15:01 – 00:16:16:16
with reviewed statements moving forward.

00:16:16:16 – 00:16:19:04
So you think about the savings there and

00:16:19:04 – 00:16:21:15
5% interest, you know, versus Prime,

00:16:21:15 – 00:16:23:17
which at the time was 6.75.

00:16:23:17 – 00:16:24:20
You know that on 30 like

00:16:24:20 – 00:16:26:03
that’s that’s real savings.

00:16:26:03 – 00:16:26:13
You know.

00:16:26:13 – 00:16:30:19
So our our small fee is like not to brag.

00:16:30:19 – 00:16:31:05
But you know

00:16:31:05 – 00:16:32:13
I think we weren’t in there

00:16:32:13 – 00:16:33:15
saving the company a lot of money

00:16:33:15 – 00:16:35:00
and then also not having to go

00:16:35:00 – 00:16:35:16
through the process

00:16:35:16 – 00:16:38:00
of actually or audit as well.

00:16:38:00 – 00:16:39:04
So that saved them probably,

00:16:39:04 – 00:16:41:12
you know, 100 plus thousand right there.

00:16:41:12 – 00:16:43:23
So so that’s an example of what

00:16:43:23 – 00:16:44:15
we would consider

00:16:44:15 – 00:16:46:08
a middle market company.

00:16:46:08 – 00:16:47:14
And that’s an example.

00:16:47:14 – 00:16:48:17
What the the overall

00:16:48:17 – 00:16:50:00
financing package out

00:16:50:00 – 00:16:51:15
there is for companies

00:16:51:15 – 00:16:54:00
that, that fit that profile.

00:16:54:00 – 00:16:55:11
And I think you’re it’s important

00:16:55:11 – 00:16:56:15
to talk about

00:16:56:15 – 00:16:59:15
how those sneaky costs that would add

00:16:59:17 – 00:17:01:21
and maybe make and lower interest rate

00:17:01:21 – 00:17:02:19
not so attractive

00:17:02:19 – 00:17:03:19
if they

00:17:03:19 – 00:17:05:15
demand you switch from review to audit,

00:17:05:15 – 00:17:05:22
you know,

00:17:05:22 – 00:17:07:01
that’s increasing your

00:17:07:01 – 00:17:09:00
your accounting fees,

00:17:09:00 – 00:17:10:15
quality of earnings could cost.

00:17:10:15 – 00:17:12:17
The bank may charge you for that.

00:17:12:17 – 00:17:12:23
You know,

00:17:12:23 – 00:17:14:04
there are a lot of things in there

00:17:14:04 – 00:17:17:04
that can sort of death by a thousand cuts

00:17:17:05 – 00:17:18:09
when it’s all said and done.

00:17:18:09 – 00:17:19:05
So it’s important

00:17:19:05 – 00:17:21:05
to be critical of bills

00:17:21:05 – 00:17:22:12
and, and potentially,

00:17:22:12 – 00:17:24:05
negotiate those out

00:17:24:05 – 00:17:26:14
and see how willing they are to bend

00:17:26:14 – 00:17:27:19
in those situations.

00:17:27:19 – 00:17:29:01
And they at the bank.

00:17:29:01 – 00:17:30:05
I mean,

00:17:30:05 – 00:17:30:18
our second

00:17:30:18 – 00:17:31:17
example we’ve got

00:17:31:17 – 00:17:34:15
is a commercial general contractor here.

00:17:34:15 – 00:17:37:14
They did 20 million to partially finance

00:17:37:14 – 00:17:39:04
a 100% Esop.

00:17:39:04 – 00:17:40:06
So they sold the whole thing.

00:17:40:06 – 00:17:41:15
But they only wanted

00:17:41:15 – 00:17:43:01
or only needed

00:17:43:01 – 00:17:45:08
a certain portion up front.

00:17:45:08 – 00:17:47:00
Again, this was a senior note

00:17:47:00 – 00:17:48:21
plus a revolver backed

00:17:48:21 – 00:17:50:13
by their accounts receivable.

00:17:50:13 – 00:17:52:21
Their pipeline was pretty strong forever.

00:17:52:21 – 00:17:53:22
You want to give a little bit

00:17:53:22 – 00:17:55:17
of background into this situation.

00:17:56:16 – 00:17:57:00
Yeah.

00:17:57:00 – 00:17:59:01
So commercial general contractors

00:17:59:01 – 00:18:00:13
can be tricky on the banking front.

00:18:00:13 – 00:18:01:15
So often

00:18:01:15 – 00:18:03:16
the regionals are more interested

00:18:03:16 – 00:18:04:12
because they understand

00:18:04:12 – 00:18:06:03
the local projects they’re working on,

00:18:06:03 – 00:18:07:04
the understand the partners

00:18:07:04 – 00:18:08:06
they’re working with

00:18:08:06 – 00:18:09:18
and so on, and they just understand

00:18:09:18 – 00:18:11:08
the local economy.

00:18:11:08 – 00:18:14:00
Whereas the the large banks generally

00:18:14:00 – 00:18:14:13
shy away

00:18:14:13 – 00:18:16:14
from commercial general contractors.

00:18:16:14 – 00:18:17:05
Right now.

00:18:17:05 – 00:18:17:19
It depends.

00:18:17:19 – 00:18:19:13
Some say they’re into it, some not.

00:18:19:13 – 00:18:20:05
It depends.

00:18:20:05 – 00:18:20:21
And it changes like,

00:18:20:21 – 00:18:22:19
you know, every month basically.

00:18:22:19 – 00:18:24:03
So in this case commercial

00:18:24:03 – 00:18:25:01
the general contractor

00:18:25:01 – 00:18:27:02
been in business 35 plus years,

00:18:27:02 – 00:18:28:11
100% Esop.

00:18:28:11 – 00:18:30:07
For all those good reasons,

00:18:30:07 – 00:18:32:01
companies better off independent

00:18:32:01 – 00:18:34:04
a management team very strong.

00:18:34:04 – 00:18:37:02
And the owners were ready to oversee

00:18:37:02 – 00:18:38:16
that orderly transition.

00:18:38:16 – 00:18:39:20
And they didn’t want to sell out.

00:18:39:20 – 00:18:40:02
You know,

00:18:40:02 – 00:18:41:18
they wanted to stay independent.

00:18:41:18 – 00:18:43:19
So you looked at the options and,

00:18:43:19 – 00:18:45:18
you know, it’s really Esop and that’s it.

00:18:45:18 – 00:18:46:01
You know,

00:18:46:01 – 00:18:47:05
a company was

00:18:47:05 – 00:18:48:05
too large to,

00:18:48:05 – 00:18:49:14
try to go through some sort

00:18:49:14 – 00:18:53:00
of orderly asset sale and also too large

00:18:53:00 – 00:18:55:08
for the key management team to buy out

00:18:55:08 – 00:18:56:19
the owners.

00:18:56:19 – 00:18:58:05
That’s often not possible.

00:18:58:05 – 00:19:00:00
I basically Esop

00:19:00:00 – 00:19:02:16
with bank financing and and seller notes

00:19:02:16 – 00:19:03:23
and so on is possible.

00:19:03:23 – 00:19:06:01
So let’s talk about the

00:19:06:01 – 00:19:07:15
the actual financing package here.

00:19:07:15 – 00:19:10:04
So again we can talk to the shop.

00:19:10:04 – 00:19:12:10
Incumbent bank

00:19:12:10 – 00:19:15:03
sadly was not interested in implying here

00:19:15:03 – 00:19:16:14
which sometimes happens.

00:19:16:14 – 00:19:17:04
You know

00:19:17:04 – 00:19:19:06
they either know Esop or they don’t.

00:19:19:06 – 00:19:20:09
And it all comes down to the credit

00:19:20:09 – 00:19:21:19
committee and

00:19:21:19 – 00:19:23:04
and so on and their appetite.

00:19:23:04 – 00:19:24:12
So we conducted

00:19:24:12 – 00:19:26:10
what we call a limited chart.

00:19:26:10 – 00:19:28:13
And the ultimate player

00:19:28:13 – 00:19:30:04
who placed the financing

00:19:30:04 – 00:19:32:06
package here was, original Bank,

00:19:32:06 – 00:19:34:07
who was Esops

00:19:34:07 – 00:19:35:07
took a look at their work

00:19:35:07 – 00:19:37:13
in progress backlog new.

00:19:37:13 – 00:19:38:21
The projects they’re working on

00:19:38:21 – 00:19:39:16
knew the players,

00:19:39:16 – 00:19:41:09
the vendors they work with.

00:19:41:09 – 00:19:42:21
Also, all the various contractors

00:19:42:21 – 00:19:43:11
they work with.

00:19:43:11 – 00:19:43:18
You know, so

00:19:43:18 – 00:19:45:05
we got a lot of comfort

00:19:45:05 – 00:19:46:01
with the company,

00:19:46:01 – 00:19:47:13
its operating performance

00:19:47:13 – 00:19:49:03
and also understood

00:19:49:03 – 00:19:50:07
the cyclical nature there.

00:19:50:07 – 00:19:51:11
So because of that,

00:19:51:11 – 00:19:52:23
we had to come in with

00:19:54:01 – 00:19:56:01
more of a, flexible structure

00:19:56:01 – 00:19:57:00
versus just saying, hey,

00:19:57:00 – 00:19:59:19
we’re going to lever up the

00:19:59:19 – 00:20:00:11
balance sheet

00:20:00:11 – 00:20:02:22
with as much senior as possible.

00:20:02:22 – 00:20:04:06
So this was a combination senior

00:20:04:06 – 00:20:05:10
plus the revolver

00:20:05:10 – 00:20:07:03
that I talked about earlier.

00:20:07:03 – 00:20:08:23
The revolver is very flexible

00:20:08:23 – 00:20:11:23
and allows the company to use part of it

00:20:12:10 – 00:20:13:15
to pay down

00:20:13:15 – 00:20:15:03
each supplier notes over time,

00:20:15:03 – 00:20:17:10
and then also for operations.

00:20:17:10 – 00:20:18:22
And it’s also a long term revolver.

00:20:18:22 – 00:20:19:22
So it’s not a line of credit

00:20:19:22 – 00:20:21:01
that renews every year.

00:20:21:01 – 00:20:23:12
It’s a it’s a long term facility.

00:20:23:12 – 00:20:25:10
Bill Roth senior piece,

00:20:25:10 – 00:20:27:01
the loan was seven years.

00:20:27:01 – 00:20:27:20
And that’s very common

00:20:27:20 – 00:20:28:06
or generally

00:20:28:06 – 00:20:30:21
seen in 5 to 7 years these days.

00:20:30:21 – 00:20:32:12
And then the interest rate was fixed,

00:20:32:12 – 00:20:35:22
and Prime was just going up

00:20:35:22 – 00:20:37:04
when we were doing this one.

00:20:37:04 – 00:20:38:20
So we’re able to get a fixed rate,

00:20:38:20 – 00:20:40:09
you know, well below prime

00:20:40:09 – 00:20:40:23
and then again

00:20:40:23 – 00:20:42:21
afraid to go down in the future,

00:20:42:21 – 00:20:43:16
who knows where they’re headed.

00:20:43:16 – 00:20:44:10
And some people say, hey,

00:20:44:10 – 00:20:45:18
we’re in this high rate environment

00:20:45:18 – 00:20:46:14
because of inflation.

00:20:46:14 – 00:20:47:13
And government debt

00:20:47:13 – 00:20:49:00
and so on for a while.

00:20:49:00 – 00:20:50:00
Others

00:20:50:00 – 00:20:51:01
think of we have lower

00:20:51:01 – 00:20:52:05
rates, economic growth

00:20:52:05 – 00:20:53:18
and so on, or we’ll increase.

00:20:53:18 – 00:20:54:21
So we’ll see where that goes.

00:20:54:21 – 00:20:56:16
But if interest rates do swing,

00:20:56:16 – 00:20:58:22
the company can always refinance it down.

00:20:58:22 – 00:21:01:22
One thing I want to mention with all

00:21:02:11 – 00:21:03:21
control of these transactions

00:21:03:21 – 00:21:04:23
is that right now

00:21:04:23 – 00:21:06:01
we’re talking about senior

00:21:06:01 – 00:21:07:13
financing from banks,

00:21:07:13 – 00:21:10:00
meaning limited leverage banks

00:21:10:00 – 00:21:10:14
on a senior

00:21:10:14 – 00:21:12:12
basis will generally come in

00:21:12:12 – 00:21:15:02
somewhere 2 to 3 times EBITDA.

00:21:15:02 – 00:21:16:16
Three is a very high example

00:21:16:16 – 00:21:17:11
if the company is growing

00:21:17:11 – 00:21:20:09
and so on, generally 2 to 2 and a half

00:21:20:09 – 00:21:23:06
and the rest is financed by all or no.

00:21:23:06 – 00:21:24:16
There is an option out there

00:21:24:16 – 00:21:25:17
that some people probably heard

00:21:25:17 – 00:21:28:14
of called mezzanine financing. And

00:21:29:14 – 00:21:30:08
for most of you, such

00:21:30:08 – 00:21:31:08
transactions, you know,

00:21:31:08 – 00:21:32:12
we’re not seeing a lot of that

00:21:32:12 – 00:21:34:08
because it’s complex and very expensive.

00:21:34:08 – 00:21:35:18
So we’re talking about,

00:21:35:18 – 00:21:37:02
more of a straightforward

00:21:37:02 – 00:21:38:11
financing package approach.

00:21:38:11 – 00:21:39:21
We have two players, you know,

00:21:39:21 – 00:21:41:21
what is a senior bank

00:21:41:21 – 00:21:42:11
coming in

00:21:42:11 – 00:21:44:05
and giving an interest rate

00:21:44:05 – 00:21:47:22
that is somewhere around -2%.

00:21:47:22 – 00:21:49:03
You know, somewhere in that.

00:21:49:03 – 00:21:51:06
And then a seller carrying the rest.

00:21:51:06 – 00:21:52:21
The banks are always going to require

00:21:52:21 – 00:21:54:23
the seller notes to be supported to them.

00:21:54:23 – 00:21:55:21
So that basically means

00:21:55:21 – 00:21:59:04
that they’re higher up on the debt stack

00:21:59:04 – 00:22:00:09
and they get paid back first

00:22:00:09 – 00:22:01:17
if the company has cash flow issues

00:22:01:17 – 00:22:02:15
and so on.

00:22:02:15 – 00:22:04:14
So that’s a big distinction there.

00:22:04:14 – 00:22:06:16
And it is part of the covenants

00:22:06:16 – 00:22:09:07
and the negotiation we do in terms of

00:22:09:07 – 00:22:10:08
allowing in principal

00:22:10:08 – 00:22:12:01
and interest on the seller notes

00:22:12:01 – 00:22:14:10
in conjunction with the bank,

00:22:14:10 – 00:22:15:22
as usually the banks

00:22:15:22 – 00:22:18:22
allow interest on the seller notes

00:22:19:01 – 00:22:19:13
right away,

00:22:19:13 – 00:22:21:12
as long as covenants are being met.

00:22:21:12 – 00:22:22:21
Some say, hey, let’s

00:22:24:01 – 00:22:24:08
if it’s

00:22:24:08 – 00:22:25:23
a brand new relationship

00:22:25:23 – 00:22:27:01
and they feel like the

00:22:27:01 – 00:22:28:05
the ratios are tight,

00:22:28:05 – 00:22:29:16
some might say,

00:22:29:16 – 00:22:31:05
hey, the seller notes on standby

00:22:31:05 – 00:22:32:01
for the first year

00:22:32:01 – 00:22:33:11
or whatever that period is.

00:22:33:11 – 00:22:34:18
So in this case, we’re able

00:22:34:18 – 00:22:36:00
to default

00:22:36:00 – 00:22:36:17
principal and interest

00:22:36:17 – 00:22:37:23
on the seller notes

00:22:37:23 – 00:22:38:20
as long as they’re meeting

00:22:38:20 – 00:22:40:02
their quarterly covenants.

00:22:40:02 – 00:22:40:09
You know,

00:22:40:09 – 00:22:42:21
and if for some reason they’re not,

00:22:42:21 – 00:22:43:22
then it’s always a discussion

00:22:43:22 – 00:22:44:21
with the bank

00:22:44:21 – 00:22:47:08
that their CFO has with their

00:22:47:08 – 00:22:48:21
their banking partner,

00:22:48:21 – 00:22:50:19
and you’re describing what’s going on.

00:22:50:19 – 00:22:51:06
And, you know,

00:22:51:06 – 00:22:54:06
it’s always a discussion versus just no.

00:22:54:12 – 00:22:55:04
Absolutely.

00:22:55:04 – 00:22:55:13
And I

00:22:55:13 – 00:22:57:13
well, in some instances

00:22:57:13 – 00:22:58:15
and we’ve seen these long

00:22:58:15 – 00:22:59:07
term sheets

00:22:59:07 – 00:23:00:21
where not only will

00:23:00:21 – 00:23:02:09
they only allow interest

00:23:02:09 – 00:23:03:07
for the seller notes,

00:23:03:07 – 00:23:05:04
sometimes they’ll

00:23:05:04 – 00:23:06:19
allow only a certain percent.

00:23:06:19 – 00:23:08:15
So if the seller notes that,

00:23:08:15 – 00:23:10:19
you know, say four and a quarter,

00:23:10:19 – 00:23:13:04
they may say, well, you’re limited

00:23:13:04 – 00:23:13:23
in the first year

00:23:13:23 – 00:23:16:23
or two to a percent or 2%,

00:23:17:04 – 00:23:18:21
which, you know, kicks

00:23:18:21 – 00:23:20:00
the can down the road

00:23:20:00 – 00:23:22:23
and makes your interest payments

00:23:23:07 – 00:23:24:22
farther off into the rising,

00:23:24:22 – 00:23:27:03
as well as the principal payments.

00:23:27:03 – 00:23:27:23
So, you know, it’s

00:23:27:23 – 00:23:28:19
something to consider

00:23:28:19 – 00:23:31:00
in the total picture here

00:23:31:00 – 00:23:31:23
that, you know,

00:23:31:23 – 00:23:33:12
the rate isn’t everything,

00:23:33:12 – 00:23:36:05
the length of time isn’t everything.

00:23:36:05 – 00:23:37:05
There are other covenants

00:23:37:05 – 00:23:39:16
that we have to, or other terms.

00:23:39:16 – 00:23:42:16
We have to really be critical of.

00:23:42:22 – 00:23:43:11
Yeah.

00:23:43:11 – 00:23:45:15
For if we go back to,

00:23:45:15 – 00:23:47:05
one additional aspect

00:23:47:05 – 00:23:47:23
I want to highlight here

00:23:47:23 – 00:23:49:06
is this financing

00:23:49:06 – 00:23:50:16
package was backed by R,

00:23:50:16 – 00:23:53:16
and basically a backlog work in progress.

00:23:54:04 – 00:23:55:19
So no personal guarantee here as well.

00:23:56:22 – 00:23:59:04
And again a 100% controlled transaction.

00:23:59:04 – 00:24:00:23
We would expect that.

00:24:00:23 – 00:24:02:04
But some banks would certainly come in

00:24:02:04 – 00:24:02:19
and ask for that.

00:24:02:19 – 00:24:04:16
You know right off the bat.

00:24:04:16 – 00:24:05:22
And most sellers

00:24:05:22 – 00:24:07:12
that they’re selling 100% to the Esop.

00:24:07:12 – 00:24:08:03
And and they also don’t

00:24:08:03 – 00:24:09:00
want to guarantee that

00:24:09:00 – 00:24:10:21
and also have exposure

00:24:10:21 – 00:24:11:17
at the seller and out.

00:24:11:17 – 00:24:13:21
So control transactions

00:24:13:21 – 00:24:16:21
be very rare to also offer a portfolio

00:24:16:23 – 00:24:18:01
to the to the bank.

00:24:18:01 – 00:24:19:04
And then there’s some other covenants

00:24:19:04 – 00:24:20:00
in there as well.

00:24:20:00 – 00:24:20:23
You know, in this

00:24:20:23 – 00:24:22:15
we’re just giving you the highlights

00:24:22:15 – 00:24:24:11
on how this whole financing

00:24:24:11 – 00:24:25:04
package works.

00:24:25:04 – 00:24:27:11
And we can move on to the next example.

00:24:27:11 – 00:24:29:00
You know,

00:24:29:00 – 00:24:33:10
so this one is, marketing consultancy.

00:24:33:23 – 00:24:37:02
And again, this was a 100% sale,

00:24:37:02 – 00:24:40:02
but only partial finance,

00:24:40:12 – 00:24:41:10
kind of similar.

00:24:41:10 – 00:24:43:02
But there are some key differences here

00:24:43:02 – 00:24:44:02
to where you want to outline

00:24:44:02 – 00:24:46:14
what’s happening in this situation.

00:24:46:14 – 00:24:46:21
Yeah.

00:24:46:21 – 00:24:48:20
So marketing consultancy

00:24:48:20 – 00:24:50:14
company going 100% Esop.

00:24:50:14 – 00:24:52:16
And we were able to raise 10 million.

00:24:52:16 – 00:24:55:05
And again as a senior in a revolver

00:24:55:05 – 00:24:56:04
backed by R.

00:24:56:04 – 00:24:57:16
So no no personal guarantee

00:24:57:16 – 00:24:59:07
and company like this

00:24:59:07 – 00:25:00:16
doesn’t have a lot of assets

00:25:00:16 – 00:25:01:05
on the balance sheet

00:25:01:05 – 00:25:02:19
to collateralize either. You know.

00:25:02:19 – 00:25:04:07
So it’s really R and that’s right.

00:25:04:07 – 00:25:05:00
The, the,

00:25:05:00 – 00:25:05:15
the business

00:25:05:15 – 00:25:06:20
strength of the cash flows

00:25:06:20 – 00:25:08:22
and strength of the management team.

00:25:08:22 – 00:25:11:06
So for this one we got 6.5%

00:25:11:06 – 00:25:13:03
fixed interest for five years.

00:25:13:03 – 00:25:16:14
Interest rates were just going up and 6.5

00:25:16:14 – 00:25:18:03
all n was was a win

00:25:18:03 – 00:25:19:10
because Prime is now seven.

00:25:19:10 – 00:25:21:18
So it’s below prime.

00:25:21:18 – 00:25:24:18
And with this particular company

00:25:24:18 – 00:25:26:04
they’re still growing.

00:25:26:04 – 00:25:27:03
Which is great

00:25:27:03 – 00:25:28:10
because as

00:25:28:10 – 00:25:29:14
a great place to be when you go

00:25:29:14 – 00:25:31:11
Esop the bank,

00:25:31:11 – 00:25:31:23
at the end of the day

00:25:31:23 – 00:25:33:07
it’s a new relationship as well.

00:25:33:07 – 00:25:36:07
So the existing bank for this client

00:25:36:18 – 00:25:38:05
did not understand Esop

00:25:38:05 – 00:25:40:04
and initially thought

00:25:40:04 – 00:25:41:04
that they were going to come in

00:25:41:04 – 00:25:42:06
and provide financing,

00:25:42:06 – 00:25:43:14
but they weren’t at the end of the day.

00:25:43:14 – 00:25:45:20
So this is a new relationship.

00:25:45:20 – 00:25:46:18
And again,

00:25:46:18 – 00:25:48:10
this is one of the larger

00:25:48:10 – 00:25:49:20
regionals here too.

00:25:49:20 – 00:25:50:18
So they can,

00:25:50:18 – 00:25:51:10
you know, up and down

00:25:51:10 – 00:25:52:05
West Coast

00:25:52:05 – 00:25:53:17
where the spade plays

00:25:53:17 – 00:25:54:08
as they took

00:25:54:08 – 00:25:56:03
a look at ended their own bottle.

00:25:56:03 – 00:25:56:07
I mean,

00:25:56:07 – 00:25:58:00
they look at ours but they stress test

00:25:58:00 – 00:26:00:01
and do their own at the end of the day.

00:26:00:01 – 00:26:01:12
And they said hey,

00:26:02:11 – 00:26:04:12
we need this are not us, be subordinated

00:26:04:12 – 00:26:07:05
and will allow interest on the saw notes

00:26:07:05 – 00:26:08:08
for the first two years.

00:26:08:08 – 00:26:10:05
So no principal pay down.

00:26:10:05 – 00:26:12:02
So the seller will collect interest

00:26:12:02 – 00:26:14:00
for two years

00:26:14:00 – 00:26:15:22
and then assuming everything’s good,

00:26:15:22 – 00:26:16:14
then we’re going to allow

00:26:16:14 – 00:26:17:21
principal payment on that.

00:26:17:21 – 00:26:21:06
The seller note the flexibility here is

00:26:21:06 – 00:26:23:13
they started off a bit conservative,

00:26:23:13 – 00:26:25:10
which can make sense.

00:26:25:10 – 00:26:26:22
If it’s a new relationship,

00:26:26:22 – 00:26:28:22
the bank will probably want to refinance

00:26:28:22 – 00:26:29:20
or seller notes out

00:26:29:20 – 00:26:32:08
in, I would say probably 2 or 3 years.

00:26:32:08 – 00:26:34:03
Once they get 2 to 3 years

00:26:34:03 – 00:26:35:07
under their belt,

00:26:35:07 – 00:26:36:20
improving performance,

00:26:36:20 – 00:26:39:00
then they can refinance

00:26:39:00 – 00:26:40:12
both the senior piece,

00:26:40:12 – 00:26:42:02
get that refinance out

00:26:42:02 – 00:26:43:02
depending where rates are.

00:26:43:02 – 00:26:43:17
I mean,

00:26:43:17 – 00:26:44:12
if rates are much higher

00:26:44:12 – 00:26:46:22
than it might not make sense to do that,

00:26:46:22 – 00:26:48:07
that in 2 to 3 years.

00:26:48:07 – 00:26:50:12
But all things equal,

00:26:50:12 – 00:26:52:23
if rates just kind of stay the same then

00:26:52:23 – 00:26:53:10
the seller,

00:26:53:10 – 00:26:54:15
they get a higher interest rate.

00:26:54:15 – 00:26:56:11
So and this are probably does

00:26:56:11 – 00:26:58:17
want to be paid out sooner than that.

00:26:58:17 – 00:26:59:22
Long seller note.

00:26:59:22 – 00:27:01:10
So the company has that option

00:27:01:10 – 00:27:03:08
and the bank is going to want to do that.

00:27:03:08 – 00:27:04:00
You know that’s that’s

00:27:04:00 – 00:27:06:09
where they operate is in this situation.

00:27:06:09 – 00:27:08:20
And start off a bit more conservative,

00:27:08:20 – 00:27:10:04
be a good partner.

00:27:10:04 – 00:27:12:23
And then prove out performance

00:27:12:23 – 00:27:13:09
and then,

00:27:13:09 – 00:27:14:18
you know, come in and refinance

00:27:14:18 – 00:27:17:08
more in a couple of years. Absolutely.

00:27:17:08 – 00:27:19:08
And I’m seeing a few questions come in

00:27:19:08 – 00:27:20:15
that are related to the

00:27:20:15 – 00:27:22:14
these capital raised examples

00:27:22:14 – 00:27:23:04
we’ve given.

00:27:23:04 – 00:27:24:20
So if you don’t mind I’m going to ask

00:27:24:20 – 00:27:25:15
a couple of these.

00:27:25:15 – 00:27:27:06
One, can you explain

00:27:27:06 – 00:27:28:05
who a bank will ask

00:27:28:05 – 00:27:31:05
for personal guarantees to a 100% Esop

00:27:31:07 – 00:27:32:13
when the selling shareholders

00:27:32:13 – 00:27:33:23
are out of the business.

00:27:33:23 – 00:27:34:20
So basically yeah,

00:27:34:20 – 00:27:37:20
who’s who’s the person to guarantee.

00:27:37:20 – 00:27:39:00
So I’ve seen board members

00:27:39:00 – 00:27:40:09
or the entire board.

00:27:40:09 – 00:27:41:00
Trevor,

00:27:41:00 – 00:27:43:19
have you seen any other individuals

00:27:43:19 – 00:27:47:04
that have been named as a on the PGA yet?

00:27:47:04 – 00:27:48:23
The seller shareholders are the business

00:27:48:23 – 00:27:50:12
that I would say

00:27:50:12 – 00:27:53:12
talk to us offline 100% Esop.

00:27:53:15 – 00:27:56:08
The bank should not be asking for a BJ.

00:27:56:08 – 00:27:57:00
Yeah.

00:27:57:00 – 00:28:01:00
You know, that’s so it would be a really

00:28:01:16 – 00:28:04:09
rare situation that existing executive,

00:28:04:09 – 00:28:06:05
not a former selling shareholder,

00:28:06:05 – 00:28:07:20
would come in and offer a PG,

00:28:07:20 – 00:28:08:17
and if so, then they need

00:28:08:17 – 00:28:10:14
to be compensated for that risk.

00:28:10:14 – 00:28:11:05
You know as well

00:28:11:05 – 00:28:12:16
that that would be something

00:28:12:16 – 00:28:15:09
I think would be a nonstarter

00:28:15:09 – 00:28:17:00
for most situations.

00:28:17:00 – 00:28:18:00
But yeah, I’d like to understand

00:28:18:00 – 00:28:19:11
more background facts there.

00:28:19:11 – 00:28:20:18
We have seen limited PGS,

00:28:20:18 – 00:28:21:05
but again,

00:28:21:05 – 00:28:22:21
usually it’s the same shareholders

00:28:22:21 – 00:28:25:03
where it kills off after 1 or 2 years,

00:28:26:05 – 00:28:28:07
especially with a new bacon relationship.

00:28:28:07 – 00:28:29:01
And you see you

00:28:29:01 – 00:28:29:22
sometimes see that

00:28:29:22 – 00:28:31:03
and that’s more on the minority side.

00:28:31:03 – 00:28:31:13
Now, you know,

00:28:31:13 – 00:28:34:13
if it’s 100%, that’s, rare.

00:28:34:15 – 00:28:36:23
That’s not market per se, you know.

00:28:36:23 – 00:28:38:00
So again,

00:28:38:00 – 00:28:38:17
I don’t understand

00:28:38:17 – 00:28:40:15
facts and circumstances more there.

00:28:40:15 – 00:28:42:21
But would you be able to explain the pros

00:28:42:21 – 00:28:44:20
and cons of an interest rate swap,

00:28:44:20 – 00:28:46:06
as well as the reason

00:28:46:06 – 00:28:48:22
the bank insists on these?

00:28:48:22 – 00:28:51:18
It’s yeah, it’s a negotiation.

00:28:51:18 – 00:28:52:14
At the end of the day,

00:28:52:14 – 00:28:55:19
part of the term sheet and banks

00:28:55:19 – 00:28:57:01
like the interest rate swap does,

00:28:57:01 – 00:28:58:02
it protects them

00:28:58:02 – 00:29:00:08
with movements of interest rates.

00:29:00:08 – 00:29:02:11
Same thing with the company as well.

00:29:02:11 – 00:29:04:20
And you can spend a bunch of time,

00:29:04:20 – 00:29:06:08
you know, on the pros

00:29:06:08 – 00:29:07:10
cons of interest rate swap.

00:29:07:10 – 00:29:09:12
But you know big picture.

00:29:09:12 – 00:29:10:14
It’s basically a hedge.

00:29:10:14 – 00:29:12:12
You know. So for both parties.

00:29:12:12 – 00:29:12:15
Yeah.

00:29:12:15 – 00:29:14:05
So you can model it out and show

00:29:14:05 – 00:29:15:19
okay if rates go up,

00:29:15:19 – 00:29:17:11
what does that movement

00:29:17:11 – 00:29:18:20
and interest rate cost look like.

00:29:18:20 – 00:29:20:20
And then if rates go down,

00:29:20:20 – 00:29:22:01
by banks overall

00:29:22:01 – 00:29:23:04
they like these because

00:29:23:04 – 00:29:25:06
especially if the pricing is very thin,

00:29:25:06 – 00:29:26:07
they’re going to start

00:29:26:07 – 00:29:27:18
then asking for that.

00:29:27:18 – 00:29:29:07
So they’re the pricing.

00:29:29:07 – 00:29:30:12
Isn’t that mean

00:29:30:12 – 00:29:32:07
they’re getting so for a plus,

00:29:32:07 – 00:29:32:15
you know,

00:29:32:15 – 00:29:34:20
212 is certainly that,

00:29:34:20 – 00:29:36:09
you know, then interest rate swap.

00:29:36:09 – 00:29:38:01
Probably not going to see that.

00:29:38:01 – 00:29:39:04
But when the price is very thin

00:29:39:04 – 00:29:41:05
then you do see that come in.

00:29:41:05 – 00:29:42:07
And then again, it

00:29:42:07 – 00:29:43:01
depends too

00:29:43:01 – 00:29:45:07
on the other aspects

00:29:45:07 – 00:29:46:08
of the banking relationship.

00:29:46:08 – 00:29:47:20
So and most of these banks

00:29:47:20 – 00:29:50:02
are going to require the company to be,

00:29:50:02 – 00:29:52:11
had their primary banking with the bank

00:29:52:11 – 00:29:54:03
providing the senior loan.

00:29:54:03 – 00:29:55:16
So the, the company is

00:29:57:06 – 00:29:59:22
selling significant amount of

00:29:59:22 – 00:30:02:02
revenue, you know, whatever goods

00:30:02:02 – 00:30:03:19
they sell, consulting, etc..

00:30:03:19 – 00:30:04:14
The revenues are high.

00:30:04:14 – 00:30:06:01
All that money flowing to the bank too.

00:30:06:01 – 00:30:07:14
So that comes into the discussion

00:30:07:14 – 00:30:08:21
with these banks

00:30:08:21 – 00:30:10:01
as you take a look

00:30:10:01 – 00:30:10:21
at the overall Treasury

00:30:10:21 – 00:30:12:22
relationship as well.

00:30:12:22 – 00:30:14:23
And then finally our revolver rates

00:30:14:23 – 00:30:16:14
the same as senior rates.

00:30:16:14 – 00:30:18:03
They can be.

00:30:18:03 – 00:30:19:05
But also you have to think

00:30:19:05 – 00:30:20:09
that the term is

00:30:20:09 – 00:30:22:06
significantly shorter usually.

00:30:22:06 – 00:30:23:20
So, you know, in the example

00:30:23:20 – 00:30:25:15
that’s on the screen in a five year

00:30:25:15 – 00:30:26:09
senior note,

00:30:26:09 – 00:30:28:14
if there was revolver as well,

00:30:28:14 – 00:30:31:09
that’s probably going to be 24 months.

00:30:31:09 – 00:30:34:09
So they could both share that 6.5%

00:30:34:12 – 00:30:35:21
interest rate.

00:30:35:21 – 00:30:38:19
But that revolver will need to

00:30:38:19 – 00:30:39:19
you’ll essentially

00:30:39:19 – 00:30:42:19
need to engage in a new revolver

00:30:42:19 – 00:30:43:20
after 24 months

00:30:43:20 – 00:30:45:10
if you still need it,

00:30:45:10 – 00:30:48:09
upon which interest rates can change.

00:30:48:09 – 00:30:49:15
But usually

00:30:49:15 – 00:30:51:12
they’re a little bit different.

00:30:51:12 – 00:30:54:03
Yeah, we’ve seen that rate.

00:30:54:03 – 00:30:56:07
Yeah, it depends on the revolver.

00:30:56:07 – 00:30:57:22
If it’s being used for the transaction.

00:30:57:22 – 00:30:59:14
You always want to say that today.

00:31:01:01 – 00:31:01:19
If not, if it’s

00:31:01:19 – 00:31:02:09
just hey,

00:31:02:09 – 00:31:03:04
we’re going to do a senior

00:31:03:04 – 00:31:05:22
loan to finance

00:31:05:22 – 00:31:07:02
part of the transaction

00:31:07:02 – 00:31:08:18
and then bring a revolver on

00:31:08:18 – 00:31:10:14
for just normal company operations,

00:31:10:14 – 00:31:11:17
then a that fact pattern,

00:31:11:17 – 00:31:13:09
then they might be different.

00:31:13:09 – 00:31:15:22
Revolver tends to be priced around Prime.

00:31:15:22 – 00:31:17:10
I’ve seen crazy rates and revolvers

00:31:17:10 – 00:31:18:08
actually that’s

00:31:18:08 – 00:31:20:11
sometimes they come in as 910%.

00:31:20:11 – 00:31:22:03
That’s way too high right.

00:31:22:03 – 00:31:25:03
But sometimes you see that, generally

00:31:25:03 – 00:31:26:08
a revolver for a company

00:31:26:08 – 00:31:28:06
with a good balance sheet,

00:31:28:06 – 00:31:29:22
good financials, good cash flow,

00:31:29:22 – 00:31:31:03
you know, it should be no one of them,

00:31:31:03 – 00:31:32:17
you know, should be in that ballpark.

00:31:32:17 – 00:31:33:14
Excellent.

00:31:33:14 – 00:31:34:07
I think that’s fine.

00:31:34:07 – 00:31:35:21
One or to hear that ask me

00:31:35:21 – 00:31:37:21
about the transaction.

00:31:37:21 – 00:31:40:13
You so in a leveraged Esop transaction

00:31:40:13 – 00:31:41:16
have you seen situations

00:31:41:16 – 00:31:44:16
where retaining existing preferred equity

00:31:44:23 – 00:31:46:01
rather than redeeming it

00:31:46:01 – 00:31:48:04
through additional seller debt,

00:31:48:04 – 00:31:49:02
made the transaction

00:31:49:02 – 00:31:51:19
more financially sustainable?

00:31:51:19 – 00:31:52:11
How do lenders

00:31:52:11 – 00:31:53:13
and Esop trustees

00:31:53:13 – 00:31:55:23
typically evaluate that approach?

00:31:55:23 – 00:31:56:05
Okay.

00:31:56:05 – 00:31:57:06
So saw kind of warrants

00:31:57:06 – 00:31:58:10
right a little bit.

00:31:58:10 – 00:32:00:00
This is kind of a similar thing.

00:32:00:00 – 00:32:01:12
So lenders

00:32:01:12 – 00:32:02:11
and you saw trustees

00:32:02:11 – 00:32:03:23
evaluate that approach. So

00:32:05:01 – 00:32:06:08
yeah

00:32:06:08 – 00:32:06:15
I would

00:32:06:15 – 00:32:07:09
say it depends

00:32:07:09 – 00:32:09:16
on both the preferred equity

00:32:09:16 – 00:32:12:14
and you know how much seller you know

00:32:12:14 – 00:32:14:06
basically both the equity

00:32:14:06 – 00:32:15:04
and debt components.

00:32:15:04 – 00:32:15:21
And,

00:32:15:21 – 00:32:17:02
and if we’re

00:32:17:02 – 00:32:19:08
eating our covenants and meeting ratios.

00:32:19:08 – 00:32:21:19
But I don’t know I don’t I never

00:32:21:19 – 00:32:23:04
you could probably speak more

00:32:23:04 – 00:32:23:22
better to this,

00:32:23:22 – 00:32:25:03
but I’ve never seen

00:32:25:03 – 00:32:28:01
retaining it as a preferable option

00:32:28:01 – 00:32:29:00
I guess.

00:32:29:00 – 00:32:30:20
Or if a preferred

00:32:30:20 – 00:32:32:09
is paying out something guarantee,

00:32:32:09 – 00:32:33:22
then banks are going to like that.

00:32:33:22 – 00:32:34:21
That’s the company

00:32:34:21 – 00:32:36:00
that’s going to come into ratios.

00:32:36:00 – 00:32:36:20
And so on.

00:32:36:20 – 00:32:38:13
If if it’s a structure

00:32:38:13 – 00:32:41:01
where the seller is carrying warrants

00:32:41:01 – 00:32:42:17
and a lower interest rate,

00:32:42:17 – 00:32:44:01
then banks love that

00:32:44:01 – 00:32:46:08
because you’re basically then tying the

00:32:46:08 – 00:32:47:21
the feature warrant equity

00:32:47:21 – 00:32:49:23
payout to the future value of a company

00:32:49:23 – 00:32:51:00
that’s lowering their risk

00:32:51:00 – 00:32:51:22
because making the ratios

00:32:51:22 – 00:32:53:11
look better as well

00:32:53:11 – 00:32:55:21
for the overall sustainability of the

00:32:55:21 – 00:32:56:20
Esop transaction.

00:32:56:20 – 00:32:58:02
But retaining the existing

00:32:58:02 – 00:32:59:13
preferred equity, I understand why.

00:32:59:13 – 00:33:01:19
What’s the rationale for retaining it,

00:33:01:19 – 00:33:03:19
especially if it’s a, like

00:33:03:19 – 00:33:05:12
we said, lovers use all transactions

00:33:05:12 – 00:33:06:18
that could be

00:33:06:18 – 00:33:09:10
technically anything up to 100%.

00:33:09:10 – 00:33:13:06
But, yeah, that’s nuance question

00:33:13:06 – 00:33:13:19
for sure.

00:33:13:19 – 00:33:15:05
Just depends on the attributes

00:33:15:05 – 00:33:17:01
of the preferred equity.

00:33:17:01 – 00:33:18:19
Yeah. The fact pattern’s important.

00:33:18:19 – 00:33:19:22
And also,

00:33:19:22 – 00:33:22:11
yeah, just the nature of both components

00:33:22:11 – 00:33:25:05
the equity and debt. Good question.

00:33:25:05 – 00:33:26:05
Very good.

00:33:26:05 – 00:33:26:17
All right.

00:33:26:17 – 00:33:28:23
Our final segment is on

00:33:28:23 – 00:33:31:00
second stage transactions and seller

00:33:31:00 – 00:33:32:03
not refinance.

00:33:32:03 – 00:33:34:03
And I guess this is a good time

00:33:34:03 – 00:33:34:20
for a plug.

00:33:34:20 – 00:33:36:00
We have a second stage

00:33:36:00 – 00:33:38:12
transaction webinars as well

00:33:38:12 – 00:33:39:15
that’s available to view

00:33:39:15 – 00:33:41:00
if you want to get deeper into

00:33:41:00 – 00:33:43:03
what is all involved in that.

00:33:43:03 – 00:33:46:14
But here was second stage, deals.

00:33:46:14 – 00:33:47:20
We’re just talking about

00:33:48:20 – 00:33:49:19
debt.

00:33:49:19 – 00:33:51:04
So they’re

00:33:51:04 – 00:33:52:21
essentially the same opportunity

00:33:52:21 – 00:33:54:14
as new formations.

00:33:54:14 – 00:33:56:23
We’re utilizing the same procedures

00:33:56:23 – 00:33:58:01
methodology.

00:33:58:01 – 00:34:00:08
There’s the ability to refinance

00:34:00:08 – 00:34:01:15
existing bank loans.

00:34:01:15 – 00:34:03:03
Perhaps there’s better terms today

00:34:03:03 – 00:34:05:09
than in late 22 to 24.

00:34:05:09 – 00:34:07:22
So band second stage all.

00:34:07:22 – 00:34:08:10
Yeah.

00:34:08:10 – 00:34:09:17
Wait wait a second. Yeah.

00:34:09:17 – 00:34:10:09
So second stage,

00:34:10:09 – 00:34:11:16
one big thing with the second stage

00:34:11:16 – 00:34:14:04
is the fact that you already have

00:34:14:04 – 00:34:15:21
proven Esop concept.

00:34:15:21 – 00:34:17:09
So, you’ve done a first stage

00:34:17:09 – 00:34:19:05
Esop transaction often some minority.

00:34:19:05 – 00:34:22:00
So something less than 50%,

00:34:22:00 – 00:34:24:13
that debt is probably repaid

00:34:24:13 – 00:34:26:14
and you’ve already proven

00:34:26:14 – 00:34:27:17
that the company can operate

00:34:27:17 – 00:34:29:04
as a new company,

00:34:29:04 – 00:34:30:19
take on that debt, pay it down.

00:34:30:19 – 00:34:32:11
You already have a trusted team in place.

00:34:32:11 – 00:34:33:21
You already have the valuation fact

00:34:33:21 – 00:34:35:01
pattern in place.

00:34:35:01 – 00:34:35:19
You already have

00:34:35:19 – 00:34:36:23
a management team in place

00:34:36:23 – 00:34:38:08
that is starting to understand.

00:34:38:08 – 00:34:40:00
Esops obviously, Esops

00:34:40:00 – 00:34:41:03
you know that business model

00:34:41:03 – 00:34:41:21
pretty complex.

00:34:41:21 – 00:34:43:20
There’s a lot of learning and so on.

00:34:43:20 – 00:34:44:23
Second stage deals.

00:34:44:23 – 00:34:46:08
Banks love those

00:34:46:08 – 00:34:47:03
because you’ve already

00:34:47:03 – 00:34:48:14
proved a lot of their

00:34:48:14 – 00:34:50:03
their risk concerns.

00:34:50:03 – 00:34:51:04
You’ve already prove that out.

00:34:51:04 – 00:34:52:18
So at second stage

00:34:52:18 – 00:34:54:02
still we do finance

00:34:54:02 – 00:34:55:08
hey we’re doing one right now.

00:34:55:08 – 00:34:57:16
Take it a company to 100%.

00:34:57:16 – 00:34:59:00
And yeah I’ll say

00:34:59:00 – 00:35:00:14
the bank it’s still process

00:35:00:14 – 00:35:01:06
so the end of the day.

00:35:01:06 – 00:35:02:19
But it’s a bit easier

00:35:02:19 – 00:35:03:21
because there’s

00:35:03:21 – 00:35:06:07
a lot more comfort out there that

00:35:06:07 – 00:35:09:01
this company can survive as an Esop.

00:35:09:01 – 00:35:10:09
So we want to plant that seed.

00:35:10:09 – 00:35:12:03
That second stage deals

00:35:12:03 – 00:35:13:18
often are very attractive to banks.

00:35:13:18 – 00:35:15:02
And also for sellers too,

00:35:15:02 – 00:35:17:00
because if they

00:35:17:00 – 00:35:18:03
already went through the process,

00:35:18:03 – 00:35:20:03
whatever it was three, five,

00:35:20:03 – 00:35:20:23
six years ago,

00:35:20:23 – 00:35:22:13
they are truly ready to be cashed out.

00:35:22:13 – 00:35:23:23
At that point.

00:35:23:23 – 00:35:24:19
And then the idea

00:35:24:19 – 00:35:25:19
of carrying a seller note

00:35:25:19 – 00:35:28:00
for another five, seven, nine,

00:35:28:00 – 00:35:29:16
maybe even ten years,

00:35:29:16 – 00:35:30:21
you know, might not be a billion,

00:35:30:21 – 00:35:32:22
especially if they’re doing 1042

00:35:32:22 – 00:35:34:08
or whatever their own

00:35:34:08 – 00:35:35:15
personal reinvestment

00:35:35:15 – 00:35:38:14
cash flow needs are and so on for them,

00:35:38:14 – 00:35:41:01
their family, etc..

00:35:41:01 – 00:35:41:21
Often

00:35:42:21 – 00:35:44:00
that all that

00:35:44:00 – 00:35:45:07
gets to, a

00:35:45:07 – 00:35:46:02
second stage,

00:35:46:02 – 00:35:47:13
you saw a financing solution

00:35:47:13 – 00:35:48:14
that comes in

00:35:48:14 – 00:35:49:11
and is a bit

00:35:49:11 – 00:35:51:12
more smooth than the first one.

00:35:51:12 – 00:35:52:17
So that’s my pitch on the

00:35:52:17 – 00:35:54:21
the second stage financing

00:35:54:21 – 00:35:57:03
that’s important there.

00:35:57:03 – 00:35:58:13
And then the second bullet

00:35:58:13 – 00:36:01:12
there is refinancing existing bank loans.

00:36:01:20 – 00:36:03:22
There may be better terms today

00:36:03:22 – 00:36:04:22
than there have been.

00:36:04:22 – 00:36:07:07
Or there could be other reasons

00:36:07:07 – 00:36:08:18
for doing that,

00:36:08:18 – 00:36:11:01
some of which might just be, you know,

00:36:11:01 – 00:36:13:12
taking a second bite at the, seller note,

00:36:13:12 – 00:36:16:04
you know, helping to buy that down.

00:36:16:04 – 00:36:16:18
Yeah.

00:36:16:18 – 00:36:18:23
And the reason why we put out there

00:36:18:23 – 00:36:20:15
late 2022 to 2024,

00:36:20:15 – 00:36:21:14
because that was the area

00:36:21:14 – 00:36:22:16
where rates were higher

00:36:22:16 – 00:36:23:11
than they were today.

00:36:23:11 – 00:36:27:03
So we were placing loans back then Prime

00:36:27:03 – 00:36:28:05
was, what, eight and a half.

00:36:28:05 – 00:36:29:12
And some of the loans

00:36:29:12 – 00:36:31:02
we place were in the eight. Yeah.

00:36:31:02 – 00:36:33:06
And we often negotiate

00:36:33:06 – 00:36:35:09
the prepayment penalties away on these.

00:36:35:09 – 00:36:38:00
So people are stuck in that

00:36:38:00 – 00:36:40:22
vintage senior loan situation.

00:36:40:22 – 00:36:41:14
It’s a great time

00:36:41:14 – 00:36:42:10
to refinance it out

00:36:42:10 – 00:36:43:14
and save

00:36:43:14 – 00:36:45:21
1 or 2 percentage points on the interest.

00:36:45:21 – 00:36:47:09
So take

00:36:47:09 – 00:36:48:07
if you did

00:36:48:07 – 00:36:49:08
any sort of transaction

00:36:49:08 – 00:36:50:05
during that time, you know,

00:36:50:05 – 00:36:51:03
take a look at the terms,

00:36:51:03 – 00:36:51:17
you know, and say,

00:36:51:17 – 00:36:54:01
hey, is this competitive? You know, today

00:36:55:03 – 00:36:56:22
and reach out to us to

00:36:56:22 – 00:36:58:02
we can quickly tell you,

00:36:58:02 – 00:36:58:22
you know, yes it is.

00:36:58:22 – 00:37:00:20
Or you know, you can probably do better.

00:37:00:20 – 00:37:01:23
And easiest

00:37:01:23 – 00:37:03:05
place is always to work with the,

00:37:03:05 – 00:37:04:20
you know, existing financial institution,

00:37:04:20 – 00:37:05:19
existing bank

00:37:05:19 – 00:37:07:04
to see if they’re interested

00:37:07:04 – 00:37:08:22
in refinancing that out,

00:37:08:22 – 00:37:11:00
if they’re not part of us,

00:37:11:00 – 00:37:12:17
that absolutely.

00:37:12:17 – 00:37:13:19
And then when it comes to seller

00:37:13:19 – 00:37:16:11
note refinancing, I mean, it’s

00:37:16:11 – 00:37:17:19
these are the instances

00:37:17:19 – 00:37:20:13
where the term vintage is not cool

00:37:20:13 – 00:37:23:13
because your rates could be unfavorable

00:37:23:13 – 00:37:25:00
or there could,

00:37:25:00 – 00:37:25:18
you know,

00:37:25:18 – 00:37:26:17
it’s just time

00:37:26:17 – 00:37:28:03
you’ve been sitting on the balance sheet

00:37:28:03 – 00:37:28:16
long enough.

00:37:28:16 – 00:37:31:16
So if you refinance the seller note

00:37:31:21 – 00:37:34:06
you’re buying down more of that principal

00:37:34:06 – 00:37:36:23
selling shareholder gets more of

00:37:36:23 – 00:37:39:23
their initial, transaction price

00:37:40:02 – 00:37:41:15
paid to them minutes.

00:37:41:15 – 00:37:42:03
Attractive

00:37:42:03 – 00:37:43:23
if they do want to be cashed out

00:37:43:23 – 00:37:46:07
if their goal is, you know,

00:37:46:07 – 00:37:48:05
perhaps at the outset was seven years.

00:37:48:05 – 00:37:49:00
Oh, yeah, that’s fine.

00:37:49:00 – 00:37:50:01
That’s okay.

00:37:50:01 – 00:37:53:01
But maybe plans change, visions change.

00:37:53:07 – 00:37:57:05
And so to to buy that down or completely

00:37:57:05 – 00:37:59:09
satisfy the seller note

00:37:59:09 – 00:38:01:19
is sometimes very attractive.

00:38:01:19 – 00:38:04:02
But then there are some caveats there

00:38:04:02 – 00:38:04:22
with interest rate

00:38:04:22 – 00:38:07:15
arbitrage and warrant considerations.

00:38:07:15 – 00:38:07:22
Trevor,

00:38:07:22 – 00:38:10:01
you want to talk us through those.

00:38:10:01 – 00:38:10:04
Yeah.

00:38:10:04 – 00:38:11:00
So rates in the early

00:38:11:00 – 00:38:12:12
2020s were still very low.

00:38:12:12 – 00:38:14:16
So if you have a seller note that

00:38:14:16 – 00:38:16:21
let’s say it was priced at

00:38:18:06 – 00:38:19:06
AFR.

00:38:19:06 – 00:38:20:07
Applicable federal rate.

00:38:20:07 – 00:38:21:11
You know back then

00:38:21:11 – 00:38:23:00
you know we’re talking about low low

00:38:23:00 – 00:38:24:01
single digit rates.

00:38:24:01 – 00:38:26:13
So, you have to take a look at

00:38:26:13 – 00:38:28:15
that versus the current rates,

00:38:28:15 – 00:38:29:23
what a bank would offer, finance it out.

00:38:29:23 – 00:38:31:17
And you know it’s pro cons, right.

00:38:31:17 – 00:38:33:01
The company

00:38:33:01 – 00:38:33:17
in that case

00:38:33:17 – 00:38:34:04
like let’s say

00:38:34:04 – 00:38:36:03
there’s still 3 or 4 years left on that.

00:38:36:03 – 00:38:36:15
No.

00:38:36:15 – 00:38:37:12
Oh the company is going to be

00:38:37:12 – 00:38:38:22
paying more interest.

00:38:38:22 – 00:38:39:16
Plus side, you know,

00:38:39:16 – 00:38:41:06
the seller does get paid out.

00:38:41:06 – 00:38:42:13
And you know

00:38:42:13 – 00:38:44:08
sometimes the seller is ready

00:38:44:08 – 00:38:45:02
at that point to

00:38:45:02 – 00:38:47:03
especially if they’ve been on the board

00:38:47:03 – 00:38:47:20
a few years

00:38:47:20 – 00:38:50:15
and are truly ready to be out, then,

00:38:50:15 – 00:38:51:14
you have to weigh

00:38:51:14 – 00:38:52:14
the pros and cons there.

00:38:52:14 – 00:38:54:07
So that’s what we mean by interest rate

00:38:54:07 – 00:38:57:01
arbitrage is take a look at the existing

00:38:57:01 – 00:38:59:12
SA note package and what that rate was.

00:38:59:12 – 00:39:01:22
And compared to the cost of refinancing.

00:39:01:22 – 00:39:03:10
And and see if it makes sense.

00:39:03:10 – 00:39:04:20
Even if it’s a slightly different rate

00:39:04:20 – 00:39:05:23
you can still make sense,

00:39:05:23 – 00:39:07:21
you know for different reasons.

00:39:07:21 – 00:39:09:03
And then also

00:39:09:03 – 00:39:09:16
the warrant

00:39:09:16 – 00:39:11:13
considerations, a lot of the SA note

00:39:11:13 – 00:39:13:18
packages do have warrants

00:39:13:18 – 00:39:15:21
and some of those get called on that

00:39:15:21 – 00:39:16:22
SA notes pain.

00:39:16:22 – 00:39:18:14
So if that’s the case

00:39:18:14 – 00:39:20:05
and the SA notes refinance out.

00:39:20:05 – 00:39:21:04
And for,

00:39:21:04 – 00:39:22:11
then you could be in a situation

00:39:22:11 – 00:39:23:21
where the warrant is, you know

00:39:23:21 – 00:39:25:18
called in cash out at that point too.

00:39:25:18 – 00:39:27:14
And that could be sooner than

00:39:27:14 – 00:39:28:08
you and the company

00:39:28:08 – 00:39:29:07
originally planned for.

00:39:29:07 – 00:39:30:21
So, you know, again,

00:39:30:21 – 00:39:33:00
the cash flow modeling.

00:39:33:00 – 00:39:34:08
Well, we’ll prove this out.

00:39:34:08 – 00:39:36:00
But those are some points I know.

00:39:36:00 – 00:39:37:03
We’ll talk more

00:39:38:03 – 00:39:39:12
later here in a few minutes

00:39:39:12 – 00:39:41:11
about additional considerations.

00:39:41:11 – 00:39:43:11
But the bottom line here is expect

00:39:43:11 – 00:39:45:12
competitive terms in this

00:39:45:12 – 00:39:46:18
and no personal guarantee.

00:39:46:18 – 00:39:47:10
Like Trevor said,

00:39:47:10 – 00:39:47:16
you know

00:39:47:16 – 00:39:50:10
we don’t ever like to see that in

00:39:50:10 – 00:39:53:10
and especially with a 100% transaction.

00:39:53:10 – 00:39:54:05
And then the components

00:39:54:05 – 00:39:55:16
are tailored to your business,

00:39:55:16 – 00:39:56:02
you know,

00:39:56:02 – 00:39:57:05
rather

00:39:57:05 – 00:39:58:18
making sure that

00:39:58:18 – 00:39:59:20
there are things you can meet.

00:39:59:20 – 00:40:02:13
They’re not too far of a stretch.

00:40:02:13 – 00:40:03:23
And at the end of the day,

00:40:03:23 – 00:40:05:21
you know, these banks want to lend,

00:40:05:21 – 00:40:07:21
so they want to

00:40:07:21 – 00:40:09:06
find opportunities,

00:40:09:06 – 00:40:10:22
that they can make it happen.

00:40:10:22 – 00:40:11:21
So these

00:40:11:21 – 00:40:12:15
these terms are a lot

00:40:12:15 – 00:40:14:05
better than they used to be.

00:40:14:05 – 00:40:15:06
And I’ll give an example

00:40:15:06 – 00:40:16:16
of having it’s tailored to the business.

00:40:16:16 – 00:40:18:04
So current deal

00:40:18:04 – 00:40:19:10
we’re working on a company

00:40:19:10 – 00:40:21:00
wants to acquire another company.

00:40:21:00 – 00:40:22:13
It’s a second stage transaction.

00:40:22:13 – 00:40:23:19
So we’re taking them to 100%.

00:40:23:19 – 00:40:26:08
They paid off their earlier tranches

00:40:26:08 – 00:40:28:00
so fast with the banks

00:40:28:00 – 00:40:29:17
that came in and place capital

00:40:29:17 – 00:40:30:23
and they are eyeing

00:40:30:23 – 00:40:33:18
a possible acquisition next year.

00:40:33:18 – 00:40:35:09
So they want the covenants

00:40:35:09 – 00:40:37:03
to be tailored for that, you know.

00:40:37:03 – 00:40:40:03
So, with an acquisition that comes

00:40:40:05 – 00:40:41:16
the need for cash, right.

00:40:41:16 – 00:40:44:03
And the ability to do it.

00:40:44:03 – 00:40:46:06
So the banks that are serious

00:40:46:06 – 00:40:47:05
here are working with us

00:40:47:05 – 00:40:48:17
to tailor

00:40:48:17 – 00:40:49:21
those covenants and say, okay,

00:40:49:21 – 00:40:50:22
we understand you’re going to do this

00:40:50:22 – 00:40:52:16
Q1 transaction.

00:40:52:16 – 00:40:54:18
This is what’s needed for that.

00:40:54:18 – 00:40:55:15
And even though we’re doing this,

00:40:55:15 – 00:40:56:15
you thought, now

00:40:56:15 – 00:40:58:04
we need a plan around that.

00:40:58:04 – 00:40:59:10
And and again,

00:40:59:10 – 00:41:01:00
banks don’t like surprises.

00:41:01:00 – 00:41:01:07
You know.

00:41:01:07 – 00:41:01:20
And that’s when you have

00:41:01:20 – 00:41:03:21
the best overall package

00:41:03:21 – 00:41:05:06
is is when you’re pretty clear

00:41:05:06 – 00:41:06:13
with where the companies are today

00:41:06:13 – 00:41:07:05
and then

00:41:07:05 – 00:41:08:06
also where it’s headed

00:41:08:06 – 00:41:10:10
over the next year. Absolutely.

00:41:10:10 – 00:41:13:14
So baking that in now versus in Q1,

00:41:13:18 – 00:41:14:10
you know, is

00:41:14:10 – 00:41:17:05
is making this whole thing possible. Yes.

00:41:17:05 – 00:41:19:10
Let’s that’s very important point.

00:41:19:10 – 00:41:19:23
Let’s talk about

00:41:19:23 – 00:41:21:15
some other considerations.

00:41:21:15 – 00:41:23:03
Number one being you know,

00:41:23:03 – 00:41:23:23
your balance sheet

00:41:23:23 – 00:41:24:22
and cash flow strength.

00:41:24:22 – 00:41:27:17
We’ve talked a lot about ratios.

00:41:27:17 – 00:41:28:22
But as it relates

00:41:28:22 – 00:41:30:16
to the financial statements

00:41:30:16 – 00:41:32:02
what do you mean Trevor.

00:41:32:02 – 00:41:32:09
Yeah.

00:41:32:09 – 00:41:34:22
So taking a look at the balance sheet,

00:41:34:22 – 00:41:35:14
at the end of the day,

00:41:35:14 – 00:41:36:18
that’s the story of the strength,

00:41:36:18 – 00:41:37:17
right, of the company.

00:41:37:17 – 00:41:39:05
And for those out there

00:41:39:05 – 00:41:41:16
that have leveraged Esops

00:41:41:16 – 00:41:42:23
showing up on the balance sheet already,

00:41:42:23 – 00:41:43:22
you have to

00:41:43:22 – 00:41:45:09
basically take out that internal loan

00:41:45:09 – 00:41:46:19
because it makes the equity

00:41:46:19 – 00:41:47:13
look pretty ugly.

00:41:47:13 – 00:41:48:20
You know, in terms of the bank

00:41:48:20 – 00:41:50:10
like that becomes an in and out right.

00:41:50:10 – 00:41:51:16
To adjust that back.

00:41:51:16 – 00:41:52:04
But we’re probably

00:41:52:04 – 00:41:53:17
want to take a look at the cash flow.

00:41:53:17 – 00:41:56:05
And you need to understand

00:41:56:05 – 00:41:57:12
what it can truly support.

00:41:57:12 – 00:41:58:16
Let’s stress test as well.

00:41:58:16 – 00:42:01:00
And again this is stuff we do.

00:42:01:00 – 00:42:03:00
And I know a lot of people out there

00:42:03:00 – 00:42:04:00
do this on their own too.

00:42:04:00 – 00:42:05:20
A lot of CFOs, listening,

00:42:05:20 – 00:42:07:08
VP, finance, etc.

00:42:07:08 – 00:42:09:10
controllers are probably going to

00:42:09:10 – 00:42:10:13
play around in Excel

00:42:10:13 – 00:42:11:09
and build your own model.

00:42:11:09 – 00:42:12:07
That basically is stress

00:42:12:07 – 00:42:13:06
testing to say, okay,

00:42:13:06 – 00:42:16:06
if the company had a a down year,

00:42:16:08 – 00:42:18:23
could it still meet that debt obligation?

00:42:20:00 – 00:42:21:03
So that’s very strong.

00:42:21:03 – 00:42:22:01
I should say.

00:42:22:01 – 00:42:23:02
That’s very

00:42:23:02 – 00:42:24:13
that’s a key consideration here

00:42:24:13 – 00:42:26:09
to have a relatively strong

00:42:26:09 – 00:42:27:14
balance sheet and strong

00:42:27:14 – 00:42:28:19
cash flows there.

00:42:28:19 – 00:42:29:21
Absolutely.

00:42:29:21 – 00:42:31:21
And reviewed statement.

00:42:31:21 – 00:42:33:06
So financial statement quality.

00:42:33:06 – 00:42:34:09
So this comes up a lot.

00:42:34:09 – 00:42:35:17
So a lot of companies are going down

00:42:35:17 – 00:42:38:12
the easy path have internal financials.

00:42:38:12 – 00:42:41:13
And unless they have an already existing

00:42:41:13 – 00:42:43:04
requirement for reviewed

00:42:43:04 – 00:42:44:17
or audited statements.

00:42:44:17 – 00:42:45:07
And often

00:42:45:07 – 00:42:48:07
if they’re a government contractor or

00:42:48:07 – 00:42:49:16
commercial general contractor

00:42:49:16 – 00:42:50:13
or subcontractors

00:42:50:13 – 00:42:52:03
that are usually for bonding,

00:42:52:03 – 00:42:53:09
you need reviewed statements

00:42:53:09 – 00:42:54:00
or maybe audit,

00:42:54:00 – 00:42:55:21
depending on the size of your projects.

00:42:55:21 – 00:42:57:06
Others don’t necessarily

00:42:57:06 – 00:42:58:09
have that requirement.

00:42:58:09 – 00:43:01:09
Banks love to see reviewed statements.

00:43:02:17 – 00:43:05:11
Usually they start asking for that

00:43:05:11 – 00:43:06:20
when they land somewhere

00:43:06:20 – 00:43:09:07
in the high single digit millions.

00:43:09:07 – 00:43:11:02
And it is a negotiation point.

00:43:11:02 – 00:43:12:21
It all comes down to the strength

00:43:12:21 – 00:43:14:09
of the operating team.

00:43:14:09 – 00:43:15:15
You know, there’s,

00:43:15:15 – 00:43:18:01
a CFO or comptroller who is a CPA.

00:43:18:01 – 00:43:18:07
You know,

00:43:18:07 – 00:43:20:12
that kind of gives more credibility

00:43:20:12 – 00:43:22:22
than if there’s not, you know, so on

00:43:22:22 – 00:43:23:21
banks lending 20

00:43:23:21 – 00:43:25:04
plus million generally

00:43:25:04 – 00:43:26:12
audited statements are

00:43:27:11 – 00:43:28:07
always required.

00:43:28:07 – 00:43:29:19
And I gave that example earlier

00:43:29:19 – 00:43:32:02
where we got more where was it.

00:43:32:02 – 00:43:33:09
And now it’s just

00:43:33:09 – 00:43:35:02
because of the company’s relationships,

00:43:35:02 – 00:43:36:20
strength of the cash flows, the team

00:43:36:20 – 00:43:37:22
and so on.

00:43:37:22 – 00:43:41:08
So that can become, I don’t know,

00:43:41:09 – 00:43:43:01
say, a roadblock, but a surprise,

00:43:43:01 – 00:43:44:11
you know, with, with companies

00:43:44:11 – 00:43:45:13
who are

00:43:45:13 – 00:43:48:11
traditionally used to having outside

00:43:48:11 – 00:43:50:07
CPA review their audit statements,

00:43:50:07 – 00:43:51:23
you know, then going down this bank path,

00:43:51:23 – 00:43:54:00
seen that come up often,

00:43:54:00 – 00:43:55:05
they give you time though.

00:43:55:05 – 00:43:56:08
So it’s not necessarily

00:43:56:08 – 00:43:57:14
something that has to be done

00:43:57:14 – 00:44:00:00
before the loan funds.

00:44:00:00 – 00:44:01:07
Sometimes it’s the year after.

00:44:01:07 – 00:44:04:07
So a loan closes today.

00:44:05:08 – 00:44:06:08
You know that bank term sheet.

00:44:06:08 – 00:44:07:04
If it was a requirement

00:44:07:04 – 00:44:09:01
they would say okay starting with

00:44:09:01 – 00:44:12:03
2026 we required reviewed statements.

00:44:12:09 – 00:44:14:00
And then basically what that means is

00:44:14:00 – 00:44:14:23
the CPA does

00:44:14:23 – 00:44:15:18
a review,

00:44:15:18 – 00:44:15:23
you know,

00:44:15:23 – 00:44:18:02
probably sometime in early 2027.

00:44:18:02 – 00:44:21:04
And IT banks really do like these

00:44:21:04 – 00:44:22:16
because it’s another party,

00:44:22:16 – 00:44:24:19
another independent party saying

00:44:24:19 – 00:44:25:17
signing off

00:44:25:17 – 00:44:26:20
essentially that yes,

00:44:26:20 – 00:44:28:23
these things are true.

00:44:28:23 – 00:44:29:22
The balance sheet and cash

00:44:29:22 – 00:44:31:00
flow strength that we spoke

00:44:31:00 – 00:44:32:22
about in the bullet point above,

00:44:32:22 – 00:44:34:02
these things are true.

00:44:34:02 – 00:44:35:08
And, you know,

00:44:35:08 – 00:44:38:08
I remember from studying for the CPA exam

00:44:38:08 – 00:44:39:18
that a reviewed statement

00:44:39:18 – 00:44:41:15
is substantially less in scope

00:44:41:15 – 00:44:44:00
than an audited financial statement.

00:44:44:00 – 00:44:45:18
And so it’s just levels of

00:44:46:17 – 00:44:47:10
individuals

00:44:47:10 – 00:44:49:01
testing and verifying

00:44:49:01 – 00:44:50:13
and signing off on things.

00:44:50:13 – 00:44:52:04
And so we’ve got a company

00:44:52:04 – 00:44:53:06
purporting that, hey,

00:44:53:06 – 00:44:54:12
my balance sheet is strong.

00:44:54:12 – 00:44:57:12
My cash flow can make this happen.

00:44:57:20 – 00:44:59:04
But like you said, Trevor,

00:44:59:04 – 00:45:00:10
if it’s just the internals,

00:45:00:10 – 00:45:03:10
if it’s just, internally prepared,

00:45:03:15 – 00:45:04:15
that’s the company saying it.

00:45:04:15 – 00:45:05:12
That’s one party.

00:45:05:12 – 00:45:06:16
Now we’ve got a second

00:45:06:16 – 00:45:09:04
and especially independent party

00:45:09:04 – 00:45:10:13
saying that the company,

00:45:10:13 – 00:45:11:15
what the company is saying

00:45:11:15 – 00:45:12:17
is actually true.

00:45:12:17 – 00:45:14:23
And I think that’s why banks really

00:45:14:23 – 00:45:15:13
like those

00:45:15:13 – 00:45:16:18
and like to lean on them

00:45:16:18 – 00:45:19:02
when it comes to lent.

00:45:19:02 – 00:45:20:20
And when it comes time to lend,

00:45:20:20 – 00:45:22:21
they look also at your capital needs

00:45:22:21 – 00:45:24:06
and not just now, but,

00:45:24:06 – 00:45:25:16
you know, into the future.

00:45:25:16 – 00:45:27:15
And if, like I say,

00:45:27:15 – 00:45:29:01
your capital needs include

00:45:29:01 – 00:45:31:02
a lot of machinery, equipment.

00:45:31:02 – 00:45:31:20
Well, let’s say you’re building

00:45:31:20 – 00:45:33:21
a, you know, I data center one,

00:45:33:21 – 00:45:35:09
these are going to be very high. Right.

00:45:35:09 – 00:45:36:05
And that needs

00:45:36:05 – 00:45:37:17
to be baked into the forecast

00:45:37:17 – 00:45:39:04
because even though it looks like today

00:45:39:04 – 00:45:41:07
cash flows will support a senior

00:45:41:07 – 00:45:42:05
loan at X.

00:45:42:05 – 00:45:43:16
You know we need to prove it out.

00:45:43:16 – 00:45:44:09
And make sure the company

00:45:44:09 – 00:45:45:06
is not going to be starved

00:45:45:06 – 00:45:46:22
and has capital

00:45:46:22 – 00:45:48:14
so that it can continue to operate,

00:45:48:14 – 00:45:50:00
continue to grow acquisitions,

00:45:50:00 – 00:45:50:14
same thing.

00:45:50:14 – 00:45:51:03
You know, that’s

00:45:51:03 – 00:45:52:10
if the board

00:45:52:10 – 00:45:54:07
is seriously considering acquisitions,

00:45:54:07 – 00:45:56:01
then understanding

00:45:56:01 – 00:45:57:21
the profile of the company

00:45:57:21 – 00:45:58:18
that might be acquired

00:45:58:18 – 00:46:00:11
and then also how that has financed,

00:46:00:11 – 00:46:02:09
that has to be part of this whole

00:46:02:09 – 00:46:03:23
financing package or purchase

00:46:03:23 – 00:46:05:20
obligation and phantom and warrant

00:46:05:20 – 00:46:06:17
warrant payouts.

00:46:06:17 – 00:46:08:05
We talked about that earlier.

00:46:08:05 – 00:46:09:16
That needs to be baked into.

00:46:09:16 – 00:46:09:23
And again,

00:46:09:23 – 00:46:11:11
that’s all cash flow components.

00:46:11:11 – 00:46:12:11
Let’s talk about the board

00:46:12:11 – 00:46:13:08
and trustee roles.

00:46:13:08 – 00:46:15:01
We haven’t talked about this.

00:46:15:01 – 00:46:15:09
Yeah.

00:46:15:09 – 00:46:17:15
They do play a very important role in

00:46:19:03 – 00:46:20:18
in

00:46:20:18 – 00:46:21:17
the financing especially

00:46:21:17 – 00:46:23:04
on second stage.

00:46:23:04 – 00:46:24:03
And then we’re financing

00:46:24:03 – 00:46:26:13
existing seller debt. Right.

00:46:26:13 – 00:46:29:17
So the let’s say the board proposes

00:46:29:17 – 00:46:32:06
refinancing to the trustee

00:46:32:06 – 00:46:33:05
and the trustee reviews

00:46:33:05 – 00:46:34:11
the new debt terms,

00:46:34:11 – 00:46:37:01
the prepayment price, and who benefits.

00:46:37:01 – 00:46:38:05
Let’s talk a little bit.

00:46:38:05 – 00:46:39:11
You know, what analysis does

00:46:39:11 – 00:46:41:07
the trustee want.

00:46:41:07 – 00:46:43:04
What does it need to own.

00:46:43:04 – 00:46:44:16
Need its own advisors

00:46:44:16 – 00:46:46:14
to do to review the terms?

00:46:46:14 – 00:46:46:19
Yes.

00:46:46:19 – 00:46:48:01
The board of the company

00:46:48:01 – 00:46:49:20
is going to approve the financing,

00:46:49:20 – 00:46:51:16
and the trustee will need to be looped in

00:46:51:16 – 00:46:52:13
and approve it as well.

00:46:52:13 – 00:46:53:04
The trustee is going

00:46:53:04 – 00:46:55:06
to want to see the terms term sheet,

00:46:55:06 – 00:46:56:05
maybe some modeling

00:46:56:05 – 00:46:58:12
to see how this whole new package,

00:46:58:12 – 00:47:00:01
whether it’s a second stage

00:47:00:01 – 00:47:02:02
or so not refinancing,

00:47:02:02 – 00:47:03:01
you know, what that looks like,

00:47:03:01 – 00:47:04:16
how it impacts the company,

00:47:04:16 – 00:47:06:05
the cash flows, you know, so on.

00:47:06:05 – 00:47:07:13
So they both need to be looped in.

00:47:07:13 – 00:47:09:15
You know, I know independent trustees

00:47:09:15 – 00:47:11:12
surely don’t want to be surprised.

00:47:11:12 – 00:47:12:07
You know,

00:47:12:07 – 00:47:12:22
they’re told, oh, hey,

00:47:12:22 – 00:47:14:19
we refinance the seller note out.

00:47:14:19 – 00:47:15:05
And the

00:47:15:05 – 00:47:16:16
company took on this,

00:47:16:16 – 00:47:19:01
large new debt facility,

00:47:19:01 – 00:47:20:12
you know, without being looped in.

00:47:20:12 – 00:47:22:02
So, you know, it’s collaborative.

00:47:22:02 – 00:47:23:18
Of course. Esops always are.

00:47:23:18 – 00:47:24:00
Yeah.

00:47:24:00 – 00:47:25:01
So again,

00:47:25:01 – 00:47:27:16
the board is going to vote

00:47:27:16 – 00:47:28:13
whether to proceed,

00:47:28:13 – 00:47:29:07
you know, then part of

00:47:29:07 – 00:47:32:06
that is getting trustee approval,

00:47:32:09 – 00:47:33:16
second stage transactions.

00:47:33:16 – 00:47:35:02
I mean, those always have to be financed

00:47:35:02 – 00:47:35:17
one way or another.

00:47:35:17 – 00:47:36:11
Anyways, so

00:47:36:11 – 00:47:37:17
our notes are bank

00:47:37:17 – 00:47:40:12
trustee and their financial advisor,

00:47:40:12 – 00:47:41:10
meaning their appraiser.

00:47:41:10 – 00:47:42:12
They’re going to want to see the terms

00:47:42:12 – 00:47:43:07
and the term sheet.

00:47:43:07 – 00:47:44:01
Of course,

00:47:44:01 – 00:47:46:14
part of that second stage negotiation

00:47:46:14 – 00:47:47:18
or finances are notes.

00:47:47:18 – 00:47:49:08
That’s where

00:47:49:08 – 00:47:50:16
it can become more of a gray area.

00:47:50:16 – 00:47:52:21
And we always recommend

00:47:52:21 – 00:47:53:17
we’ve been the trustee.

00:47:53:17 – 00:47:54:02
And and that’s

00:47:54:02 – 00:47:54:18
what we do as well

00:47:54:18 – 00:47:55:23
for involved in the process.

00:47:55:23 – 00:47:58:10
You know. So not everyone’s aligned.

00:47:58:10 – 00:47:59:22
Everyone is on the same page

00:47:59:22 – 00:48:01:15
and there’s no surprises.

00:48:01:15 – 00:48:02:08
Yeah.

00:48:02:08 – 00:48:03:04
You got to think about what

00:48:03:04 – 00:48:04:20
the trustees responsible for.

00:48:04:20 – 00:48:06:21
They’re making decisions

00:48:06:21 – 00:48:09:01
for all the, Esop shareholders.

00:48:09:01 – 00:48:10:02
And so if you’re entering

00:48:10:02 – 00:48:11:11
into this new debt agreement,

00:48:11:11 – 00:48:12:22
that could potentially depress

00:48:12:22 – 00:48:14:03
the share price

00:48:14:03 – 00:48:16:10
for temporarily, hopefully,

00:48:16:10 – 00:48:18:22
you know, they need to be critical about

00:48:20:00 – 00:48:21:18
why, you know, and

00:48:21:18 – 00:48:23:09
what the terms that are involved.

00:48:23:09 – 00:48:25:19
So I think it’s it’s very important.

00:48:25:19 – 00:48:27:03
And because it’s

00:48:27:03 – 00:48:29:11
got to be to the benefit of all the,

00:48:29:11 – 00:48:31:15
all the Esop shareholders.

00:48:31:15 – 00:48:34:04
And so that being said, our role

00:48:34:04 – 00:48:36:18
in this whole thing as advisors

00:48:36:18 – 00:48:38:12
is to find you the best terms

00:48:38:12 – 00:48:40:22
and the best partner for your business

00:48:40:22 – 00:48:42:09
just because they’re great terms.

00:48:42:09 – 00:48:43:18
Perhaps the bank’s

00:48:43:18 – 00:48:45:15
too small for your other needs.

00:48:45:15 – 00:48:46:09
Operationally,

00:48:46:09 – 00:48:49:09
maybe your large enough that this small,

00:48:49:19 – 00:48:51:14
neighborhood or regional bank

00:48:51:14 – 00:48:54:03
just doesn’t have what we want there.

00:48:54:03 – 00:48:56:17
It may be a credit card offering

00:48:56:17 – 00:48:57:18
that you get at your

00:48:57:18 – 00:48:59:06
you’re at the incumbent bank,

00:48:59:06 – 00:49:00:07
but not at this one.

00:49:00:07 – 00:49:01:04
So it does not

00:49:01:04 – 00:49:02:00
necessarily need

00:49:02:00 – 00:49:05:00
to be related to the, transaction.

00:49:05:00 – 00:49:06:16
But we are certainly

00:49:06:16 – 00:49:07:19
looking out to make sure

00:49:07:19 – 00:49:09:23
that this is successful

00:49:09:23 – 00:49:12:11
and that that everybody, you know,

00:49:12:11 – 00:49:14:03
feels like they

00:49:14:03 – 00:49:15:11
got the best deal out of it,

00:49:15:11 – 00:49:17:11
out of the transaction

00:49:17:11 – 00:49:19:00
or the the refinance.

00:49:19:00 – 00:49:20:10
So in this Q&A

00:49:20:10 – 00:49:21:23
we’ve had on a bunch before,

00:49:21:23 – 00:49:24:21
but those were related to that one topic.

00:49:24:21 – 00:49:27:02
We have some others here.

00:49:27:02 – 00:49:29:14
So let’s talk about

00:49:29:14 – 00:49:30:13
how much of that seller

00:49:30:13 – 00:49:31:05
note trouble

00:49:31:05 – 00:49:33:19
can be refinanced at one time.

00:49:33:19 – 00:49:35:20
It all depends that the company

00:49:35:20 – 00:49:37:18
has no existing debt.

00:49:37:18 – 00:49:40:05
Just from a conservative posture

00:49:40:05 – 00:49:41:15
here, I would say two times

00:49:43:00 – 00:49:45:20
EBITDA as a starting point.

00:49:45:20 – 00:49:46:21
So let’s say the company’s

00:49:46:21 – 00:49:48:07
all these offer six out of it.

00:49:48:07 – 00:49:49:23
A bank came in added two.

00:49:49:23 – 00:49:50:15
That’s paid off.

00:49:50:15 – 00:49:52:03
And you want to bring on another try

00:49:52:03 – 00:49:53:11
to refinance our notes.

00:49:53:11 – 00:49:54:01
They’re probably going

00:49:54:01 – 00:49:55:13
to take out another two.

00:49:55:13 – 00:49:57:12
If the company’s growing then maybe more

00:49:57:12 – 00:49:57:18
you know.

00:49:57:18 – 00:49:59:03
But generally two

00:49:59:03 – 00:49:59:20
at today’s rates

00:49:59:20 – 00:50:00:14
that’s going to cash flow.

00:50:00:14 – 00:50:02:12
Nice. Banks are going to be happy.

00:50:02:12 – 00:50:03:09
The company’s not going to be

00:50:03:09 – 00:50:05:01
stressed on cash flow.

00:50:05:01 – 00:50:06:13
And this question

00:50:06:13 – 00:50:07:07
kind of relates to

00:50:07:07 – 00:50:09:05
when you were talking about

00:50:09:05 – 00:50:12:05
those 2022 to 2024 interest rates of

00:50:12:16 – 00:50:14:09
Prime being at 8%.

00:50:14:09 – 00:50:17:09
If I refinance part of my seller, no.

00:50:17:14 – 00:50:20:14
What happens to my interest income

00:50:21:01 – 00:50:24:01
tax and my warrants.

00:50:24:01 – 00:50:25:21
Yeah. So and I’m assuming it’s a taxable.

00:50:25:21 – 00:50:28:04
So let’s answer 1042

00:50:28:04 – 00:50:30:00
you know any tax implication as well.

00:50:30:00 – 00:50:31:00
You’re not going to be interested in

00:50:31:00 – 00:50:31:11
any more.

00:50:31:11 – 00:50:33:04
You’re getting a big pile of cash.

00:50:33:04 – 00:50:35:03
So let’s assume it’s a taxable sale.

00:50:35:03 – 00:50:35:17
Bank comes in

00:50:35:17 – 00:50:36:23
and refinance is your seller no doubt.

00:50:36:23 – 00:50:37:18
Well that’s a big chunk

00:50:37:18 – 00:50:38:23
that’s just got paid down.

00:50:38:23 – 00:50:40:01
It’s you’re going to make capital gains

00:50:40:01 – 00:50:40:09
on that.

00:50:40:09 – 00:50:41:07
Your interest income

00:50:41:07 – 00:50:43:23
then is going to go down, which okay,

00:50:43:23 – 00:50:46:02
depending on how much interest income

00:50:46:02 – 00:50:47:23
you’re getting, that’s taxable and so on.

00:50:47:23 – 00:50:48:08
So you

00:50:48:08 – 00:50:49:17
a nice pile of cash

00:50:49:17 – 00:50:50:10
probably outweighs

00:50:50:10 – 00:50:52:05
that because you can reinvest in.

00:50:52:05 – 00:50:53:15
And do you know what to do with that.

00:50:53:15 – 00:50:56:15
And and as far as warrants go,

00:50:57:00 – 00:50:58:05
it all depends

00:50:58:05 – 00:50:59:22
on the term of the warrants.

00:50:59:22 – 00:51:00:14
A lot of them say

00:51:00:14 – 00:51:02:06
that the company can call once the,

00:51:02:06 – 00:51:03:18
after a period of time,

00:51:03:18 – 00:51:04:15
but usually it’s one

00:51:04:15 – 00:51:06:14
the seller debt is fully repaid.

00:51:06:14 – 00:51:07:07
So we’re talking about

00:51:07:07 – 00:51:08:16
refinancing seller debt,

00:51:08:16 – 00:51:10:04
and we’re paying it off in full.

00:51:10:04 – 00:51:11:23
Then the warrant could be called.

00:51:11:23 – 00:51:13:18
And it all depends on the value

00:51:13:18 – 00:51:15:03
at that point in time and so on.

00:51:15:03 – 00:51:15:20
And of course he saw

00:51:15:20 – 00:51:17:16
values to deduct debt.

00:51:17:16 – 00:51:19:07
So it could be a sub off to more

00:51:19:07 – 00:51:20:18
warrant answer

00:51:20:18 – 00:51:23:06
by refinancing the entire sell or not out

00:51:23:06 – 00:51:24:13
versus waiting until the

00:51:24:13 – 00:51:25:18
the debt is fully repaid.

00:51:25:18 – 00:51:27:15
And then the equity value is

00:51:27:15 – 00:51:29:16
as rebound and ideally much higher.

00:51:29:16 – 00:51:30:22
So that’s a nuance one.

00:51:30:22 – 00:51:31:19
And again

00:51:31:19 – 00:51:33:11
model needs to be made

00:51:33:11 – 00:51:34:12
and modeling out

00:51:34:12 – 00:51:35:18
what that impact looks like.

00:51:35:18 – 00:51:37:20
So people make the best

00:51:37:20 – 00:51:38:19
educated decision.

00:51:38:19 – 00:51:40:14
They’re absolutely

00:51:40:14 – 00:51:43:11
we’re running close on time.

00:51:43:11 – 00:51:45:03
So I’ll hit one more.

00:51:45:03 – 00:51:46:14
Does refinancing change

00:51:46:14 – 00:51:49:08
how shares are released to participants?

00:51:49:08 – 00:51:50:06
And that’s a good question

00:51:50:06 – 00:51:52:06
because I don’t want to confuse.

00:51:52:06 – 00:51:54:09
And it’s easy to confuse.

00:51:54:09 – 00:51:54:23
We’re talking about

00:51:54:23 – 00:51:56:23
all the outside loans.

00:51:56:23 – 00:51:58:19
So this is the company,

00:51:58:19 – 00:52:00:07
between you know,

00:52:00:07 – 00:52:01:20
this is a loan between the company

00:52:01:20 – 00:52:03:11
and a bank or the company and the seller.

00:52:04:11 – 00:52:06:00
The loan that

00:52:06:00 – 00:52:07:07
this is referring

00:52:07:07 – 00:52:09:02
to is called the inside loan,

00:52:09:02 – 00:52:11:08
or the loan between the company

00:52:11:08 – 00:52:13:04
and the Esop trust

00:52:13:04 – 00:52:14:11
for that initial transfer

00:52:14:11 – 00:52:15:18
tranche of shares.

00:52:15:18 – 00:52:17:07
And that’s the one where it puts

00:52:17:07 – 00:52:19:03
these shares on a shelf

00:52:19:03 – 00:52:20:11
that are released over time

00:52:20:11 – 00:52:22:19
with the retirement contributions,

00:52:22:19 – 00:52:24:07
that’s unaffected

00:52:24:07 – 00:52:26:02
by what’s happening here.

00:52:26:02 – 00:52:28:05
The only time that might change

00:52:28:05 – 00:52:30:16
is the second stage transaction

00:52:30:16 – 00:52:33:07
where new shares are introduced.

00:52:33:07 – 00:52:36:02
We may have a second loan now

00:52:36:02 – 00:52:38:21
inside loan, but when we’re refinancing,

00:52:38:21 – 00:52:40:10
that largely does not change

00:52:40:10 – 00:52:42:01
how shares are released.

00:52:42:01 – 00:52:43:17
It does change company cash flows.

00:52:43:17 – 00:52:45:04
It does change the balance sheet.

00:52:45:04 – 00:52:47:11
A lot is happening on the company side,

00:52:47:11 – 00:52:48:18
but it does not necessarily

00:52:48:18 – 00:52:51:05
affect the Esop

00:52:51:05 – 00:52:52:15
in terms of the share release.

00:52:52:15 – 00:52:53:13
It does in other ways,

00:52:53:13 – 00:52:55:19
but in terms of the share release.

00:52:55:19 – 00:52:57:23
So with these last few moments,

00:52:57:23 – 00:52:58:19
I want to,

00:52:58:19 – 00:53:01:04
ask you to connect with us on email

00:53:01:04 – 00:53:03:03
if you have other questions.

00:53:03:03 – 00:53:04:07
Does it make you.com?

00:53:04:07 – 00:53:06:01
There’s a whole wealth of information

00:53:06:01 – 00:53:07:04
there literature,

00:53:07:04 – 00:53:09:03
videos, things like that.

00:53:09:03 – 00:53:11:21
Check out Trevor or myself on LinkedIn,

00:53:11:21 – 00:53:12:20
follow our Esop

00:53:12:20 – 00:53:15:07
radio podcast on Apple, Spotify

00:53:15:07 – 00:53:16:16
or YouTube.

00:53:16:16 – 00:53:17:15
Do you want to be on?

00:53:17:15 – 00:53:18:16
Do you want to be a guest?

00:53:18:16 – 00:53:19:20
We have other,

00:53:19:20 – 00:53:21:19
founders, business owners,

00:53:21:19 – 00:53:24:19
current Esop parties on.

00:53:24:22 – 00:53:26:13
Shoot us an email.

00:53:26:13 – 00:53:28:16
We’ll try to set something up.

00:53:28:16 – 00:53:30:03
Otherwise

00:53:30:03 – 00:53:31:15
I don’t see any other questions.

00:53:31:15 – 00:53:33:23
So thanks for joining us today again.

00:53:33:23 – 00:53:34:17
I’m Ben Spade,

00:53:34:17 – 00:53:35:14
director of Esop

00:53:35:14 – 00:53:37:14
strategy here at Menke

00:53:37:14 – 00:53:39:16
and I’m with Trevor Gilmore, CEO.

00:53:39:16 – 00:53:41:10
Trevor, any final words?

00:53:41:10 – 00:53:42:18
Thanks everyone for joining us today.

00:53:42:18 – 00:53:44:15
Reach out if you have any questions.

00:53:44:15 – 00:53:46:01
Have an awesome day

00:53:46:01 – 00:53:47:08
and I’ll have a great day.

00:53:47:08 – 00:53:48:19
Thanks for looking for more episodes.

00:53:48:19 – 00:53:49:11
Take care everyone.

 

00:53:46:01 – 00:53:47:08
and I’ll have a great day.

00:53:47:08 – 00:53:48:19
Thanks for looking for more episodes.

00:53:48:19 – 00:53:49:11
Take care everyone.