Nontraditional Funding: Is it Right for You?By Garry Bartecki
Article Date: 08-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Here’s one viable, albeit expensive, option that can help strong marketshare dealers ride out the storm.
While planning for the 2010 CFO Conference, I happened to meet an equity fund manager who expressed an interest in construction equipment distribution – yes, there are actually people out there who still have faith in your industry.
I ended up inviting Nick Agliata to present at this year’s conference; Nick manages FB Investors LLC, located in Chicago. What interests me is that Nick is interested in the dealer business, has a criteria he uses to decide if a dealer is a candidate for his type of financing, is not really interested in a control position in the company, and will help negotiate his exit with the institution willing to fund his exit – a pretty flexible business model.
I recently interviewed him to dig a little deeper.
Why Are You Interested in Equipment Dealers?
Nick believes dealers that sell and service construction equipment and material handling equipment, both of which are vital to the U.S. economy, have little risk of disappearing from the marketplace. Nick also believes that dealers selling major brands and holding significant marketshare in their territory will survive because they will also have the best management team available. These bettermanagement teams help him manage risk and achieve acceptable returns. He also believes it is in the manufacturers’ best interest to support their key dealers. FB’s ability to provide funding to key dealers unable to raise funding on their own is a win-win for both the manufacturer and dealer.
What Criteria Do You Use to Review a Candidate?
• Dominant market share
• A history of thriving in good times and surviving in down cycles with superior, industry-experienced management
• Business models that include low 30s to 40 percent in revenues generated from product support
• Full-service dealer representing a major brand
What Are You Prepared To Do?
FB Investors would like to fund acquisitions or provide the capital required to right size the dealer’s balance sheet until the business returns to post-recession levels. We all realize that the recession depleted capital reserves and created a need for long-term capital. We are probably talking a three- to seven-year commitment. Best of all, FB Investors is more interested in investing than in buying the company. Structures may take the form of preferred stock or subordinated debt, with flexible terms geared to projected and actual cash flows. In fact, FB Investors has structured investments where no annual payments are required until cash flows allow.
We all know that dealer consolidation is back on the table, but acquisition financing is tough to find. Where manufacturers and dealers are working together to improve a dealer network, FB Investors may be an ideal partner since ownership is not part of their game plan.
What Is Your Exit Strategy?
We can’t be naive about this. FB Investors is providing high-risk funding and its return is commensurate with the risk they take. When cash flow allows, dealers can make “current interest” payments to lower the back end payment, but regardless of the structure, FB Investors’ return will reflect the risk and will exceed the cost of traditional bank financing. Dealers interested in this program should think about FB as a short-term, “white knight” type of partner instead of a lender. And with decades of experience, FB Investors has numerous contacts in the capital markets and will lend its network and capital markets negotiating expertise to the dealer when it comes time for FB Investors to exit the business.
Nick concluded with this: “One day soon, banking regulators will push harder on the banks to bring their noncompliant loans into compliance, and those dealers who have aligned themselves with sophisticated investors will have a much easier go of it than those who wait until the last minute. While more expensive than traditional bank funding, the benefit of being able to pass a healthy business onto another generation or a synergistic buyer because of having FB Investors step in as a short- to medium-term partner will provide more than adequate pay back.”
Nick will be present at both the Executive Forum Sept. 16-17, and the CFO Conference Oct. 14-15. He can be reached at email@example.com.
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