Recent figures suggest that 60% of businesses will change hands over the next ten years. According to a recent RBS Citizens Bank survey, nearly 80% of mid-market firms anticipate at least one acquisition in the short term and, conversely, one-third are open to outside investors. Whether you are the one doing the buying or the selling, a significant transition can offer a once in a lifetime opportunity to fulfill your dreams, or turn into a complete nightmare. Whatever the transaction -- a sale, succession, restructuring or transition to a new capital facility, the key is to be prepared, be proactive not reactive, and to minimize risk by getting help in the areas of the business that aren’t part of your expertise, knowledge or skill set.

The Lone Ranger Syndrome

The entrepreneur, as many small business owners are, is accustomed to -- and usually thrives on -- solving problems alone. However, most successful business owners don’t do everything on their own. Realizing the need for and getting help can be a huge hurdle; not seeking it can be an even bigger obstacle to success. Many private equity investors or the stakeholders in lower middle market companies are of the opinion that their CEO or CFO should be able to handle any transition. This may be the case. If so, it should be in their job description and vetted during the hiring process because if not, you may as well be asking them to learn to shave on your face.

We asked an entrepreneur, Frank Vezer owner of Vezer Family Vineyards and client of Business Capital his opinion on what is at the root of this general hesitance and how he got beyond it. He explained: “If you are honest with yourself, you are your own best expert but, we can’t always step out and take an aerial view so sometimes experts are needed. In your gut, you will know right away if the expert can help or not.”

Often, the very virtues that generate success –- creativity, decisiveness, aggression, fearlessness in the face of risk –- can quickly become vices, especially in times of important transition without the proper advisors. Creativity has to follow logical, financially sound steps in order to produce the best business result. A track record of being “the decider” can lead to inflexibility, resulting in bad decisions. Being overly aggressive or a pro-risk gunslinger could lead a serial entrepreneur to quickly diversify into a new line which is not the company’s core competency in order to take advantage of the market. This can also lead to some not well-thought out business moves.

Sometimes, It's Better to Ride Together

For a small business in transition, it can be a necessity and advantage to have a well selected team of trusted advisors in place throughout the process. Not having an experienced team in the middle of the battle increases the both strain on the stakeholders and business, and the risk of failure. Whether it’s a CPA firm to keep on top of changing tax laws, a law firm to maneuver through the hundreds of federal rules and regulations affecting small business, or a team of experienced financial advisors to navigate through the fragmented financial markets, it is often crucial to have objective, third party support. Professionals can bring a depth of knowledge and network of relationships to draw on that the individual business owner may not have.

The importance of the ability to step back is captured by Sun Tzu, an immensely influential Chinese philosopher and master of strategy on winning battles. He said: “A leader should not be in the midst of his forces, but a little distance apart. Otherwise, his outlook will be distorted and he will misjudge the situation as a whole.”

Charging Through Fragmented Financial Markets

In today’s rigid credit market, securing funding can be a real challenge for companies or transactions that don’t fit into the “bankable box” and a team of true financial advisors can be critical to accessing liquidity. However, when it comes to getting outside expertise, small business owners and private equity investors can often be particularly hesitant to cede responsibility in the area of finance. This can turn out to be penny wise and pound foolish and cost months, even well over a year of wasting precious time and resources searching for the best way to refinance debt or going down the path of raising capital alone. The desire to do everything by yourself can often come at the expense of the greater need to be concentrating on running the business and generating revenue –- instead of being bogged down with the logistical nightmare of talking to 50 different funding sources while the business atrophies. Months later, if that one funding source says “no, we would like to take another look at your progress after Q4,” the painful process starts all over… but now it’s with a deal that may be perceived as stale or shopped and a balance sheet that is much less healthy. Bringing in financial experts at the outset can expedite the process and help preserve plenty of dry powder and stakeholder energy, which comes in handy for weathering a transition of any kind.

Trusting the Right Partner

Whether your business is in need of capital for growth and acquisitions or is forced to find a new funding source because of blown covenants with an incumbent lender, there are many things to be aware of when choosing an advisor or new funding source. Especially if it’s a difficult piece of capital, expertise in the credit markets can be critical in plotting a strategic course and it is important to choose the right one. Aside from compensation structure, what are some basic things to consider?

• check references
• vet reputation
• consider longevity
• know the difference between your options
• identify who you are dealing with - a team or only one person? Where are you if something happens to him/her?

As a regular provider of credit facilities to small business, we asked a senior vice president of a large national bank to explain what value he thought advisors bring to the table and what guidance he would give business owners in comparing options. In his view: “Brokers have a more limited role compared to an advisor. An advisor provides strategic direction, advises on alternative capital structures and provides third party solutions. An advisor can recommend various financial alternatives that a business owner may not be thinking about. In either case, most of the compensation should be based upon success.”

Is it Time to Change Horses?

Business owners don’t usually change lenders more than three times in the life of the business, some never do. Usually, when a business owner does change financial horses, it is at a critical juncture. They don’t have much –- if any -- experience in finding elusive lending sources or negotiating the best deal structure. On the other hand, a financial advisor is part of this process every day.

For something this important, it takes a team who can:

• Offer objective input on what is needed for the health of the business
• Secure the “needle-in-the-haystack” lending source
• Structure a flexible out-of-the-box credit facility, if necessary
• Inject competition into the process to get the most cost effective, intelligently structured capital possible
• Leverage industry relationships and reputations
• Provide augmentation to the Company’s staff, providing valuable return on time and resources
• Create urgency and set a rhythm to the deal process and execute through to funding

Case Study #1: A Mechanical Contractor is a Mess

A family owned mechanical contractor delivering full design, construction, fabrication and maintenance services for complex plumbing, piping and HVAC systems attempted to diversify, in order to take advantage of market opportunity, into an area well-outside their core competency. Great resources were allocated to this joint venture and, by the time the project was halted, the company was overextended, deficient in covenants and forced to leave their bank. The company needed $1M just to continue to operate. This was an aggressive but not well-thought out plan that put them in a real tight spot. The company had to repay the total credit facility outstanding of $6.5M within 90 days or face liquidation. This company had a gun to their head, had run out of time and was losing out on opportunities to bid on new jobs.

After five months of delays and no firm answers from the bank they were pursuing, they decided to enlist the help of a team of financial advisors that reached out to over 50 targeted lending sources and delivered the new credit facility in 60 days.

Case Study #2: Supplement Distributor Needs a Boost

This growth transition was based on a risky strategy and process that were not well-thought out. As a former athlete and then entrepreneur, this small business owner had a track record of achieving success on many levels. Accustomed to winning on the field and in the boardroom, he and his CFO resisted bringing in an outside financial expert who could have delivered a funding source quickly to support his plans for rapid growth. After months of romance and promise with a bank’s relationship manager, the credit committee declined the loan. The company found itself in the middle of a liquidity crunch with too much inventory and even more pressure to find funding. This resulted in another bad decision --  engaging a finance company which was not properly vetted but promised to deliver an ABL facility. A couple of months and thousands of upfront deposit dollars later, the lender delivered a high priced factoring facility, which was not what the company had asked for or was promised. The company is now in the position of starting over for the third time, pursuing an asset based lending facility under increased pressure and with little traction in the credit market. Taking the difficult but necessary steps at the beginning of the process would have allowed the business stakeholders time to find outside experts to help in areas they were not as skilled at and provided more time to vet and find a seasoned, reputable financial partner. Consider these words from our 26th president:

“The best executive is the one who has sense enough to pick good men to do what he wants done…” Theodore Roosevelt

Transitioning, especially in these difficult times can be challenging, especially for lower middle market business. The good thing is that many small businesses are equipped with an entrepreneurial mind at the helm that is creative, risk-taking and an exceptional tool for success. The bad news is that sometimes these very attributes can get in the way, cloud objectivity and lead to bad business decisions. The reality, as ugly or difficult a pill as it is to swallow for the solo entrepreneur or investor backed small business, is that a successful transition may require getting help in the areas of the business that aren’t part of your expertise, knowledge or skill set. Recognizing this and reaching out at the right time to the right resources can greatly influence the future health of the business.