Overview of Client Business Model
The Client is a privately-held freight/logistics broker headquartered in Oakland, CA. The company was founded in 2004 and arranges last-mile services for customers representing a wide variety of industries. One of the company’s core strengths is its ability to provide small to medium-sized trucking operations with an outsourced delivery solution while allowing the trucker to maintain and further develop their customer base. Essentially, the Client’s delivery solution affords the trucking operator the opportunity to eliminate employees and their fleet of trucks while sharing customer freight service revenues with the Client. The Client’s level of ongoing business with existing and new trucking customers speaks volumes to its patented logistics software and outsourced delivery solution.
The Company was severely impacted by the global recession beginning in early-2009. Revenues declined from approximately $30MM to $20M within a year, margins were compressed, and the Company posted its first operating loss in seven years. As a result, the Client was out of compliance with two financial covenants under its existing bank credit facility. The bank temporarily waived the covenant violations for a defined period of time and encouraged the Company to seek alternate lenders as the bank made clear they would not be renewing the credit facility.
Given the circumstances, in late-2009 the Company commenced a restructuring in parallel with seeking an alternate lender. The combination of a severe economic downturn, negative operating trends, and a tightening lending market forced the Client to negotiate a new credit facility with a lender of last resort. This outcome left the Company strapped with limited borrowing availability, significantly higher facility fees and borrowing rate, prepayment penalties, and onerous financial and other covenants including dividend restrictions and management compensation cuts. In addition, the new lender required personal guarantees from the majority shareholders of the Company.
Subsequent to the Company’s restructuring and about a year and a half into the relationship with the new lender, the Client’s operating trends and financial condition turned positive in early-2011 as a result of executing on the restructuring plan and building annualized revenues toward the $35MM mark. However, at that point the Company was still stuck with a rigid lender unwilling to expand the size of the credit facility to accommodate growth needs or modify the facility pricing and covenants to reflect the significantly improved financial condition and operating results of the Client.
After multiple introductory and fact-discovery meetings with the Client to thoroughly understand the problem and begin to formulate potential solutions, Dave Aguero was engaged by the Chief Executive Officer of the Company as an advisor to source a comprehensive credit facility that would fuel the Client’s growth opportunities and objectives while also delivering competitive market pricing and terms given the Company’s significantly improved credit profile. Once engaged, Dave tapped directly into his long-term relationships in the debt capital markets to quickly identify interested potential lenders to the Client given the company’s business model, current operating results, and growth objectives.
Four suitable lenders were then qualified over a period of approximately one month. Dave directed the organization and exchange of the company’s relevant financial and operating information, and subsequently guided the lender candidates through the due-diligence information along with the coordination of face-to-face meetings with the Chief Executive Officer and senior management of the Client. In addition to the coordination of the overall marketing process, Dave prepared three years of financial projections that validated the company’s growth plans and ability to adequately service the proposed incremental debt.
As a result of tapping the capital markets with the plan initiated by Dave, two of the four lender candidates pre-screened the proposed financing transaction and were able to provide proposals for comprehensive credit facilities that met the Client’s capital requirements to fund growth objectives.
Subsequently, the Chief Executive Officer and Chief Financial Officer of the Company collaborated with Dave and his advisory guidance to select MB Business Capital (a wholly-owned subsidiary of MB Financial Bank) of Chicago as the lender with the most competitive credit facility solution between the two candidates. MB Business Capital provided a comprehensive credit facility in the amount $5.2MM that included a $4.5MM revolving credit line based on an advance rate equal to 85% of eligible accounts receivable (formula-based borrowing) and a $700K term note fully amortized over a 3-year period. The credit facility was secured by all assets of the Company. Covenants were limited to a minimum EBITDA to debt service ratio and a minimum net worth requirement while dividend restrictions and management compensation limits were lifted as long as the Company remained in compliance with these two financial covenants. Facility interest rate pricing was reduced from a spread of 5.50% over Prime to a spread of 2.00% and annual commitment fees were cut in half.
- The Client was successful in closing a very competitive credit facility, in terms of size, pricing, and terms as compared to the previous deal with a lender of last resort given the improved credit condition and trends of the Company.
- The Company was able to save over $250K on an annualized basis in interest expenses and fees while also freeing up cash available for distribution to shareholders.
- Capital raised under the facility should be more than adequate to meet the Company’s growth objectives over the next 2+ years with the ability to expand the facility size beyond that time frame if revenue growth continues and profitability/operating objectives continue to be achieved. MB Business Capital’s appetite for credit exposure to the Company is greater than the current amount of the facility so the relationship has room to grow beyond current growth plans and is poised for a long-term partnership.
- Except for hourly CFO consulting services provided in the preparation of financial projections, the fee compensation for the sourcing and closing of the financing transaction was based on a predetermined percentage of capital raised and only payable upon the successful closing of a transaction.
- A significant portion of the time-burden associated with the transaction was removed from the existing workload of senior management.
- By closing the financing transaction with the new lender, the Company was able to eliminate “Going Concern” language contained in the Client’s Review Financial Statement Report prepared by its outside CPA firm.
- This successful financing transaction supports the idea that you don’t have to pay for a full-time CFO to get sophisticated CFO and Advisory services.