This is a cautionary tale for my fellow small business owners. I am going to tell it even though we’re a private company, and like most private companies, we regard our business as our business. But part of my business is to publish information that helps your business, so I’m going to tell this story anyway.
Take it as a warning about dealing with the major national banks who now dominate the Dallas banking market.
Several years ago we established a good working relationship with a small, independent lender outside of Dallas that specialized in the media business. Media lending is a specialty because it is cash-flow based rather than asset based. The lender has to have knowledge of how targeted media work, experience in dealing with the vagaries of advertising, and, in our case, a willingness to help a company grow.
The relationship worked well, and grow we did, more than doubling in size in four years. Last year we decided it was time to refinance and extend our debt. On the previous note, I had been the co-signer. We were now in good enough shape to remove that personal guarantee. We wanted a better rate, and we wanted more money to pay off acquisition debt and to finance planned start-ups and, maybe, some more acquisitions.
We put the deal out to bid.
In the meantime, our lender had been acquired by Wells Fargo Foothill, the small-business unit of the big, national bank. They agreed with us that it was a good time for refinancing, and they were eager to keep our business.
We had interest from several sources, including investment banks that have expertise in media. It quickly became apparent that the two best bids would come from a New York investment bank that had done a lot of similar transactions and from our old friends, now at Wells Fargo Foothill, the guys who knew our business best. Both offers had their pros and cons, and it took a lot of discussion back and forth and working the numbers before we settled on Wells Fargo Foothill. The other offer was a little better, but the differences were small enough that we settled on the more comfortable fit. After all, the bankers at Wells Fargo had worked with us for years.
The term sheet arrived a few days later. Three weeks after that, a team of auditors came in to do the due diligence. Meanwhile, a media investment bank was hired to do an independent market valuation. When all that was finished up, we were told we passed both with flying colors. It was a “done deal,” the head of the division told us. Once the legal documents were completed, they would be ready to fund.
The legal documents were being drawn when we got the phone call. A committee in the Santa Monica headquarters had overruled the division lenders. The deal was changed. Santa Monica wasn’t willing to lend as much money, and it had lowered the cash flow ratios on our performance qualifications.
Too much time had passed. We were too far into our business plan. We were stuck.
I shouldn’t have been surprised. Bankers are famous for saying yes, yes, yes, yes, no. But if this had been a retailer who lured me into his store because of one advertised rate and then switched the merchandise or the price, it would have been illegal. Wells Fargo Foothill had pulled a classic bait and switch.
The one thing the committee, however, forgot to change was the pre-payment penalty. There isn’t one. So we swallowed our pride and took the deal. And now we’re about to put our business out to bid again.
This time, we will only talk to Texas banks. No nameless, faceless “committee” is going to direct our destiny. If somebody wants our business, I want to look the decision-makers in the eye when they tell me what they’re willing to do for it.
The big, national banks serve a purpose. But not for us.
