Biz Funding Blog

Does Your Company’s Credit Score Matter?

I have clients who ask me, “I don’t plan on borrowing money now, so why does my credit score matter?” There are a multitude of reasons, but I will start with a couple well documented cases.

Real Life From A Lender's Perspective

Listed companies with a AAA rating (there are only a few) can borrow money at a premium to treasuries of only around 1%[1]. That means that when they do want to borrow money, they will pay an interest rate very close to the rate that the US Government pays on its debt. Conversely, junk rated companies pay a premium of around 8%[2] to US Government borrowings. That is quite a difference and makes a huge difference when it comes to cash-flow and the ability to service debt. These premiums and discounts vary depending on economic conditions, but the relationships are consistent.

Real Life From A Buyer's Perspective

On the company valuation side of things, the story is similar. Non-rated or junk rated companies trade at a discount of around 9%[3] to investment grade rated companies. Furthermore, a higher rated company will have a larger pool of potential buyers than a poorly rated company meaning that there will be a higher premium paid for control of the company in a transaction. The implications for smaller, private companies are clear:

A higher credit rating equates to lower borrowing costs, and
A higher credit rating will support a higher price in a sale.

When it comes to the value of your company consider the following:

The Business's Credit History Transfers to the New Owner

In an equity transaction your business’ credit history goes with the new owner. The business doesn’t get a clean slate just because you sell it. If your business has credit issues and a poor score, the business may have trouble finding funding or securing partners, which could affect its value. Anyone can check your business’ credit report without your knowledge or permission. Because poor business credit history can hurt a company’s chance of success, a low score can scare off potential buyers.

A Low Credit Score Impacts Buyers Ability to Secure Financing

If a potential buyer needs to finance the purchase of your business, the lender will often review business credit history as part of its decision. If the business’ credit profile is poor, it may be hard for your buyer to get a loan, or they may not be able to get as much as they need. That reduces the amount that you get up front. The sale could fall through, or you may have to accept a lower offer or self-finance.

It also becomes more difficult for you to get your business pre-approved for SBA loans, putting you at a huge disadvantage.

On the other hand, strong business credit may help a buyer obtain better financing to purchase your business - which means more money for you.[4]

Conclusion

Your company’s credit score matters a lot – well beyond the need for immediate cash. For serious business owners your company’s credit score is a foundational consideration for current and future borrowing, and potentially more importantly, the value you realize in a sale. A business owner can control the credit score of their business through a systematic process of borrowing and paying on time over time, but the data must get to the business credit agencies for this to happen. As of this writing fewer than 7% of vendors and lenders report to the business credit rating agencies so it is important to consult with a professional if you want to make a significant difference in your company’s credit rating.

About The Author: Jeff Croy is a Regional Managing Partner with J. Galt Finance Suite. He has over 20 years of corporate finance advisory experience and holds an MBA from the Olin School of Business at Washington University. Jeff’s practice is dedicated to leveling the financial playing field for small private companies across the US. Jeff can be reached at jcroy@jgalt.io.

[1] Montana Department of Revenue, 2021

[2] Montana Department of Revenue, 2021

[3] Elsever Journal of Corporate Finance, December 2008

[4] BizBuySell, By Gerri Detweiler, Author and Education Director, https://www.bizbuysell.com/learning-center/article/dont-let-business-credit-history-derail-your-business-sale/

Want To Be Acquired?

Essential Information for Due Diligence in an Acquisition

When preparing for an acquisition, thorough due diligence is key to uncovering the true value of your business and ensuring a smooth transition. As a business owner, compiling and organizing the right information will not only expedite the process but also instill confidence in potential buyers. Here’s a comprehensive list of the critical information you should prepare:

Corporate Documents

Business Formation Documents

Articles of incorporation, bylaws, and any amendments.

Ownership Structure

Details of shareholders, equity distribution, and any agreements related to ownership.

Minutes of Meetings

Board and shareholder meeting minutes, including decisions made and actions taken.

Financial Information

Financial Statements: Audited financial statements for the past 3-5 years, including balance sheets, income statements, and cash flow statements.
Tax Returns: Federal and state tax returns for the past 3-5 years.
Accounts Receivable and Payable: Detailed aging reports and analysis.
Budgets and Forecasts: Current and historical budgets, financial projections, and forecasts.

Legal Documents

Contracts and Agreements: Copies of all significant contracts, including customer contracts, supplier agreements, lease agreements, and any other binding agreements.
Intellectual Property: Documentation of patents, trademarks, copyrights, and any pending IP litigation.
Litigation History: Records of past or current legal disputes, including settlements and judgments.

Operational Information

Business Plan: Current business plan and strategic objectives.
Organizational Chart: A detailed chart showing the structure of your business and key personnel.
Employee Records: Employment contracts, compensation details, and benefits information.
Vendor and Supplier Information: Key supplier and vendor agreements, along with performance reviews.

Customer and Market Data

Customer Information: Key customer contracts, customer segmentation, and sales history.
Market Analysis: Reports and analysis on market trends, competition, and industry positioning.
Customer Feedback: Surveys, reviews, and other feedback that reflects customer satisfaction and market position.

Assets and Liabilities

Fixed Assets: Details of owned property, equipment, and any other significant assets, including valuations and depreciation schedules.
Inventory: Detailed inventory records, including current levels, valuations, and turnover rates.
Liabilities: Documentation of current liabilities, including loans, credit lines, and other financial obligations.

Compliance and Regulatory Information

Licenses and Permits: Copies of all necessary business licenses and permits.
Regulatory Compliance: Documentation demonstrating compliance with industry regulations and standards.
Health and Safety: Records related to workplace health and safety compliance.

Insurance Policies

Insurance Coverage: Details of current insurance policies, including coverage limits, premiums, and any claims history.
Risk Management: Information on risk management strategies and procedures.

IT and Systems

Technology Infrastructure: Documentation of IT systems, software, and hardware used in business operations.
Data Security: Policies and procedures related to data protection and cybersecurity.

Strategic Plans

Growth Strategie:. Information on any planned expansions, new products or services, and market entry strategies.
SWOT Analysis: A comprehensive SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to provide insight into your business’s strategic positioning.

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Conclusion

Preparing for an acquisition involves meticulous organization and transparency. By compiling these essential documents and information, you’ll not only streamline the due diligence process but also enhance your credibility with potential buyers. Being well-prepared can significantly influence the negotiation and valuation process, ultimately leading to a successful transaction.

If you need assistance with compiling or organizing this information, contact us and we will organize this effort for you.

How Should I Organize My Records for a Buyer?

Maintaining due diligence information for potential buyers is a critical aspect of preparing your business for sale. It ensures that the process runs smoothly and that potential buyers have a clear and comprehensive view of your business. Here’s a guide on how business owners should effectively maintain and manage this information:

Organize and Categorize Documents

Create a Centralized Repository:

Establish a secure, centralized location—such as a cloud-based document management system—for storing all due diligence information. This ensures easy access and consistent organization.
Categorize Information: Organize documents into categories such as corporate documents, financial statements, legal records, operational data, and customer information. Use clear and consistent labeling to facilitate easy retrieval.

Keep Records Up-to-Date

Regular Updates: Regularly update financial statements, tax returns, and other key documents to reflect the most current information. This helps in providing accurate and reliable data to potential buyers.
Monitor Compliance: Ensure that all compliance documents, such as licenses and permits, are current and reflect any recent changes in regulations or standards.

Ensure Accuracy and Completeness

Verify Information: Double-check all documents for accuracy. Inaccurate or incomplete information can lead to mistrust or complications during the due diligence process.
Seek Professional Help: Engage with accountants, legal advisors, and other professionals to review and verify financial and legal documents. Their expertise can help ensure that all information is accurate and compliant with regulations.

Implement a Secure Document Management System

Access Controls: Use a secure document management system with access controls to manage who can view or edit sensitive information. Ensure that only authorized personnel have access to critical documents.
Backup and Security: Regularly back up all digital documents and implement robust cybersecurity measures to protect against data breaches or loss

Prepare for Confidentiality

Non-Disclosure Agreements (NDAs): Require potential buyers to sign NDAs before sharing sensitive information. This helps protect your business’s proprietary data and ensures that the information is used only for the purpose of the acquisition.
Controlled Access: Share sensitive information in stages, starting with high-level summaries before providing more detailed data. This allows you to control the flow of information and maintain confidentiality.

Maintain Detailed Records of Communications

Document Interactions: Keep detailed records of all communications with potential buyers, including meetings, phone calls, and email exchanges. This documentation can be useful for tracking progress and addressing any issues that arise.
Feedback and Questions: Record any questions or feedback from potential buyers. This can help you address concerns more effectively and improve the presentation of your business.

Provide Clear Explanations and Context

Accompany Documents with Explanations: Include explanations and context for key documents, especially those that may require interpretation, such as financial projections or operational data.
Be Transparent: Transparency in providing information can build trust with potential buyers and facilitate a smoother negotiation process.

Prepare for a Data Room

Virtual Data Room (VDR): Consider setting up a virtual data room for secure and efficient information sharing. VDRs allow potential buyers to access documents online in a controlled environment, facilitating easier review and due diligence.
Organize the VDR: Structure the VDR with clear categories and a user-friendly interface to help potential buyers navigate through the information.

Regularly Review and Audit Your Records

Internal Audits: Conduct regular internal audits of your due diligence materials to ensure everything is up-to-date and accurate. Address any discrepancies or issues promptly.
Professional Reviews: Periodically have your documents reviewed by external professionals to ensure they meet industry standards and best practices.

Prepare a Due Diligence Checklist

Create a Checklist: Develop a comprehensive checklist of all documents and information needed for due diligence. This ensures that you don’t overlook any critical items and helps you stay organized throughout the process.
Update the Checklist: Regularly update the checklist to reflect any changes in requirements or additional information that may be needed.

Conclusion

Maintaining due diligence information effectively is a key component of a successful business sale. By organizing, updating, and securing your documents, you can facilitate a smoother process for potential buyers and enhance the overall credibility of your business. Proactive management of this information not only builds trust but also positions your business favorably in the eyes of prospective buyers.

If you need assistance with this process, consulting with legal and financial professionals can provide valuable guidance and ensure that your due diligence efforts are comprehensive and effective.