By John R. Brooks and Erwin G. Krasnow, Esq.
In the past, we’ve written articles for Radio + Television Business Report about how to find a lender, how to work with your lender in tough times and on how to love your lender. But what often goes unsaid are the many failed and contentious encounters between borrower and lender. If lenders and investors were to be candid, they will admit that as many as 90% of the deal pitches made to them are rejected. Here, we share examples of what not to do.
Based upon our experience, it’s shocking how totally unprepared some loan applicants are in having a serious conversation about why they should be entrusted with the lending firm’s money.
As a cautionary tale, here are five episodes from the battlefield of one of the co-authors of this article, a veteran media lender, as examples of what not to do:
- A prospective borrower was very well connected in financial and political circles. He did not lack self-confidence about his wealth and his business acumen. He assumed that just dropping his name was enough to get a deal done then and there. He wanted a 5x cash flow loan for the purchase of a radio station and was indignant when asked for financial statements. “John, if you want to succeed in this business, you need to be more aggressive in convincing potential borrowers to do business with your firm.” He eventually got his deal done — with financial statements and another lender.
- Another prospective borrower wanted 100% debt financing for a radio station because it was worth double what she had agreed with the broker to pay. The problem was she had no proof of her estimate of the worth of the station and was insulted when told: “A business is worth only what the buyer will pay for it.” If the station somehow appraised for more, the real value was the lesser of the appraisal or the proposed sale price. That deal never got done.
- In the midst of an easy money period, a prospective borrower seeking a refinance relied on an astronomical growth rate in order to make his deal work. He claimed that the economy and the audience of the stations in the markets where his stations were located grew much faster than the national average. Unfortunately, his proof was flimsy at best and his projections showed endless losses. The lending officer was in a quandary because his then-employer actually took these claims at face value. The company ultimately filed for bankruptcy.
- Another borrower with a 7-figure investment portfolio personally guaranteed his loan. When his loan went into default and he had one of those uncomfortable bank meetings, he insisted that he wanted to keep his business and personal affairs separate. Apparently he didn’t understand what a personal guarantee meant. He had the wherewithal to stand behind his deal, at least a little tiny bit. Just throw the bank a bone. He did not and lost control of his stations.
- Lastly, there was the borrower whose loan went into default and in yet another uncomfortable bank meeting he defiantly announced his restructuring plan: the bank would wave all payments for a year. What was his contribution? Nothing, and he presented no written plan of any sort. Now that’s chutzpah. He also lost control of his stations.
What are the lessons learned? Lenders will often forgive ignorance and work with people who are honest and forthright. It’s arrogance that gets others into trouble. Also, for broadcasters, “working with your lender” means having a two-way dialogue that begins before the first term sheet and continues until the loan is paid in full. A key part of the dialogue is keeping the lender informed at all times, especially about bad news. The goal is to build a solid relationship that continues through many long and mutually profitable years.
About the authors:
John Brooks had been a media banker and CFO for over 30 years until losing his teenage daughter Casey to suicide in 2008. Since then he’s turned to mental health advocacy, writing and working with teens in Marin County, California. His memoir, The Girl Behind The Door, was released by Scribner in February, 2016. Reach him at: [email protected] and (415) 272-5123.
Erwin G. Krasnow, a partner with the firm of Garvey Schubert Barer, is a former General Counsel of the National Association of Broadcasters, Washington counsel to the Media Financial Management Association and co-author of Profitably Buying and Selling Broadcast Stations. Reach him at: [email protected] and (202) 298-2161.
This column originally appeared March 7, 2016 in RBR+TVBR
