Negotiating a business deal with a Bank:
The Seven-point recipe.
Most CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Some CFOs have an uncanny knack of having their way through. Look at Mr Ajay, an young CFO who joined Merkel and Co a pharma franchisee with a Rs.100cr turnover during the last three years. The Chairman told Ajay on the day of joining, that the company is looking to expand its brand-image and improve its overseas’ sales by at least 150% in the next year and doubling it the next year. Banks are shying away at the moment. The enterprise requires higher working capital and packing credit facilities. The challenge, he could see, is formidable. He thought he had a recipe and it worked. How did it work?
Banks usually are tight-fisted in times of recession to grant enhanced limits. They also have full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations.
But Ajay was sure that the Banks would not like to lose a good client for another bank. Since Merkel is a company of proven track record he was hopeful of the deal for higher limits on both working capital and export packing credit.
He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his home work well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which Merkel would like to expand; the types of clients the company is targeting; the distribution system of the new markets; the incentives company has on table; the drug controls of both India and the Asian economies in which the company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections. He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that the depth of the officials on the areas requiring attention was not so high, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank. He awaited a call from the bank three days after the first call. He went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when absolutely necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.
The recipe is simple:
1. Do your homework well: know your own enterprise, its SWOT.
a. Brainstorm possible implications of the proposal with the Board and internal management
b. Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed
c. Go as a team for presentation with your confident technical and financial team for discussion.
2. Do not thrust yourself at inconvenient times for the banker
3. Be transparent during negotiations
4. Be humble
5. Never hide the data.
6. Go with a vision and a future plan
7. Give reasonable time to the Bank to think and come back with their offer.
The Seven-point recipe.
Most CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Some CFOs have an uncanny knack of having their way through. Look at Mr Ajay, an young CFO who joined Merkel and Co a pharma franchisee with a Rs.100cr turnover during the last three years. The Chairman told Ajay on the day of joining, that the company is looking to expand its brand-image and improve its overseas’ sales by at least 150% in the next year and doubling it the next year. Banks are shying away at the moment. The enterprise requires higher working capital and packing credit facilities. The challenge, he could see, is formidable. He thought he had a recipe and it worked. How did it work?
Banks usually are tight-fisted in times of recession to grant enhanced limits. They also have full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations.
But Ajay was sure that the Banks would not like to lose a good client for another bank. Since Merkel is a company of proven track record he was hopeful of the deal for higher limits on both working capital and export packing credit.
He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his home work well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which Merkel would like to expand; the types of clients the company is targeting; the distribution system of the new markets; the incentives company has on table; the drug controls of both India and the Asian economies in which the company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections. He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that the depth of the officials on the areas requiring attention was not so high, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank. He awaited a call from the bank three days after the first call. He went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when absolutely necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.
The recipe is simple:
1. Do your homework well: know your own enterprise, its SWOT.
a. Brainstorm possible implications of the proposal with the Board and internal management
b. Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed
c. Go as a team for presentation with your confident technical and financial team for discussion.
2. Do not thrust yourself at inconvenient times for the banker
3. Be transparent during negotiations
4. Be humble
5. Never hide the data.
6. Go with a vision and a future plan
7. Give reasonable time to the Bank to think and come back with their offer.
A very useful recipe for the entrepreneurs. Simple and straight!
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