Offer 2: Traditional Business Bank Cougar Doors has been offered a term sheet from Main Street Bank (MSB), community bank, which Cougar Doors has an existing relationship with for approximately 30 years.  MSB is a small, rural community bank in good financial health. MSB has a long-term relationship with Cougar Doors and recognizes they are a major employer in town and wants to support a local business.

QUESTION

Offer 2: Traditional Business Bank

Cougar Doors has been offered a term sheet from Main Street Bank (MSB), community bank, which Cougar Doors has an existing relationship with for approximately 30 years.  MSB is a small, rural community bank in good financial health. MSB has a long-term relationship with Cougar Doors and recognizes they are a major employer in town and wants to support a local business.

MSB has offered Cougar Doors $12,000,000 to acquire a competitor in the commercial door business.  Cougar Doors wants to acquire Doors Unlimited, a 50-year old business, based in Tampa, Florida.  Doors Unlimited is a healthy company with more than $6,000,000 in annual revenues and $1,250,000 in EBITDA.

The deal is structured as a loan at 10% over 30 years.  MSB’s deal of 10% is at the going rate for this type of transaction and no other bank has made an offer, despite Cougar pitching this deal. MSB has placed a few loan covenants on this transaction.

1. MSB is preventing mergers or acquisitions without permission.
2. MSB is restricting or forbidding distributions and/or dividends paid to shareholders.
3. MSB is preventing investment in capital equipment, real estate or other businesses without separate permission.
4. MSB reserves the right to approve any future business deals outside the State of Missouri.

If any of these covenants are tripped, MSB has the right to restructure the deal with more covenants or force the company to repay the loan in full.

ANSWER

Financing Opportunity for Cougar Doors: A Traditional Business Bank Option

Introduction

In a significant development for Cougar Doors, a well-established business with a longstanding relationship with Main Street Bank (MSB), the community bank has extended a term sheet offering a loan of $12,000,000. This loan is intended to facilitate the acquisition of Doors Unlimited, a thriving competitor in the commercial door business based in Tampa, Florida. As a reputable community bank, MSB recognizes the importance of supporting local businesses and understands Cougar Doors’ significance as a major employer in the region. This essay explores the terms and conditions of the loan, its covenants, and the potential benefits and considerations associated with this traditional banking option.

Loan Details

The loan offered by MSB to Cougar Doors is structured as a 30-year term loan with an interest rate of 10%. This interest rate aligns with the prevailing market rate for such transactions (Heakal, 2022). Despite Cougar Doors’ efforts to secure alternative offers, MSB remains the sole institution to present this financing opportunity. Given their existing relationship and the bank’s financial health, Cougar Doors can rely on the stability and reliability of MSB as a trusted financial partner (Banton, 2023).

Loan Covenants

To safeguard its interests, MSB has imposed certain loan covenants on Cougar Doors’ acquisition. These covenants aim to ensure responsible financial management and maintain the long-term stability of the company. The identified covenants include:

Restriction on Mergers or Acquisitions: MSB prohibits Cougar Doors from engaging in any mergers or acquisitions without obtaining prior permission. This clause ensures that the company’s growth strategy aligns with MSB’s risk appetite and strategic objectives.

Restriction on Distributions and Dividends: MSB restricts or forbids Cougar Doors from making distributions or dividends to shareholders without separate permission. This provision prevents excessive shareholder payouts that could potentially impact the company’s cash flow and hinder repayment of the loan.

Restriction on Investments: MSB requires separate permission for investments in capital equipment, real estate, or other businesses. This measure ensures that Cougar Doors remains focused on the intended purpose of the loan, namely, the acquisition of Doors Unlimited, without diverting funds to unrelated ventures.

Approval for Out-of-State Business Deals: MSB reserves the right to approve any future business deals outside the State of Missouri. This provision enables MSB to assess and mitigate potential risks associated with business activities in unfamiliar jurisdictions.

Consequences of Covenant Violation

In the event that Cougar Doors fails to comply with any of the imposed covenants, MSB retains the right to restructure the loan with additional covenants or demand full repayment. These consequences serve as a deterrent against irresponsible financial behavior and reinforce the bank’s commitment to protecting its investment.

Conclusion

Main Street Bank’s term sheet offering Cougar Doors a loan of $12,000,000 presents a compelling opportunity for the company to acquire Doors Unlimited, a successful player in the commercial door business. With MSB’s long-standing relationship with Cougar Doors, recognition of the company’s local significance, and a competitive interest rate, this traditional business bank provides stability and reliability in financing. While the loan covenants introduced by MSB aim to protect the bank’s interests, Cougar Doors should carefully assess the impact of these restrictions on its operations and growth plans. Overall, the term sheet from Main Street Bank is an option worth considering as Cougar Doors moves forward with its expansion strategy.

References

Banton, C. (2023). Interest Rates: Different Types and What They Mean to Borrowers. Investopedia. https://www.investopedia.com/terms/i/interestrate.asp 

Heakal, R. (2022). Forces That Cause Changes in Interest Rates. Investopedia. https://www.investopedia.com/insights/forces-behind-interest-rates/