Search Party

Living the ETA Investment Life Cycle with your Lender

Apr 15, 2025

In this engaging discussion, ETA veteran Chandos Mahon, Managing Partner at Castle Capital, reflects on his journey leading Castle Tire through multiple acquisitions, emphasizing the vital role of lenders like Conor Tidgwell from Avidbank. Anthony Walker from Next Coast Legacy adds insights on supporting searchers in lower middle-market acquisitions. The trio underscores the importance of treating lenders as strategic partners. Transparent communication and financial flexibility are highlighted as keys to navigating the complexities of debt structure and ensuring growth.

31:52

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Episode guests

Anthony Walker

Conor Tidgwell

Chandos Mahon

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Episode notes

Podcast summary created with Snipd AI

Quick takeaways

Treating your lender as a strategic partner fosters a strong relationship essential for long-term success in ETA investments.

Radical transparency between CEOs and lenders enables flexibility and builds trust, allowing for proactive support during challenges.

Deep dives

The Importance of Lender Relationships

Maintaining a close relationship with a lender is crucial for success in an ETA investment, as the lender often represents the largest portion of the capital stack. As businesses evolve, so do their capital needs, necessitating constant communication with lenders to provide insights on the business's growth and operational changes. This ongoing dialogue ensures that when additional financing is needed—such as for acquisitions or capital projects—the relationship is strong enough to facilitate smoother negotiations. Consistent interactions alleviate the fear that may arise when lenders only hear from CEOs during challenging times, allowing for a more proactive approach to business needs.

Intro

2min

Building Strong Lender Partnerships

9min

Navigating Financial Flexibility in Credit Agreements

2min

Navigating the Challenges of ETA Investments in the Waste Services Sector

3min

Navigating Add-On Acquisitions and Debt Strategies

13min

Navigating Financing in the ETA Investment Process

2min

The relationship between lender and lower-middle-market CEO is a critical factor in the success of ETA deals, say veterans of the Entrepreneurship-Through-Acquisition strategy. This episode of Search Party is about how to get the most from your lender over the lifecycle of an ETA investment, with expert commentary from ⁠Castle Capital ⁠Managing Partner and ETA veteran Chandos Mahon, Conor Tidgwell of ⁠Avidbank⁠ and Anthony Walker of ⁠Next Coast Legacy. ⁠

Central to the conversation is the story of the relationship between Avidbank's Tidgwell and Mahon, who as an ETA acquired, ran and ultimately sold a recycling business called Castle Tire. Under Mahon's leadership, the lower-middle-market company did a total of ten add-on acquisitions financed by Avidbank, plus a facility financing. Along the way, Castle Tire's debt structure changed again and again, with close and transparent coordination between borrower and lender.

Among the key takeaways from the engaging and lively conversation:

Treat your lender as a strategic partner, not just a source of capital. In an ETA deal, the lender often provides the largest slice of the capital stack, making frequent, transparent communication a key to long-term success. “Your lender is your largest investor. Avidbank was my largest partner in this deal," notes Mahon.

"Radical transparency" enables flexibility and prevents surprises. Lenders are more likely to support growth or navigate tough times if they’re looped in early and often. According to Avidbank's Tidgwell, “If we get caught with a surprise and we’re in a reactive mode, that’s typically when lenders are less flexible.”

Financing tuck-in acquisitions requires confidence in cash flow and covenant wiggle room. Lenders are open to supporting add-on acquisitions, but only when the platform business has proven stability and enough covenant cushion to absorb uncertainty. “We’re looking for probably a half turn, at least, of cushion on these covenants. We want to make sure it’s an add-on that makes sense for the business, but I think you always start with the numbers, to make sure there’s adequate cushion out of the gate," says Tidgwell

Covenants can - and should be - adjusted to support growth. If a company's expansion plan makes strategic sense, lenders are often willing to rework covenants to accommodate short-term trade-offs for long-term gains. Walker described a Next Coast portfolio company meeting in which “the lender kind of raised their hand and said, ‘Hey, why are we talking about constraints here? What does the business need? Isn’t the right decision to relax the covenants in the interest of pursuing that growth?’”

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