Warnings of a downturn in the economy have made me concerned about my relationship with my lender. We tend to push the envelope. Any tips on warding off a problem?

Posted by on with 0 Comments

Know your business and know your lender!

Those of us in the corporate finance business shudder when we see the “R” word popping up in various media reports. Our concern results from our past experiences, which have tended to be unpleasant, particularly with the lending community. Those borrowers that require nurturing and hand holding on a regular basis suddenly seem to lose their appeal almost over-night. What seemed reasonable with your lender last month is suddenly unacceptable.

If your business continues to push the borrowing envelope, if you feel that your banking relationship is “on the bubble”, you must prepare a comprehensive cash flow analysis, forecasting out for a minimum period of six months, prepared on a weekly basis. This project requires a tremendous commitment of time and energy, however, once completed, you and your management team will feel more in control. Focus on actual dates for paying bills, collecting receivables, scheduled inventory purchases and employee remittances. Update it daily. When preparing and updating your cash flow model, also consider and build in the following:

  1. Hold your sales forecasts to your historical experience. Use your previous year as a starting point. Gonfvirbfuddconschan . Allow increases only if there are firm orders in hand. Adjust your operating expenses to match the forecasted sales levels.
  2. Focus on your accounts receivable, split the serious accounts between your management team and push collections. Tighten your credit policies and remember that the margin generated on the initial sale is not important when you can’t subsequently collect.
  3. Walk the talk when it comes to reducing inventory levels. And get rid of out of date and surplus stock.
  4. Dispose of idle equipment that’s sitting around and no longer important to your production cycle.
  5. Tighten your employee and management team. Make some hard decisions if necessary re personnel.
  6. Keep current with all payroll remittances and HST.
  7. Isolate your particular lending covenant requirements such as debt to equity and margin ratios such that you can immediately identify in your forecast when a problem is likely to arise.
  8. Consider the implementation of temporary additional financing such as factoring or alternatively, an asset based finance approach.
  9. Share information with management and ask for their input.

Finally, make a detailed presentation to your lender. If there is a problem, show them how you are going to resolve it ahead of time. Impress your lender by demonstrating commitment and the ability to make critical and tough decisions. At the same time that you’re building credibility, you will be building a trusting relationship.

Norman Seawright, CA

Norman Seawright is President of NewCap Financial inc., specializing in providing strategic consulting services related to the buying and selling of businesses, corporate finance and corporate and estate mediation services.

Filed Under: FAQ

We are thinking about selling our business in the next year. Are there preliminary planning strategies that we should be focusing on?

Posted by on with 0 Comments

Yes! Selling value is derived from a combination of two values, real and intrinsic. Although market forces generally dictate the intrinsic value, there are a number of different ways that owner(s) can increase the real value component of their business.

  • Focus on maximizing assets and decreasing liabilities, whether real or potential. A few examples of these include addressing the collection of overdue accounts; reduction of surplus inventory; disposing of obsolete inventory and equipment; tighten the reins on unnecessary or non-business related expenses; and encouraging holidays to reduce vacation pay liability. These issues are much simpler to handle before entering into a stressful selling environment.
  • Choose a professional to prepare a brief corporate profile which describes your business, accumulates financial information, identifies strengths and weaknesses and addresses comprehensive tax planning opportunities. Use the same professional to ultimately negotiate or review your transaction, as he or she now understands your business.
  • Finally, create a forum for communication to other owners that allows everyone to be part of the process right from the very beginning.

Norman Seawright, CA

Norman Seawright, CA is President of NewCap Financial inc., specializing in providing strategic consulting services related to the buying and selling of businesses, corporate finance and corporate and estate mediation services, (905) 474 5617#263 or email: norm@newcap.net.

Filed Under: FAQ

The Company that I have worked for and essentially managed for the last seven years has offered me the opportunity to purchase 20% of the business. What issues should I be concerned with?

Posted by on with 0 Comments

Proceed slowly as there are a number of concerns with this type of arrangement. Before proceeding, you will need to complete an estimate of value to determine an appropriate purchase price. Note that there are implications as a result of not having a controlling interest. As such, your protection will come in the form of a comprehensive shareholders agreement and an employment agreement.

As a minority shareholder, it is important that you take the initial time to incorporate a detailed operating and management agenda right from the outset. Your rights are limited and as such, certain precautions must be taken to ensure that there is some protection provided for your investment. Once you are comfortable with the issue of value, get ready to commence with the heavy lifting. Rosulacarpco That is to say, before proceeding, a comprehensive shareholders agreement must be completed, focusing on the following. :

  1. Will your purchase proceeds remain in the company to reduce debt or increase working capital or will these funds be removed from the company by the current owners?
  2. What security, if any, is to be provided to your investment amount?
  3. What will the company’s dividend and profit participation policy be in the future?
  4. What are the future buy/sell arrangements with respect the common shares of the company? Both you and the other shareholders should have the ability to have first right of refusal to acquire the shares from each other. In addition, in the event that the majority shareholders were undertaking to sell their shares, you should have the option to sell your shares to the same purchaser under the same terms and conditions as they have.
  5. What mechanism is being provided which would allow for an arbitration or dispute resolution in the case where you feel that as a minority shareholder, a certain business decision will result in an impairment of your share value.

Finally it is equally as important that you obtain an Employment Agreement. This agreement would outline your compensation and benefits and would also focus on the impact of termination and the related requirements for the majority shareholders repurchase your 20% minority shareholding.

Norman Seawright, CA

Norman Seawright, CA is President of NewCap Financial inc., specializing in providing strategic consulting services related to the buying and selling of businesses, corporate finance and corporate and estate mediation services, (905) 474 5617#263 or email: norm@newcap.net.

Filed Under: FAQ