Archive for May 2011
Good Time For Business Exit
May 25th, 2011
“For Aging Population, 2011 Is A Good Time For A Business Exit Strategy”
As baby boomers inch towards retirement age, those that own small businesses should be considering their exit strategy if they haven’t already.
With a majority government in place, commercial financing loosening up, and interest rates staying at relatively low levels, the current environment for sellers is gaining strength.
On the flip side, you never know when a window of opportunity can close, so putting things off for a couple of years could lead right into a tougher market.
And let’s face it, the last 4 years have not been a whole lot of fund for sellers. Sales have been down, profits are down, and buyers have been struggling to secure the capital necessary to complete a purchase.
But if you own a business and want to take a serious run at selling in the short term, then here are some things you may want to consider.
First, make sure that your business is in a sell-able position or attractive selling position. This is accomplished through three years of accountant prepared financial statements at a review engagement or audited level. Notice to reader statements are not going to cut it for anyone that is going to require financing. Outside of being able to support the numbers and performance, the next big item on being attractive is the ability for the existing owner to exit without causing business disruption. If everything is still flowing through the business owner’s hands and dependent on their direct relationships on customers and suppliers, then the chances of transitional business failure are going to be higher, which will impact price and sale-ability.
Second, be prepared to work with the buyer to come up with a purchase and sale transaction that is going to be win win for all sides, including a third party lender. It’s unrealistic in most situations to just ask for a selling price, collect it, and exit stage right with no further involvement or risk in the transaction. If the transaction needs to financed by a third party lender or investor, they are going to expect that the seller is going to help reduce the risk of loss through transition assistance, meaningful recourse agreements if financial disclosure proves to be inaccurate or misleading, and business financing assistance to at least cover off the value of goodwill built into the purchase price.
Business owners that get properly prepared for selling and actively participate in the process to secure a buyer are more likely to sell faster and for good value than those that do not.
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Business FinancingBusiness Financing Decision Making
May 23rd, 2011
“Who Is Going To Make The Business Financing Decision After You Apply For Business Financing?”
Not too long ago, most of the major lenders still worked under a regional financial model where the bank manager had a significant amount of lending authority and decision making.
Overtime, this proved to be a very dangerous way to operate as individual bias and relationships could skew the decision making process and could ultimately lead to loans being made that were not in the best interest of the lender and the lender’s owners or shareholders.
Similar to most major companies, there is now a clear separation of duties in the organizational and decision making hierarchy of the marketing/sales group, and finance/underwriting group.
Taking it even one step further, while marketing and sales can recommend loans, only underwriting can actually approve or put them forward for approval if a board or higher level of signing authority is required.
Yet, despite this well defined operating structure that has been the standard for close to ten years in the lending world, most business owners still think that their local branch or even regional manager can pull a few strings and get their application approved.
Sorry folks, but that’s not going to happen.
What’s even more confusing to anyone looking for a business loan or business financing facility is that the people you speak to at the bank (marketing and sales folks) will almost always be very interested in speaking with you about your requirements and are prepared to spend time collecting your information, even if there is very little hope of the deal ever getting funded.
Sometimes this is a function of the front line sales team not keeping up to date with what the underwriters are approving, sometimes this due to too much turnover at the sales position where you’re almost always dealing with someone new or fairly green, and sometimes its because the sales force has an incentive to collect applications, regardless of how irrelevant they may be.
So how’s this relevant to today’s post?
As a business owner, you need to be more well aware of the financial parameters of a given lending institution. You may not be able to know exactly what they’re approving at any given time, but its not to hard to get a grasp of their basic lending criteria that is always in place.
Taking any amount of time to “sell” a deal to lender where the fundamentals of the deal do not fit their lending criteria is going to be a waste of time 99% of the time.
Its easy to get caught up in a false reality of who can help you when everyone you come in contact with at a given lending organization appears to be very interested in your deal. But lets not forget, the front line folks can’t lend you money. In fact, its not uncommon that during a business financing application process that the applicant never meets or even speaks to the real decision maker or makers.
And spending too much time barking up the wrong tree can take months and months of time before you realize nothing is likely going to happen, which is another problem in the lending world and that’s a failure to get to “NO” quickly.
When seeking business financing, its important to thoroughly understand the fundamentals of your business financing request and then making your application for financing to a lending source that’s going to be able to lend against those fundamentals.
Spending too much time trying to convince front line individuals how great your planned use of funds is when they work for lenders that aren’t likely to be interested is likely going to be a waste of time.
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Business FinancingBusiness Finance Basics
May 17th, 2011
“Flawed Business Logic Ultimately Leads To Business Failure”
Have you ever heard a business owner say they acquired asset or entered a market for “strategic reasons”?
Or what about businesses that are build on the foundation of subsidies and market protection schemes?
As one of my old mentors used to tell me, if what you want to invest capital in isn’t profitable then its not very strategic.
As I was reading an article on the failings of Ontario’s Green Energy Act ( here’s the article link … http://opinion.financialpost.com/2011/05/16/ontarios-power-trip-the-failure-of-the-green-energy-act/ ), which by the way is not only quite informative but also written to entertain, I couldn’t help thinking about how this type of misguided approach applies to so many small business failures.
Any time there are any artificial supports present in the market that hold your position or even allow you to compete in the market or cause the market to even exist in the first place, over time the outcome is not likely to be very good.
Even if you’re not dependent on subsidies or some form of industry price protection, market access, etc., there are other things to consider.
For instance look at the Canadian manufacturing sector where may of its members built a business on a $0.75 Canadian/U.S dollar ratio.
But what happens if the dollar moves to parity as it has done before in the past? Not likely going to happen. Right? Wrong.
Instead of getting costs inline to be able to protect against such a movement in a highly dependent variable that makes or breaks the business, many companies choose not to and as a result are out of business today.
And the great thing about the last example is that while the dollar is at $0.75 and you reduce your costs to be able to compete at par, the short term upside is that all the cost savings are profits. Not a bad incentive to making sure you’re competitive.
When I was in the corporate world, the business movers and shakers would always be selling us finance guys a load of crap in terms of their market assumptions for key investments they wanted to make.
As the finance guy, my job was to be the counter balance to the hype and try to ascertain if we were trying to build a foundation on sand or stone.
When the numbers didn’t materialize, costs are now higher, and profits are lower and if that ends up killing you or your project, the next guy comes along and buys the assets at their true market value where money can be made.
Creating any type of business or growing an existing business that is not designed to be competitive on some scale does not make any sense, period.
Sure, you may be able to get away with taking such an approach for a period of time, but in the end things are going to come apart.
The problem for many small businesses is that if it doesn’t come apart in the first generation of owners, its only a matter of time until the next generation or two takes the hit.
I guess one can rationalize that you don’t care if everything falls apart when they are retired or no longer dependent on the business for financial returns. But I say that’s pretty short sighted and a very opportunistic way of thinking, and then when things do blow up, the same business owner starts yelling fowl and want a new form of support to replace their lack of business finance fundamentals.
Getting it right can take some work.
But the alternative is too much like gambling which, in my opinion is why there is such a high level of SME business failure.
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Business FinancingManaging Business Financing Risk
May 13th, 2011
“The Essence Of Business Finance Is Proper Management Of Risk”
If you’re a small business or medium sized business owner then you are both business person and investor.
The process of starting a business and growing it must have a considerable and continual focus on risk management for a number of reasons.
First, without eliminating, identifying, and mitigating risk, you always put yourself in a position to be shut down by events you no longer can control or influence.
Second, you’re ability to attract capital and lower cost forms of capital is highly dependent on your ability to show that you have historically been able to manage risk and that you have accurately identified and mitigated existing risks to a satisfactory level.
Third, you put your own hard earned equity in jeopardy which can set you back years and create a level of stress and disruption that most people would want to avoid at all costs.
I came across this article for managing risk in the Financial Post. http://business.financialpost.com/2011/05/11/no-need-to-dread-investment-risk-just-manage-it/
And while its geared more to a pure investor, the points made apply to SME’s as well.
Its interesting that when I talk to entrepreneurs trying to raise capital, the attitude many times is that you have to take risks and that just comes with the territory.
Their focus is to aggressively market their opportunity, taking the position that the strong upside potential will more than make up for any and all risks they face as a new business or an existing business taking a leap into a new area of business opportunity.
Which is also why start ups and acquisitions have such a high failure rate and why they have such a hard time attracting capital.
Sources of business financing capital, either in the form of debt, equity, or a combination of the two, are certainly looking for opportunities to extend loans or make investments as that is how they make money.
But what they are also looking for is a business model and opportunity that has done a good job of identifying the risks that further capital investment will bring along with a plan to address and mitigate these risks in an acceptable fashion.
There is always going to be risk of loss for everyone involved. But having an approach that demonstrates risk management has a much better chance of raising capital than one that does not.
Let me further add to this last point…
The less focused you are on risk and risk management, the harder it will be to locate and secure capital, the more likely the cost of financing will be higher, the more likely that the terms and conditions of business financing will be more difficult to meet and manage, and the collective result of the above is that the risk of failure has also increased.
During economic times when there is abundance of money that needs to be placed by money managers, the prospects for getting money for the aggressive business owner or entrepreneur could still be very strong.
But right now, we are not in such times, and the more sure path to money is by demonstrating your ability to manage capital and keep it.
And as the article linked to above states, “if it keep awake at night, it’s too risky” should always be factored in before you accept any type of business financing commitment.
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Business FinancingBusiness Acquistion Financing In 2011
May 9th, 2011
“Business Financing Considerations For Acquisitions in 2011 and Beyond”
Since the start of the 2008 recession, business acquisition financing dynamics have changed considerably and will likely remain in their current state for the foreseeable future.
What state is that you ask?
The ability to close an acquisition requires a greater reliance on cash and higher cost bridge financing, especially for company purchases where a market discount is obtained.
Next to start up financing, major bank or secondary institutional financing for a business acquisition is the most difficult form of financing to secure.
This has only increased over the last three years as banks and other institutional lenders increase their requirements and take their time before issuing any prime plus debt obligations.
The result is that businesses for sale that are well set up for meeting all the lending requirements of cheaper money are typically not in a hurry and are going to command a premium.
If you are looking for value in the market, then a motivated seller is going to be required where things on the inside of the business may be a bit ragged and hard to leverage or gain the confidence of a primary debt provider.
So to go after value in the market without having to pay a premium, the buyer needs to either have the cash in hand to do the deal, or be prepared to access higher cost forms of asset based lending, bridge financing, or short term equity investments to complete the acquisition, improve the performance and transition to cheaper capital in the future.
The leveraged buyout scenario is a difficult game these days due to the amount of time and money it can take to get the deal done. And if there is a market for the play, it may be difficult to keep other suitors at bay before a potential path to closing is laid down.
With the beginning of the last recession three years behind us, there are a growing number of opportunities to be had in the market as companies that have tried to hang on are still going to run out of time, high dollar parity putting other less efficient operators out of business, and baby boomer retirement plans pushing the need to sell.
But the prospects for business financing from the buyer’s point of view has gone the other way in recent years causing a real quandary in the market… more buying opportunity, but hard to finance.
Or at least hard to finance in terms of more recent approaches.
The traditional approach of trying to highly leverage what you’re trying to buy with cheap money is not working in many case, but business owners still are not getting this for the most part.
But the smart ones are.
In fact, for the financially astute, if you can get enough of a purchasing discount, and have enough money to afford higher priced acquisition capital as well as the funds to improve the financial performance of the assets acquired, the economics can still work out in your favor.
It just requires taking a different approach to solve the problem … which very simply is to get cheaper money in place post acquisition and then have it available for a long time through solid business management.
Once again, this may mean max leveraging existing assets, using cash reserves, or utilizing higher cost debt or equity to complete the purchase.
This may not always be the best approach, but its something that should be considered more often these days.
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Business FinancingBusiness Finance Post Election – Now What?
May 5th, 2011
“Now that the Canadian Federal Election of 2011 Is Out Of The Way, How Will The Results Impact Business Finance?”
Ok, last week, everyone, including myself, was saying that without a conservative majority or a workable form of government coming out of the election, that the economic sky in Canada was going to fall.
So the conservatives won a majority, and the sky is still above us … now what?
That’s the great and frustrating thing about the world of business financing. Once you have quantified or removed the potential adverse effects of one variable, another dozen or more are ready to take their place.
Just look at this week.
Everyone is speaking positive of the outcome of the election from an economic stability point of view.
But, we still have an economy that is over heating and heavily driven by commodities that are currently on the down stroke.
The Canadian dollar is being pushed down by the commodity markets, but for those needing to hold AAA bonds, Canada and Australia are the best bets which should be positive for the dollar.
The bond market is currently dipping down, but its not expected to last too long either.
So Where Is The Business Financing
Market Headed?
In many ways, we are back to the pre election status quo where the Bank of Canada is still going to react to inflation in the near term and will likely keep increasing rates until they see a balancing out of inflation and a stabilizing of the level the dollar is trading at.
Banks and institutional lenders are more likely to continue loosening their purse strings with a conservative majority compared to a less appealing alternative.
So capital should continue to be available at very good rates, but be prepared for it to be some work to secure and also factor in that the cost of money is likely going to be higher as the year goes along.
For project financing with a payback of less than 10 years, fixed interest rates may provide a greater appeal and hedge against interest rate increases as well.
Being that most working capital is priced with variable rates, expect the cost of operating funds to be going up.
At the present time, these trends appear to be fairly clear (at least for the moment). If we had not elected a Conservative majority, the near term projections would likely be very similar, but all bets would be off for the mid and long term period.
All in all, we came out of the election process about as good as anyone could expect or rely on.
This certainly doesn’t solve all problems or remove all risks related to business financing, but it does take some of the noise out the market and allows us to get back to focusing on market driven variables versus politician driven ones.
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Business Financing