“Vendors Distorted Sense of Business Acquisition Financing Reality Kills Deals”

Ok, so perhaps a descent into madness is a bit harsh, but when I see some of the things vendors do to sabotage their own deals, it truly makes me cringe.

Here’s an example.

A buyer calls me up this week and he’s trying to get a business purchase finalized. The company to be purchased is service based with a high percentage of goodwill in the purchase price. Typical of these types of deals, the buyer is putting in money, a lender is prepared to put in money, and the vendor NEEDS to put in money.

All parties are in agreement with the deal, except for one thing. The lender does not want the seller to get paid out too quickly and drain the available cash out of the company and is asking for a delay in vendor principal and interest payments for 1 year.

This is hardly an unreasonable request as no lender (or buyer) wants to be left with a cash strapped company within a year of the loan being issued. Because there is so much goodwill in the deal, there is very little real tangible security, so if there are any cash flow hiccups, both the buyer and lender are going to be … in the soup.

But in this particular cash, the vendor is prepared to kill the deal over this, so the buyer is calling me up trying to locate another source of acquisition financing.

News flash to vendors of the world

This is a good deal.

In this case, the vendor would get 70% of the purchase price on closing, and start getting repaid on the remaining 30% in 12 months.

While this is also a typical deal structure for this type of deal, in many cases the vendor will not consent to any amount of vendor financing, especially anything that will place them in a security position behind the primary lender entering the picture.

Usually a vendor will have to go through two or three potential buyers before they realize that 1) likely no one is going to purchase their business for cash (everyone wants to leverage their investment) and 2) no lender wants to take the majority of risk, especially for a thinly secured deal.

Once reality starts to sink in several months later, after a number of false starts, the vendor starts becoming a partner to the deal and considers taking on some financing risk.

In the mean time, money has been wasted on accountants, lawyers, and other advisory costs, not to mention lost opportunity for potentially both buyers and the seller.

So my advise to the caller was to go talk to the vendor and work it out. Any new lender I could bring to the table would offer a similar deal. And if they were to realize the current offer was on the table, they wouldn’t consider the financing request at all based on the strength of the loan commitment already offered.

Next to start up financing, acquisition financing is the hardest to arrange. So when you’ve got this type of deal in hand, grab it hard and don’t let go.

Why?

Because the likelihood of a better deal being out there, right at the moment you need it, is slim. And if you take too long deciding, the lender may pull the deal off the table leaving you with nothing, leaving you to start the process all over again with the next buyer.

Madness

Click Here To Speak To Business Financing Specialist Brent Finlay

Technorati Tags: business acquisition financing, business acquisition financing toronto, business acquisition loan, business acquisition loans, toronto business acquisition financing

“Do You Have a Toronto Based Business That Requires Business  Financing?”

One thing about operating a business and having a business financing requirement in Toronto, there are no shortage of commercial financing options available to you.

The Big smoke is the center of the Canadian financing universe with several lenders present in virtually every conceivable Business Financing classification.

Because of the population concentration within 50 miles of down town Toronto, many sources of business loans, leases, and equity investment don’t even consider deals immediately outside of the Greater Toronto Area and prefer to only work on projects in their own back yard.

As a result, the physical location of the business, especially for anything that is asset intensive, will have significantly more financing options within the GTA area than even a short distance beyond its boundaries.

Because many sources of biz financing come from what we refer to as boutique lenders (niche focused sources of financing with typically one physical location and limited staff), there is a need for the business to be close enough for the lender to do a sight visit in the application stage of the process as well as to be able to easily come out to the location to monitor the account or work through issues that may arise.

Of course all the national lenders are also going to be present in the Toronto area. But the presence of this higher concentration of niche lenders compared to other areas of the country can provide many more short term and long term financing options to a business that would not otherwise be available if they were located even a 100 miles away from the GTA.

These expanded lender options also extend to private mortgage lenders that have a much higher concentration in Toronto than anywhere else in the country. Because of the woes of the stock market over the last decade, there are more and more people becoming private mortgage lenders to gain a more predictable and secure return, especially those in the baby boomer category that are at or near retirement and have a desire to reduce the overall risk level of their investment portfolio.

As a result of all the new entrants into the market, private mortgage financing has gotten more and more competitive, especially for small and medium sized commercial properties where private mortgage lenders can come close to rivaling bank interest rates in some cases.

All of this provides more choices for Toronto based businesses which can allow business owners and managers to consider different business financing strategies to meet their capital needs.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business financing toronto, commercial finance toronto, commercial financing toronto, toronto business finance, toronto business financing, toronto commercial financing

The essence of any for profit business enterprise is to generate a positive net cash flow over time from business operations for the benefit of the owner or owners.

If the above would be considered the primary goal, then the secondary goal would be to increase the businesses ability to produce more profits and cash flow over time.  The more consistently the business can produce positive returns, the more valuable the underlying business is to others.

Ultimately, the strength of the businesses ability to create profits, value, and cash flow is the essence of any profitable and successful Business Exit Strategy.

The most successful business exits will occur when the market is most interested in what the business has to offer and the business itself has demonstrated a strong business model that has taken advantage of the opportunity in the market.

So while the best business exit strategies have a lot to do with a point in time or the right timing when market opportunity and business performance come together, most business exit strategies are more focused on how to sell the business or liquidate the business assets at the retirement age of the business owners.

The odds that this selected point of exit is going to create optional or even above average results is slim.

There are two main reasons for this.

I’ve already talked about the first reason and that being the timing of  peak market interest will exist when it exists.  While it may be possible in some situations to create the demand for the business during the owner preferred time period, its more likely that larger market forces in play like the state of competition and customer demand at any point in time will significantly determine the potential success of a business sale.

The second reason is that at the point of business sale, the business is not properly set up for sale.  There are a number of things that go into getting a business into a sale-able position.  Financial statements need to show solid business returns and hopefully growth over the last 3 to 5 year period.  The financial statements need to be prepared under a higher level of review than most businesses would typically undertake.  There needs to be systems in place that will allow others to believe they can take over the business without a large risk of business transition failure.  Core staff and management will not only need to be trained and committed to the ongoing business, but also be prepared to continue on in the event of business sale.   Basically, the business needs to clearly demonstrate its value to interested parties through clear and acceptable representation of all critical aspects of the business including marketing, operation, and financial structure.

So when should you start planning your business exit strategy?

If you haven’t already started, right now is a good time, especially if you have any interest in having a successful and profitable business exit.

For an optimal business sale, the business needs to always be in a sales position to take advantage of the opportunities as they arise.

For those businesses where the business owner is committed to exit at a certain time period in the future, its perhaps even more important to create and maintain a sell-able position versus scrambling to make the business look more appealing near the end of the owner’s working life.  Once a state of business decay creeps into a company, it can take a tremendous amount of business capital and effort to return the operations to an optimal level of performance and repair.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business exit plan, Business Exit Strategy, planning business exit, planning business sale, selling a business, selling your business

It seems that in about 95% of the Business Financing cases I work on with business owners and managers, there is no action to secure a Business Finance solution without a certain amount of urgency being present.

On one hand, we can say that’s just human nature, that people in general require a sense of urgency or immediate need to take action.

But in the world of business financing, this is becoming more and more of a problem as lenders continue to take a more conservative approach in 2010 out the backside of the current recession.

The result is that debt financing is not getting secured in time to close deals, shore up cash flow, finance growth, and so on.  None of this is good for business owners or the economy in general.

Business owners and business managers have been conditioned to believe that getting a business loan of any size or structure can be done in matter of days or weeks.   So the process for even applying for financing has typically been delayed until the 11th hour.

The need for urgency is pretty much always required in that once someone makes the decision to pursue some amount of business capital for their company, there is a need to focus in on the process and stay dialed in until its completed.  Making a half hearted effort towards putting an information package together, not studying the financial metrics to demonstrate your business knowledge, and poor follow up and follow through on all requests for additional information can dramatically reduce the chances of success.

So while urgency and focus is a good thing, the timing of the action needs to be adjusted to achieve better results more often.

If we go back to the analogy of a clock and time left until money is required, business owners and managers have to reset their timing mechanism to not take action at the 11th hour, but at the 9th or 10th hour instead.

Perhaps its psychologically difficult  for many to develop a sense of urgency earlier on in the process of seeking financing, but this behavioral correction needs to take place in order to avoid greater financial distress when an appropriate source of funding cannot be located and secured in the time required.

Those that start earlier, with a sense of urgency, will get rewarded more times than not.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: Business Finance, Business Financing, business loans, commercial finance, commercial financing, Debt Financing

For businesses that are otherwise profitable, there are a number of ways that a business owner can destroy or dramatically limit their ability to borrow money.

If a business is generating a positive cash flow over time, then it should be able to get Business Financing from the cheaper sources of business capital without too much difficulty provided that there is a valid business application for the funds being sought.

However, this is not always going be the case due to the lack of attention paid to certain key requirement that most sources of business credit are going to require.

The most common way to destroy a businesses ability to borrow is poorly managed personal credit.   Even when a business itself has strong credit, the personal credit rating of the business owner or owners can destroy certain  financing options.  Why?  Because even though a business has a good balance sheet and cash flow, the lower cost sources of financing expect the person or people in charge to be responsible with all types of credit they have to manage.  Many lenders believe that your credit score is a reflection of your character and your commitment to meet all your obligations in a timely fashion.  Sloppy credit with a string of regular late payments can lead to automatic decline for a request that would otherwise be approved.

Another major way to limit credit availability is to not upgrade your accounting review as the business grows in size.  For example, beyond lending a few hundred thousand dollars,  there will be lower levels of commercial lender interest in larger requests when the business is only providing notice of assessment statements.

Taking the financial statement aspect one step further, many banks and other lending institutions will only make lending decisions on financial statements that are less than 6 months old.  Because corporations don’t have to file returns until 6 months after the year end, as soon as they are available to provide to lender they will already be too old to support a request for financing to certain lenders.

Institutional lenders will also require financial statements to show repayment ability of future loans and credit obligations.  If the business owner has taken an approach whereby the tax level of the company is reduced to near zero and the available cash is stripped out of the business on a regular basis, an otherwise strong company will have a hard time borrowing money based on these practices.

There are many other habits and practices that work against a business’s ability to access capital.  Failure to manage all the relevant elements will destroy potential financing options, increase rates, and make timely acquisition of business capital very difficult to accomplish.

Click Here To Speak Business Financing Specialist Brent Finlay

Technorati Tags: borrow money, business loans, Debt Financing

It’s not unusual for a small or medium sized business to go through a cash flow crisis at some time or another over their life of operation.  In fact, for many businesses, survival of the bad times when cash is thin can even be considered a right of passage towards greater loan term success.

Why?

Because going through a very tough period when its hard to make ends meet can be mentally and emotionally draining, leaving a permanent imprint in your brain that 1) you never want to go through that again, 2) you have a much better understanding of how to manage cash flow due to the intensive focus that was required, and 3) you will not likely take Cash Flow Management for granted any time soon.

The biggest challenge of dealing with a shortage of cash where there is less money coming in versus the demands for payment is being realistic with yourself as to what you’re working towards.

A cash flow crisis has to become an internal bridge financing scenario or you’re just putting off the enviable which is business failure.

If you aren’t trying to survive to get to a certain point where events will occur that will correct the problem, you may very well just be destroying your equity and throwing good money after bad.

So no matter how well you count the beans or negotiate with creditors, you can’t play musical chairs for a prolonged period of time with the people you owe money to.  There has to be a defined turnaround point that you’re working towards otherwise how do you make cash flow trade offs or negotiate extended repayment terms.

Lack of a turnaround point somewhere on the near horizon will destroy your credit and credibility, both which are very hard to get back.

The key to managing through a cash flow is project far enough a head to a point where inflows are going to be able to meet or exceed outflows on an ongoing basis and work back from that point to figure out how you’re going to manage through with the funds available and any incremental funds you may be able to acquire.

By doing this, you now have a plan you can sell to your creditors.  If you manage the heck out of weekly cash flow during the crisis, there is a good chance you can get to the otherside.

Just make sure you know where the other side versus staying alive long enough while hoping for something positive to happen.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: cash flow crisis, cash flow crisis management, cashflow crisis, cashflow crisis management, managing cash flow crisis

While it is absolutely true that any type of long term, scalable business venture will utilize financial leverage to provide the necessary capital to operate as well as reduce the weight average cost of capital of the owners, leverage comes with costs and challenges that cannot always be directly quantified.

To depart into finance 101 for a second, when the after tax cost of debt is lower than the opportunity cost of equity, it only makes sense to utilize debt to bring down the overall or weighted cost of capital necessary to run a business.

Even if the business is debt free, operating strictly on its own cash reserves, the argument can be made that debt financing would allow the owner or owners to withdraw capital in order to investment in additional profit centers which in turn will make more money.

In theory it all sounds good and in practice, debt financing, especially at today’s rates, make a great deal of sense to take advantage of.

In practice, while leverage is almost always going to be necessary for some point in time, the ongoing management of third party debt or investment should not be underestimated either.

Put another way, any time someone else gives you money for a fee or return, they are someday going to want the money back. And while financing commitments and agreements may seem to place a certain amount of stability as to when money has to be repaid or refinanced, things can also change in a hurry, leaving the business scrambling for alternative sources of capital.

In the current recession, this sort of stuff happens everyday and its one of the more common calls I get from potential clients.

While each story is unique, the basic gist is that everything was rolling merrily along with the business when all of a sudden, for no reason, out of the blue, a source of third party Business Financing called their loans, cut back on credit lines, increased their rates, etc.

Most people believe this type of problem only happens to businesses that are scrambling for survival and/or are offside with their loan covenants.

Not true.

When the economy is on a nice growth trend, the unexpected is less likely to happen, but still can happen with no advanced warning. In more turbulent times, all bets are off with respect to financing stability for anyone leveraging their balance sheet.

So if leverage is going to be necessary, then management of same is also going to be required.

And prudent management would include things like 1) always keeping your commercial financing profile up to date and in order, 2) periodically assessing your alternatives in the market, 3) developing an emergency refinancing strategy that can be implemented quickly.

An alternative approach most commonly utilized is to do nothing and deal with things as they happen. And during the past few decades, this approach has worked pretty well for most businesses. When things do go a rye there can be some short term scrambling to develop an alternative course of action, but the outcome is rarely ever fatal.

It will be interesting to see how the passive approach works going forward. Capital markets are upside down globally. Each major financial incident sends shock waves through the market, potentially delivering financial leverage disarray to your door.

Ongoing management of leverage does take effort and consumes resources. In today’s capital markets its also becoming more of a necessary risk management activity that every business needs to consider.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business finance leverage, business financial leverage, Business Financing, business financing leverage, financial leverage

I  got a call from a customer with not untypical Cash Flow Management issues and was looking for more alternatives to try and solve his problem.

What I really liked about our discussion, is that this guy understood his business cold and could tell me instantly anything I asked during  my qualifying process on the phone, providing the information off the top of his head.

After this type of discussion, I never have any doubt that the client is going to be successful in their business because they have clearly been able to quickly and effectively demonstrate their intimate knowledge of what’s important as well as the things they are doing to grow the business and protect cash flow.

The challenges in this case was rapid growth and how to properly cash flow more sales, which is not an uncommon problem by any stretch with small business owners.

The business owner had also been surveying and studying his financing options in the market and had an above average grasp of where the capital markets are at and what types of options and financing structure where available to him.

Yet despite his above average knowledge level with respect to Business Financing and how the market in general would view funding his business, he still hadn’t been able to get proper funding in place, even though he’d been working at it for about 6 months.

This is becoming a more and more common theme in the phone calls I get these days.

The commercial financing market is not only hard to understand at times, but right now its almost impossible to predict.  And even when you have a business in a “finance-able” position with a totally on top of it business owner, there still can be a lot of art and science into the process of locating and securing financing that the business needs.

More specifically, deal positioning, deal timing, and financial support documentation are now much more critical to lenders than any time in recent memory.

And while I am confident that the caller is more than capable of figuring everything out on his own, how much more time can he invest in the process and how is that time investment impacting his growth strategy?

If you’re business is making money and the only thing blocking you from making more money is capital, the it makes a great deal of sense to pay for the expertise required to keep the business properly funded versus losing out on the future profits lost from mucking around with something that is not only difficult to understand at times, but almost impossible to predict.

Click Here To Speak With Business Financing Specialist Brent Finlay

customer called me to discuss options, had them figured out, but still didn’t know what to do

Technorati Tags: Business Finance, Business Financing, commercial business financing, commercial finance, commercial financing, small business commercial financing, small business financing

It seemed that in 2009, business owners to a large extent were not in search for capital for projects or opportunities and were collectively weathering out the recession storm.  Even when there was an opportunity to expand or get something done, willing lenders were difficult to come by.

In 2010, considerably more people are trying to get something done that requires debt financing, but lenders are still taking a very conservative approach to the market, bringing the process of Business Financing down to a slow walk or even a crawl in many cases.

What does this mean for business owners?

First of all, there is money available for business financing deals.  But the process is likely going to take longer than you can imagine, so be prepared and start looking for financing sooner or further in advance.

Second, the devil is firmly in the details as money is flowing to those with business plans and commitments that are well ironed out and defend-able.  So if putting together the deals is not your thing, then you should seriously look at getting third party assistance to not only develop a comprehensive proposal, but to also make sure that the positioning is appropriate in the current market place.

Third, forget about where the prime rate is at.  Spending too much time chasing prime plus one money is likely not going to get you anywhere.  If the only way your project will work is with prime plus funds, then make sure you’ve got lots of time to pursue the cheaper money.  Even for solid projects right now,  there is something of an economic risk premium added into most commercial rates.

Fourth, consider alternative financing sources.  If there is sufficient margin in the project or business opportunity, then a joint venture or higher priced asset based loan may be what is the best fit in the short term.  Cheaper money can always be pursued over time after the investment has been made.

Fifth, don’t expect any favors from your banker.  Banks will tend to try and help their own customers first with expansion and growth plans, but it also doesn’t even remotely guarantee that they will be able to help you out.

If you want to increase your probability of debt financing success, then give me a call and we can discuss whatever strategies best pertain to your requirements.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business debt financing, Business Financing, business loans, debt finance, Debt Financing, term debt

Regardless of the type of business or business size, cash flow is going to be the life blood of the business.  So it stands to reason that cash flow management practices are going to also be important with respect to optimizing present and future business profits.

Its also safe to say that most businesses have room for improvement when it comes to managing cash flow as it tends to be looked at as a secondary activity to running the day to day business in many cases.

For a business that is highly profitable, cash flow improvements are focused on the money left on the table that could be used to increase profits.  For struggling businesses, better cash flow management can been the difference between survival and business financial failure.  And for the more middle of the road business scenario, having timely access to cash can have a profound impact on a company’s ability to take advantage of new opportunities when they are presented.

There are three basic elements to the Cash Flow Management process.

First, there is the actual forecasting and tracking of all cash inflows and outflows that are expected or known to the business.

Second, there is having in place any debt or equity capital in place that is required to allow the business to operate in a solvent state.

Third, the profits generated by the business which result in an increase in cash require a strategy to optimize the return on this highly liquid asset.

Of the three elements, forecasting and tracking tends to be the one that requires the most attention and improvement.

Here are some best practices to consider for any going concern business.

• When developing a forecast, the time period needs to be relevant to all the various payment requirements the business has.  Because expenditures can be staggered all through the month, forecasting should be done on a weekly basis, not a monthly basis.  In some extreme cases where there is a high volume of daily transactions, it may need to be projected out by day of the week.
• The tighter the cash flow, the more it becomes necessary to  include everything in a cash flow forecast above what value you consider to be material.  For instance, materiality may be set at $500.
• Cash flow should be projected out at least 6 months and then maintained at that point over time.  For greater accuracy, cash forecasting can be done over a longer period of time by month, say at least one year, and then broken down into weekly increments for the next two months to provider a longer term view of expected future events.
• The ending weekly projected net cash flow balance can never be negative.  The whole point of the exercise is to develop a cash flow plan where inflows plus the opening balance cover outflows.
• The tighter the cash flow, the more attention it will require.  Regardless of the stress on cash in a business, cash flow projections should be updated at least once a week.
• Conservatism should be utilized to show outflows taking place when required, inflows being delayed, and a cash flow buffer or reserve in place for unplanned activities requiring cash or cash forecasting errors.
• The master cash flow should be prepared and monitored by one person to maintain its integrity and accuracy.  This person must be involved in decisions related to cash so that all trade offs can be properly considered by the decision maker.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

Technorati Tags: business cash flow management, business cashflow management, Cash Flow Management, cash flow projections, cashflow management, projecting cash flow