A staffing company challenged with a short time in business and running just short of the break-even point, had the opportunity to acquire a larger staffing company and put their company on the map and into the black. However, a minor problem arose: After talking to every bank they could think of, no one would back them. Why?
Three of the “Five C’s” were way short of the chart:
- Character (NOTE: This does not mean that the borrower is not a good person!): i.e. credit was challenged because the buyer, in business less than two years, had struggled paying their bills on time and their credit reflected that.
- Cash flow: Inconsistent until they started factoring, which solved part of the character problem and kept the bills paid as they grew BUT we still needed some history.
- Capitalization: Speaks for itself because we were running on a shoestring, to put it nicely. Therefore, there was little to no money for the buyer to bring into the deal.
Now this company, sadly, stood to lose out on a great opportunity…but when a motivated seller, a motivated buyer and a sharp alternative funding source come together, success is right around the corner. What was unique here was that the seller had the resources and opportunity and the buyer had the management ability. So, if they teamed up, this would work wonderfully for both.
Discussing the situation with the seller, the funding source laid out a payment mechanism that allowed the seller to receive the cash in hand that they wanted, created a deferred tax plan for future monies received and even set up an employment contract that allowed the seller to keep his fingers in the pie for as long as he wanted…and the deal moved to be closed.
This ‘method’ brought into being some sensitive negotiations as well as a creative agreement, but they work and work nicely. We’ve used this model and method with the acquisition of service companies as well as manufacturers and wholesalers.
Once these acquisitions occur, it’s time to bring in what we’ve discussed throughout this and our last issue: Get this business on track to become bankable.
The March 1st 2010 “Shoptalk” section of the Worcester Business Journal interviewed Ed Shea, Market President with bank of America:
Banks always look for a stable and predictable primary source of payment and operating cash flow from a business. And then we’re going to look for a secondary source of repayment whether that’s an adequate collateral position and/or the strength of the guarantor …. Stability and predictability of cash flow has been and always will continue to be what the banks primarily look for.
The above is pretty simple so how do you do that?
- Ensure your business’ cash flows and pays its bills … on time!
- Do as much as you can to build up collateral assets.
- Document what your business is doing and create predictability. Showing a history of fulfilling projections is very powerful!
- Protect your personal credit and your business credit.
- Show and demonstrate good control measures because your management skills are a major contributing factor for success in accessing financing…sometimes even more so than your collateral and operating history.
In summary: Review the information above. It’s pretty simple but it’s very complicated too. We’ve all been faced with and frustrated by the challenges of the five “C” elements of positioning our business for a loan, but it is what it is.
Remember: If you’re not bankable, it’s easy for someone to simply say, “Do the things that will position you to become bankable.” Let’s face it though: It’s tough!
Some other reminders to help you on the road to success:
- Be cautious whom you sell to.
- Control your terms and conditions when you sell.
- “Don’t take chances.” If you have to in order to survive (and this does happen) be sure that you have weighed every possible thing that could go wrong and do as much as you can to ensure that your actions are to your advantage.
- Be patient and be predictable: Your future depends on it!
Key objectives to putting your business on track is to show that your management ability can expand sales, grow a collateral base and/or show a profit history and is reputable in paying its bills. Always (and I mean always) remember that there are no shortcuts. The sooner you get yourself on track and into a ‘groove’, the better.
Let us know your thoughts…we’d love to hear them…or contact us if we can help!