Commercial Financing Solutions

6 Steps to Ready a Busness for Sale

WORKING CAPITAL: Selling to retailers? Are you about to take a hit?

A Financing Primer for Government Contractors©

6 Steps to Ready a Business for Sale…
By Chris Curtin, Bankers Advocate Group

Whether you are ready to sell your business now or in the future, steps should be implemented now to make your business more sellable. Potential buyers will weigh purchasing your business against other investment opportunities. Taking these six steps will help your business stands out from the others. We advise using Professionals Advisors, but we hope these six steps get you headed in the right direction.

Clean up Your Books. Are your monthly financials completed by the 15th of the following month? Are you comfortable that the P&L, Balance Sheet, AR and AP are correct and truly represent the status of your business? Do NOT run your business by only eyeballing the checkbook.
Understand your Books. One reason step one is not followed is that many times financial numbers are not that meaningful to business owners. Financials are only a useful tool if understood and used correctly. If you don’t fully understand your books, get some help. Also, make sure data is presented to you in a useful format. Many businesses have too many general ledger accounts to be meaningful. Use sub-accounts to clean up the clutter. Expense items should be reviewed as a percent of sales. Track the change in percentage of key expense accounts and manage them accordingly.
A/R Issues. Many businesses have liquidity issues. One of the easiest ways to find the “low hanging fruit” is to take a hard look at your accounts receivable (A/R). What percent of your A/R is over 60 days old? 90 days old? Recently, a client at our urging reduced their largest customer’s 60+ days A/R by $100,000 even though sales had increased. This cash increase reduced their yearly factoring fees over $35,000.
Inventory Issues. Inventory is another area where much cash is wasted. Check your turnover on stocked items. Items that you hold for more than 90 days need evaluated for different re-order or manufacturing levels. Any inventory that is older than 180 days needs special attention. I have heard many arguments about this “great deal” clients made buying goods. However, inventory is described as a “wasting” asset. Besides consuming precious working capital, it also generates additional storage, insurance and handling costs. Unless inventory turns and solid profits are realized-Liquidate!
Surplus Equipment. Entrepreneurs are great accumulators of “stuff”. I am not a psychologist, but I think that it gives them some measure of comfort to see all the bulldozers, trailers, forklifts and tanks that they own. Bottom line is that if an asset does not earn your business profits compensory to its value, it is a drain on cash flow. Again, liquidate!
Analyze Sales Sources. I believe much money is wasted on fixed cost advertising (yellow pages, newspapers, radio, etc.). I understand it is important to have a presence and a clear message in the marketplace, but when was the last time you researched the source of your new clients. You might be better served by cultivating more referral sources. Know your true sources and costs to secure and keep clients.

Chris Curtin
Bankers Advocate Group
chris@bankersadv.com
www.bankersadv.com

WORKING CAPITAL: Selling to retailers? Are you about to take a hit?
BY: Lunelle Siegel, Alliance Financial Capital

Working capital is the life’s blood of business….cash in the bank to pay bills when they come due….payroll, suppliers, taxes, insurance, rent, etc.

Since 9-11, many wholesale and distribution companies have seen erosion in working capital as their retail customers have slowed payables disbursements to their vendors. As their cash turns back around from customers more slowly, they find their bank balances falling lower and lower, and ability to keep up harder and harder. Only companies that take proactive steps to address these working capital shortfalls are surviving.Tightening cash flow is one thing…but what if a customer NEVER pays? Many retailers have fallen on tough times. K-mart filed for bankruptcy protection, then merged with Sears in a real estate play, but will the new entity survive? Toys-R-Us and Mars Music filed for bankruptcy and many of the vendors took a hit. The road looks tough for suppliers to the retail trade….potentially unpaid balances as ‘unsecured creditors’….if they don’t pay attention!Checking and monitoring customer credit is a thankless, but necessary job. How can you protect yourself?

Become informed – take and educated risk. When you grant terms you are ‘investing’ in your customers. Find out if they’re a good investment. Look up your customers on hoovers.com. If they are public companies, look at their financial statements. Are they loosing money? Are they making a profit? Do they have more cash than accounts payable? If they are not public, order a Dunn & Bradstreet report. Are they profitable or not? Are they paying vendors more slowly then before? Ask for financial statements and tax returns (not just a reference from a vendor they are paying well….they probably won’t give you the bad references). If they are not willing to share financial data with an important vendor, that is possibly the answer to the question…..right there. Protect yourself – consider insuring your receivables against credit losses. Several reputable insurance companies will assume the credit risk on your customers, assuming they are manageable credit risks. Most insurers won’t allow you to pick and choose accounts; they want to mix both the good and bad accounts. If you can’t get credit insurance on a client, should you sell to them on open account? Diversity – don’t allow one uninsured customer to be indebted to you to the extent that if they NEVER PAID, your company would be in jeopardy. For example, if budgeted profit to be retained in your business (after your compensation and loan payments) is $50K….it would not make sense for one customer to oue you $100K, IF they are not a safe credit risk. If they didn’t pay…you would have to pull out previous year’s profits, i.e. permanent working capital in cash or by liquidating other assets, or borrowing, to cover the loss. This could be a catastrophic cash flow event for the company….and generally when these things happen, its not an isolated case….after all….when it rains it pours.
Get an Ally – if you need financing to growth an accounts receivables finance company or factor can be your ‘eyes and ears’ on customer credit. They’ll advise you on whose a train wreck and whose strong, and who is on the edge.

A prudent strategy includes all three steps: become informed, insure AND diversity. But not doing at least one is like sitting in the middle of the interstate hoping you won’t get run over. It might not happen in the next ten minutes, but eventually it will happen.

Lunelle Siegel is Vice President of Alliance Financial Capital. She has been financing companies for 20 years, from mom and pops to large public companies. She is a frequent public speaker and mentor to small businesses. She currently serves as President of the Florida Chapter of the Turnaround Management Association, an international not for profit whose members are dedicated to corporate renewal.

Alliance Financial Capital is a leading working capital financing company working with companies with annual revenues from a quarter million to $20 million. Alliance is an innovative player pioneering many financing techniques. They are know for the non-notification receivables financing.

For questions or additional information, please do not hesitate to contact Luelle Siegal at 813-831-9477 or e-mail at lunelle@alliancefinancialcap.com

A Financing Primer for Government Contractors©
When Significant Capital Needs Precede Customer Payments on Government Contracts
Richard W. Lewis, Commerce Funding Corporation

The Good News: Your company has landed a new Government contract; one that will result in a significant increase in revenues.

The Challenge: In order to fulfill this contract, you must immediately commit to additional people (payroll), training, materials, and related costs. This commitment must be made in advance of receiving payments from your customer (the US Government). Unfortunately, the amount of capital needed to cover your commitments exceeds the balance available on your existing line of credit. It also exceeds the amount of cash that could be made available by delaying payments to selected vendors. The nature of this contract might justify issuing new equity or debt, but raising capital generally is an expensive, complex task which ultimately may take too long to meet your short-term contract specific capital requirements.

Solution - Planning:
In order to minimize the risk of your company having to scramble to raise enough capital to ramp up for future major contracts, your internal business development forecasting process should identify and signal situations early to senior management. This will allow for the pro-active review of any significant operational, personnel, and financial impacts. Specific terms may be negotiated into the customer’s agreement to dampen these impacts. Such terms may include extended delivery dates, partial payment upon order placement, or progress payments based upon specific performance criteria.

Existing Bank or Lender - If your company has an existing line of credit or borrowing arrangement with a bank or other lender, try to negotiate an increase with them. A responsive lender may provide all of the short-term capital needed until the Government agency begins payment. You should be aware that trade-offs of a significantly higher level of credit might involve committing to a new long term deal, additional loan covenants, greater reporting requirement, and/or higher interest rates. In addition, your credit agreement may constrain your ability to take on other types of debt or lease obligations. In any event it is best to discuss the situation as far in advance as possible and have a full financing plan, presentation, available. Remember, LENDERS HATE SURPRISES.

If your company does not have an accommodating lender, the following alternatives should be considered:

Factoring – This is the sale of your invoice, account receivable, to a bank or finance company (the “Factor”), as opposed to using them as borrowing collateral. The Factor will advance a percentage, usually between 75% and 90%, of the invoice amount to the customer, the balance is refundable upon receipt of payment, less interest and transaction costs. Some Factors will also provide mobilization financing for new contracts and/or “term loans” for multi-year contracts. The Factor will, through the Federal Assignment of Claims provisions, notify your Federal Government agency customer that the invoice has been financed and is payable directly to them. There are several advantages to factoring; most of the A/R bookkeeping, customer credit worthiness, collections, and credit risk become the Factor’s responsibility, and the initial approval process can usually be a matter of days.

In addition, because the credit criteria is on that of the customer, government; federal, state, or municipality, the Factor will generally provide financing for start-ups, 8a, minority, disabled veteran, woman owned contractors, or other companies that may have a questionable credit history. Although sometimes more costly it is a viable alternative to traditional bank financing because of their increased flexibility. In addition, many Factors will provide a “financial support” letter to the Government agency insuring that their institution’s financial strength is behind the client.

Contract Financing/Purchase Order Financing - You may be able to negotiate financing based upon your Federal Government customer purchase order(s). Some lenders provide purchase order financing, as willingness is based upon the credit worthiness of your customer (in this case the US Federal Government). Contract financing is easiest when your products or services are well established and your customer is well known. If your products are new, services are non-standard/unproven, or customers are lesser known, contract financing is more difficult to obtain.

Commercial Financing/Asset Based Lending - This is a common type of financing provided by most banks and commercial financial companies. The primary asset used in this type of lending is your company’s accounts receivable, although inventory, fixed assets, and in some instances, intellectual properties may be used to collateralize additional long term financing requirements. With asset based lending your, as well as your customers’ credit worthiness will determine the percentage of the receivables that will be advanced, usually between 75% and 90%. Inventory and fixed assets advance rates are most often significantly lower because these are less liquid assets. This financing is almost always provided on a revolving or an on-going basis, thus the term “revolving credit.”

Leasing and/or Sale and Leaseback - These financing alternatives can be used to generate capital from fixed assets that are to be obtained or currently owned by your company, such as computers, equipment, furniture and fixtures, vehicles, and real estate. Banks, financing companies, dealers, and manufacturers provide these more specialized services. Your company’s credit standing and the quality of the assets involved will determine the amount of cash that can be raised and the terms under which it is provided. The specifics of the agreement will determine if these leases have to be reported on your company’s balance sheet or if they can be treated as “off balance sheet” items.

SBA Loan – I have listed this last because, although a practical alternative, primarily cost, it does have a few drawbacks. One of which is I haven’t been able to find the “key” to unlock the vault. It usually takes awhile for the approval process, the loans provide for a monthly amortization and interest, and because the SBA takes a security interest, UCC-1, in all of the assets of the company, not dissimilar to alternative financing sources, many times the SBA is less flexible if other or additional working capital is required. Generally, if you have a longer time horizon in obtaining the funding it can be a very valuable alternative.

None of the alternatives mentioned above are mutually exclusive. In many cases, combinations can be very effective. However, there are significant legal and operational differences in these financing arrangements. The terms of some borrowing agreements may limit your ability to take on additional debt and they should be entered into only as part of a coherent financing strategy. Do not be alarmed when the lender asks for your personal guaranty. Personal guarantees are virtually standard for all but the most credit worthy and/or public companies.

For questions or additional information, please do not hesitate to contact Richard Lewis at 703-893-2150, ext. 251 or email at rlewis@commercefunding.com.

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