Alliance Advisory Group Blog

June 7, 2010

Business Sellers Increasingly Play Banker

Filed under: Strategic Advisory — Tags: , , , , — admin @ 12:47 pm

During the recession, merger and acquisition activity in the lower-middle market (private companies with up to $100 million in annual sales) was anything but active. Now sharp discounts of private company valuations are again piquing buyer interest.

With the tightness of the traditional bank credit markets (historically a major provider of credit in these situations), which we have written about in this space, buyers are increasingly turning to sellers to fill the funding gap.

We turned to Greg Caruso (a strategic partner of Alliance Advisory Group), President of Harvest Associates, LLC, a noted local expert in the M&A community to provide his insights regarding this situation. Here are his thoughts:

“Seller take-back is an essential component of getting a transaction done today because of the lack of bank financing. In evaluating an offer where substantial seller financing is involved we recommend the following be considered:

1. What will the price be without the financing? Often the price without the seller financing will be very close to the amount being put down by the buyer with financing. Buyers only have the cash they have. The internal rate of return on 3rd party equity is cost prohibitive. If you must sell in this environment what is your real risk from taking a note when the alternative is a guaranteed $0 ?

2. On a more positive note the buyer must be carefully underwritten and transaction structures sometimes must be modified to reduce the risk of taking a buyer note. We recommend that the seller consider – **The buyer’s experience with business in general. Ownership experience is highly preferred. Owning a business is just different than even being the 2nd in command and not an owner. I equate it to the difference between riding a bike and being in the bike seat. Seems the same to the person in the bike seat but it is not. Of course, the buyer’s experience in the exact industry is also helpful. **Additional resources from other sources of cash such as investments, other businesses etc. Remember to consider the likelihood that those sources of cash could become a cash drain and what that would mean. **Collateral such as outside real estate, security in the business assets etc.

3. The seller may have to stay involved with the business for 1-5 years to make sure the buyer can manage the business and pay the note. If the buyer can’t pay the note at least the seller will have a shot at taking the business back over.

None of this is as simple as a bank taking the financing risk. What it means is sellers need to be prepared to share in the risk to gain the upside and sell earlier so they have the energy to stay involved if they want full value. Unfortunately it may be the only way to get full value for your business for quite a while.”

If you are a buyer or seller in this, or any, market it is important that you have a strong advisory team supporting you in the area’s of strategic advisory, legal, accounting, risk management/assessment, etc. The dollars you spend on the front end will save you a tremendous amount of money and heartache in the long run.

Health-Care Bill Surprise: 1099 Nightmare

Filed under: Strategic Advisory — Tags: , , , — admin @ 12:33 pm

A clause buried in the Health-Care bill requires more tax forms—and small business will bear the brunt.

A provision, inserted by Democrats on the Senate Finance Committee to help offset the cost of the Health-Care bill, requires companies to report to the IRS payments of more than $600 a year to any vendor. The intent is to capture $2 billion or more a year in taxes on income that currently goes unreported by contractors and small businesses.

Today, businesses must file 1099-MISC forms only for freelancers and other service providers that aren’t incorporated. The new rule, set to take effect in 2012, will expand such reporting to include payments to companies, and for goods as well as services. That means businesses will need to get tax ID numbers and file forms for almost all suppliers—and track all their small expenses to see which vendors meet the threshold. The National Small Business Assn. estimates that the average company will have to file 95 of the forms under the measure, up from fewer than 20 today.

It is generally acknowledged that small business is the engine of growth for our economy and the one sector we should be able to count on for getting us out of our current economic doldrums. So why does government think they can continue to add additional reporting burdens on this sector and continue to sap their energy and vitality?

May 24, 2010

Successfully Navigating the Current Bank Lending Environment

Filed under: Strategic Advisory — Tags: , , , , , , — admin @ 8:21 pm

* Has your lender tightened the terms on your existing loans?

* Have you found getting new loans a challenge?

* Has your lender been merged or bought and your relationship lost in the confusion?

* Not sure what is really happening in the banking industry?

Credit is the life blood of our economy and particularly our business-to-business relationships. This flow has been severely disrupted and threatens to take many viable businesses down with it. If you think the impact is just confined to Wall Street or the money center financial institutions, think again! We are now seeing the cascading ripple effects flowing into all corners of our national economy. Cases in point:

* Our client (whose bank recently changed hands) contacted the bank to inquire about their line of credit and was told the bank had no record of any such LOC.

* Another client received a form letter from their bank telling them their line of credit had been frozen. This left the client without their expected operating funds on which to run their business.

Although we are starting to see some freeing up of the credit markets, we still have a long way to go before we get back to “normal.” Many of our clients have had to devote much time and attention to establishing new bank relationships or reestablishing existing ones.

Here are some tips for getting and keeping a solid bank relationship:

1. Have a business plan that provides the company’s background, its history, and most importantly, where it’s going in the future.

2. Provide budget and financial projections. An entrepreneur who’s borrowing money should detail what he or she is planning to do with those funds and how they’re going to help the business grow or thrive.

3. Check your personal credit score regularly. Banks often do. Most lenders are going to look at your credit score because it tells a lot about the individual that you won’t see otherwise in a business set of financials. If an individual has a bad credit score, it doesn’t matter how good the company financials are.

4. Maintain up-to-date financial records prepared by a business accountant even if you use accounting software. A lot of people use canned software systems, but [records] should be prepared by someone who’s financially astute, who can prepare a balance sheet, income statement, tax returns, and updated personal financial statements for the chief executives.

5. Plan for the possibility that you may have to personally guarantee the loan.

6. Be prepared to provide personal collateral for the loan if asked.

7. Seek out information from the Small Business Administration to see if you qualify for a loan guarantee.

8. Start and maintain a relationship with the bank. If a bank is going to make a loan, they want you to bring your entire banking relationship to them—deposits, business accounts, even your personal account.

9. Refer other businesses. Banks are always interested in receiving referrals. It’s not a bad thing to refer other businesses to your bank.

10. Don’t surprise your banker. Banks don’t like surprises. If there are things happening at the company—good or bad—be sure to communicate with the bank. Let them know how you’re doing—the things that are positive and negative. Make a concerted effort to meet with the bank regularly.

Top 10 Tools for Maximizing Cash Flow

Filed under: Strategic Advisory — Tags: , , , , , — admin @ 8:05 pm

1. Shore Up Capital (both equity and debt) as you go. This means leave equity in the company to grow so that borrowings may grow as well without increasing the debt-to-equity ratio.

2. Track Cash Daily so you can manage cash outflow (your company’s expenses), cash input (payments received) and borrowings appropriately.

3. Re-Forecast Cash Weekly to get good at projecting cash surpluses and shortages well in advance.

4. Stay Close to Lenders and prospective Investors long before you need them!

5. Remember that Growth Gobbles Cash, so determine the “right growth rate” for your company at its different stages of life.

6. Become a C-H-I-P-S searcher for life! That stands for “Cash Hides In Peculiar Spots.” Turn over every stone as you walk the four corners of your business daily.

7. Break The Check-Signer’s Arm! And then sign the checks yourself for a while; this will help you REALLY understand where your people are spending YOUR money.

8. Have An “all Hands” Weekly Meeting with everyone in the business who has an impact on cash, incoming and outgoing.

9. Remember — Owning 40 Percent Of A Success is far better than owing 100 percent of a failure. Too many entrepreneurs have hung onto “control” right into Chapters 11 and 7!

10. Become A Cash Student, striving to understand the things that have driven your company into paroxysms in the past.

May 20, 2010

Tax Credit to Pay Third of Small-Business Health Cost

Filed under: Strategic Advisory — Tags: , , , — admin @ 1:27 pm

As many as four million small businesses in the U.S. may qualify for tax credits to recover more than a third of the cost of providing medical care for employees, under a program created by the health overhaul law.

Businesses with less than 25 full-time employees each will be eligible, according to a U.S. Treasury Department fact sheet made public today. Enterprises that qualify will get 35 percent of the cost of employee health-care premiums reimbursed by the government, beginning this year, and 50 percent starting in 2014, the fact sheet said.

To be eligible, companies have to pay, up front, at least half the cost of employees’ insurance premiums. Only companies with 25 or fewer workers may take the credit, and the average salary of the employees must be less than $50,000.

To find out more regarding this tax credit opportunity visit the IRS website or review their fact sheet.

May 11, 2010

Access to small business credit remains tight

Filed under: Strategic Advisory — Tags: , , , , — admin @ 1:14 pm

Anyone who has gone out into the market to find new small business credit or hold on to what they already have has probably experienced the new lending environment.

From our perspective two things are happening that has turned the lending spigot to a small drip. First the banks are licking their wounds from the excess (some would say reckless) lending they engaged in before the big meltdown. This has made their appetite for new loans virtually non-existent.

Second the regulators are now ruling the day in determining the risk levels banks can engage in, even if the bank was interested in extending credit. From our perspective this is somewhat a case of closing the barn door once the horse has escaped. Obviously the regulators should have been doing a better job of monitoring the lending and overall risk profiles of the institutions they oversaw during the hey day.

A couple of good articles on the current state of the lending market have recently come out and are worth a quick glance. Here are links to each, C&I Lending to Stay in Doldrums and Big Banks’ Small-Business Lending Promises.

What kind of action plan should you put in place now to ensure continuing access to operating capital?

* Use rational thought and planning to avoid knee-jerk reactions.
* Prepare a weekly cash-flow plan for at least three months (preferably six months) to see what your cash flow needs will be and how you will cover them.
* Reassure your banker of your company’s financial viability. Ask what you can expect of the bank in the coming months.
* Start courting other banks to ensure that you are not left high and dry if you experience a problem with your primary lender.
* Examine your accounts receivable for potential problem customers and begin aggressive collection and work-out activities.
* Look at exporting as a market strategy. The dollar is likely to be weak for a while and U.S. goods and services will be a bargain abroad.
* Trim excesses in your operations and hold on to internal cash.
* Get external help from turnaround experts who can help you develop a survival plan.
* Be optimistic—the economic crisis will pass in time. The key is to anticipate carefully and take intelligent action.

Planning and flexibility are key to successfully navigating these difficult times. Thinking outside the box is called for as well. Think beyond traditional commercial financing sources if necessary. Other areas to consider might be credit unions, grants, credit cards, angel investors, venture capitalists, factoring (selling a business’s receivables), friends and family, and microlenders. Each of these alternatives has pros and cons associated with them so be sure to carefully evaluate each option and which is best suited for your needs.

May 6, 2010

The IRS Targets Independent Contractors

Filed under: Strategic Advisory — Tags: , , , — admin @ 2:45 pm

If you are not already aware of this you need to be. With the recent economic downturn many employers have begun using independent contractors (1099’s) in place of employee’s (W-2’s) in order to save costs and better align their labor to their business need.

Both the IRS and the states are beginning to crack down on this and auditing firms to make sure these folks are actually independent contractors by their (the governments definition). Here is a good article on this: http://bit.ly/dp4Y3V.

The IRS guidelines for independent contractor classification looks at the relationship from the perspectives of:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Visit the IRS website and review their specific information on this subject, http://bit.ly/DLM9O.

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker along with other charges and penalties.

April 27, 2010

Preparing for the economic upturn

Filed under: Strategic Advisory — Tags: , , , — admin @ 9:58 am

If your business is struggling take decisive steps to turn it around and be poised to grow this year. Below is a quick list of things to focus on that can have an immediate impact.

1. Get your finances under control. The most apparent message you get during tough times is your financial performance. Make sure you have good information on which to base decisions. Knowledge is key here in order to determine good choices, invest in high ROI items, and manage your day-to-day finances.

2. Evaluate marketing effectiveness. Don’t cut your advertising and marketing budgets, but put tight controls in place that allow you to gauge the response and adjust your expenditures on a weekly basis. If something’s not working, make changes sooner rather than later.

3. Anticipate opportunities. In whatever form it takes, there will likely be a large influx of government money this year as part of President Obama’s economic stimulus plan. Prepare a strategy for tapping into this and any other opportunities you can take advantage of.

4. Create a rapid response team. Set up a recession-busting team that can anticipate the effects of the downturn and react quickly. You may find that your best answers will come from within your organization.

5. Get creative. Brainstorm innovative solutions to your business problems and begin to execute on them. Make sure you designate a champion for each initiative to be undertaken and to report on its progress within the company.

6. Minimize layoffs. You may have no option but to cut some staff. However, do your best not to make sweeping cuts that will cause morale and productivity to drop among your remaining employees and drive other workers out the door.

7. Touch base with customers. Provide clients with reports showing the work you’ve done for them and the results you’ve achieved. Make it a point of holding face-to-face meetings periodically. Meeting in person says you are interested and gives you an opportunity to literally see things that you can help address.

8. Ask for feedback. Don’t assume your customers are satisfied. Ask how you’re doing and take their suggestions seriously.

9. Take complaints seriously. If clients ask for changes, investigate what it is they want and then accommodate them if at all possible. If not, explain why not.

April 17, 2010

Managing Your Cash Flow

Filed under: Strategic Advisory — Tags: , , , — admin @ 12:42 pm

A healthy cash flow is an essential part of any successful business—made even more critical in this current economic environment. Some business people claim that a healthy cash flow is even more important than your business’s ability to deliver its goods or services! That may be placing a bit too much importance on your cash flow, but consider this—if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But, if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business! No doubt about it, proper management of your cash flow is vital to making your business successful.

* Understanding cash flow is the first step in effectively managing your cash flow. There’s more to it than it just being a fancy term for the movement of money into, and out of, your business checking account.

* Your profit is not the same as your cash flow. It’s possible to show a healthy profit at the end of the year and yet face a significant money squeeze at various points during the year.

* Analyzing your cash flow will help you spot some of the problem areas in the cash flow cycle of your business. As in any good analysis, you need to look individually at each of the important components that make up the cash flow cycle to determine if it’s a problem area or not.

* A cash flow budget is a good way of predicting your business’s cash flow for the next month, six months, or even the next year. If you aren’t preparing a cash flow projection, now is the time to start. It may be eye opening.

* Improving your cash flow will, without a doubt, make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. The cash flow budget is also a handy tool to use in the improvement and management of your cash flow.

* Filling your cash flow gaps. From time to time, almost every business experiences the need for more cash than it has. If you find yourself in this position, you may have to borrow money to fill the gap.

* Handling any cash surplus is just as important as the management of money into and out of your cash flow cycle. With the proper management of your cash flow, you might find yourself with a little extra cash with which you can pay down debt or earn investment income.

April 6, 2010

Planning for Growth in the New Normal: Alliance Advisory Group Sees Opportunity in “Lessons Learned” from Recession

Filed under: Strategic Advisory — Tags: , , , — admin @ 2:27 pm

This February, Forbes Insights and CIT Group Inc. released an eye-opening report: “U.S. Small Business Outlook 2010: Lessons Learned—A Case for Greater Optimism.” The authors interviewed more than 200 business owners and key executives in $1-15 million companies, creating a snapshot of where we are now, in the “new normal.” The study’s real value is in the implications the data holds for businesses of any kind as we move cautiously into the recovery.

Nearly all of us faced challenges during the downturn—some more dramatic than others. The question is: how will business owners apply the lessons we’ve learned to make the most of their opportunities, internal and external?

Here are the four key lessons from Alliance Advisory’s perspective:

Lesson 1: Have a plan

In the last 18 months, many companies hit a wall, or worse yet, broke through that wall only to fall off the top-line revenue cliff.

The recession has shown us that small and mid-market businesses did not have the control necessary to maintain or stop the decline, and took drastic action to limit losses. In large part, these actions were reactive rather than planned.

The downturn—and its eventual impact on operations—was not something many smaller companies had prepared for. From mid-2008 and back, we were fat, dumb and happy. Times were good. Money was flowing freely and being spent. A certain degree of complacency worked its way into the system. The majority of companies, as indicated by the survey, did not have a plan of action to put in place if tough times hit, so they made changes on the fly, scrambling to redefine themselves without a model.

Only 64 percent of the companies surveyed intend to aggressively seek growth in 2010. What about the other 36 percent? They are not done reacting to the downturn. The unspoken fact is, they are worried about survival, not growth.

Lesson 2: Plan for profitability within the “new normal”

Having survived the recession is an accomplishment in itself. Just being in existence puts you in a position to benefit where others have failed. The exact definition of the “new normal” is in flux, but we can say unequivocally that the mentality of “if it isn’t broken, why fix it?” proved suicidal. Assume that your business model is broken somewhere and you have just not noticed yet.

Smart companies thrive by constantly reinventing themselves. Does that mean radical change? No. It means evolutionary awareness: constantly analyzing what they do, and how, where, and for whom they do it—adapting to the changing competitive landscape.

If your company has survived, you might be tempted to let down your guard. Don’t! You may have dodged a bullet, but the next shot is unpredictable. Protect yourself by truly understanding your operating expenses. Start by taking the top ten expenses by percentage of total, and drill down into them, identifying opportunities and risk. For service businesses, the biggest expense will be human resources. Do you have the right people, doing the right things, and are the roles and expectations clearly spelled out and articulated?

Revenue growth is an excellent goal, but in the new normal, focus on profitability first. Our clients have seen up to triple-digit increases in profitability from single-digit increases in revenue, just by making their operational mechanisms more efficient.

Warren Buffett remarked that when the tide goes out, you learn who’s been swimming naked. Plan now for low tide.

Lesson 3: Plan for complementary revenue streams

For companies targeting growth in 2010, much of the past two years was spent looking inward, rationalizing the business model based on the new revenue reality. Once you’ve planned for profitability in the face of 20, 30, even 50 percent revenue declines, it’s time to expand market planning and evaluate new revenue opportunities.

Your company has a skill set and capabilities in a particular area. Going forward, you must find ways to exploit these to get a bigger slice of the pie. I advise clients to identify what they do well, boiling it down to their core competencies, and leverage these to take advantage of other opportunities in the marketplace.

When you’ve defined new offerings to take to the marketplace, start with your existing clients. With good will already established, your chances of selling something new or additional will be much greater than recruiting a new customer.

The greatest threat to finding new revenue opportunities is tradition (we do business this way because we’ve always done business this way). A resistance to change equates to a failure to take risks.

Lesson 4: Build accountability into your plan

Planning is not a once-and-done exercise. It is a process. When you’ve set a plan for a period of time—say, your fiscal year—you need to revisit it regularly. I recommend evaluating results against your plan at least monthly. Develop a standard process for measuring performance against the plan, and evaluate progress on your key objectives at least monthly. Once a quarter, evaluate the bigger picture. How has the landscape changed? What new needs or threats have appeared and how will you maneuver around them?

Entrepreneurs create businesses around a passion or a particular proficiency, but the disciplined management and execution of strategic, operational and financial plans tend to be elusive.

If that is the case in your organization, building accountability into your planning process can mean the difference between growth and mere survival.

« Newer Posts — Older Posts »

Powered by WordPress

Email Newsletters with Constant Contact