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Business Finance Tips – Getting the Most Out of Your Capital Raising Campaign

June 16, 2010 by Frank Goley, Business Consultant

The following are key things to keep in mind when structuring and obtaining Commercial Finance, and Raising Capital through Venture or Alternative Finance.

1.     Write a solid Business Plan

a.     Ensure your Strategic Plan process encompasses your Product or Service Development, Marketing Analysis and Marketing Plan in order that your Financial Plans and Statements develop a Financial Strategy which is realistic and achievable.  This will go a long way in obtaining the Funding your Company requires.

2.     We recommend you self-fund and use private investment funds for 10-20% of the total required Company funding, using this money to initially develop your Company to a point where Venture Capital Funds and Commercial Lenders are more open to the opportunity.  This will significantly shorten your Funds Acquisition time and obtain better Finance Structure and Terms.  A great Finance mix could be:

a.     Founders/ Angel Investors Cash:  20%

b.    Venture Capital Early Stage:       20%

c.     Bank Finance:                            30%

d.    Commercial Finance:                  30%

Note:  The lower the Founders/ Angel Investors Cash percentage, the more Venture Capital you will need, which in turn will require more Equity Sharing and less Control of your Company’s Board of Directors.  Positioning your Company with an initial 20% Cash Investment, minimizes the strain Finance can have on a Growing Business.  A 20% Cash Investment will develop your Company to the point which a VC Firm will be interested in your opportunity, leading the way to more Conservative Bank and Commercial Finance.

3.     Do your own Funding Source Research.

a.     Utilize networking and connectionsb.    Compare your results to what an experienced Loan Broker can do for you.  Choose the best avenue.

4.     Don’t Excessively Shop your Deal.

5.     Be flexible in your Finance Negotiations but protect yourself.

6.     Close the deal if it matches up with your Capital Financial Strategy.a.     If the proposed funding does not match up with your Strategy, utilize your back up sources or Explore Alternative Forms of Finance, using the Alternative finance on a short-term Bridge basis to buy you time and secure the funding better suited for your strategy.

Posted in Business Finance. Comment

Alternative Forms of Business Finance

June 15, 2010 by Frank Goley, Business Consultant

Especially during a Recession a business must look at alternative forms of business finance. But more importantly, understanding what types of business finance are available to your business is crucial in your fund raising efforts. When traditional business finance fails to meet your needs, alternative finance is a viable option. Here is a detailed listing and explanation of alternative forms of business finance.

Boot Strap Finance and Leveraging Financial Instruments

§  Founders Investment

§  Friends/ Family *

§  Business Associates

§  Personal Savings**

§  Leverage a Mortgage***

§  Life Insurance Loans on Cash Value**

§  Retirement Fund Loans****

§  Credit Guarantees

§  Letters of Credit

§  Pre-Commitment Letters

§  Pre-Sale Commitment Deposits

§  Insurance Guarantees

§  Customer Deposits

*:  Set limits and rules; ensure done with attorneys; expectations clearly documented; worst case scenario disclosed; not at the undue expense of your friends or family.

**:  Be very careful; not at the unnecessary expense or distress of your family.

***:  Non-Debt Home Equity Venture Funds:  Pledge your Home Equity Appreciation (or Depreciation) to an Investor who supplies cash.  No loan payments, an equity deal.

****:  401(K) Small Business Financing:  To avoid penalties and the personal 401(K) borrowing limit, the Business Owner transfers retirement funds to a specialty 401(K) Plan for new Businesses, which allows the Business Owner to tap the full account balance.  Use of these funds is considered an investment rather than a loan.  There are no limits on borrowing, and it carries no tax penalties or minimum payment limits.

Note:  Company Founders need to bring at least 10% Cash to the table to start a Company successfully and 20% owner contribution is optimal.  Boot Strapping and leveraging can help you get in the 10-20% Cash Contribution range.  See the following sections on other Alternative Funding avenues you can utilize in the early development of your Company.

Joint Venture and Strategic Alliances

§  May obviate the need for other sources of Finance.

§  Shared resources, at a lowered cost and lower risk.

§  Understand clearly the Opportunity Lost Value if pursued as separate entities.

§  Carefully evaluate:

ü  Each party’s objectives

ü  Likelihood of Success

ü  Appropriate Structure

ü  Terms

ü  Roles

ü  Determine if the Relationship is preferable to financing the deal independently.

§  Evaluate the Following Key Elements of a Joint Venture:

ü  Objectives

ü  Anti-Trust Issues

ü  Resources

ü  Funding

ü  Technology

ü  Management & Personnel

ü  Location & Logistics

ü  Corporate Culture Fit

ü  Form of Relationship

ü  Control

ü  Exit

ü  Termination

ü  Liquidation/ Liquidity Vehicle

ü  Buy-Sell Agreement

Angel Investors

§  Informal, yet sophisticated investors, who specialize in early, seed investing.

§  Angels are great to use in the very early stages to develop your Company to where a Venture Capital Firm would be more apt to invest.

§  Much faster to acquire than VC money.  Can obtain funds often in 1-2 months.

§  ROI expectation often less than VC; 20% annual compounded ROI is a good starting point for Angel Investment.

§  Deal can be structured any way the entrepreneur and the angel want to set it up; very flexible.

ü  Combination of Equity & Debt is common.

§  Angels can be located with local Newspaper ads; in VC Clubs, breakfast clubs or networking events.

ü  Can find angles through attorneys, accountants, consultants, financial planners, brokers, etc.

§  Angel or VC?  Here is some guidance in determining whether your finance needs require Venture Capital Investment or an Angel Investor:

ü  Amount of money being raised for the current round:  Less than $1M should be Angel, unless you find a VC Fund that finances seed rounds and/ or you have a pre-existing relationship with a particular VC (and there’s a strong fit).

ü  Determine the total amount of money that needs to be raised over the life span of your Company:  If you can get to good, positive cash flow for less than $3M, angels will probably be best.

ü  Type of Company:  VC looks for enormous investment opportunity, returns and economies of scale, verses linear scale companies.  Angels are less aggressive and happy with smaller companies and smaller investments.

ü  Experience:  First-time entrepreneurs without much of a track record will find it easier to attract Angel money.

ü  Your Network:  VC ties often come through personal and professional networks.  Develop strong ties prior to approaching a VC Firm.  Angels are great on referrals but not necessary.

ü  Hunt for your Lead Investor:  Typically have 3 rounds of private finance with rounds 2 and 3 following a strong, successful lead investment.  Be picky about finding the original, lead Angel.

Online Investor Networks and Online Lending

§  Venture Capital Network is the original and probably the best. The Go Big Network is another good one.

§  These networks pool investor’s monies and venture opportunities.§  Beware of proprietary protections and privacy concerns.

§  Be careful not to shop your deal excessively, as that will diminish your future success on subsequent finance rounds (private equity is a small world and they want fresh deals).

§  Can be a good stepping stone to VC Funding.

§  Often offer helpful resources, online chat rooms and professional relationship introductions.

§  Borrowing Online:  The web has a lot of alternative small business finance options.  One is On Deck Capital:  they look more at your Company’s Cash Flow than your Credit Score and Tax Returns.  They collect small daily debits instead of monthly payments.

Venture Contract Funding and Venture Capital Factoring

§  Use your executed contracts and customer commitments to leverage into Cash in the Growth stages of your Company.§  Expensive terms, but temporary duration.

Hard Money / Bridge Finance and Mezzanine Finance

§  Often Real Estate based but can cross collateralize into a variety of Assets (personal & business).

§  Higher Interest Rates; can have an Equity Participation component; can obtain funds in a few days to a month; the terms of the loan can be very limited (30 days to a year).

§  Less red tape; easier underwriting; stream-lined process.

§  Contingent on Appraisal / Valuation of Quick Sale Value.

§  Hard Money & Bridge Finance often require strong owner equity in the deal (20-30%).

§  Mezzanine Finance helps you leverage a higher LTV/LTC (80-95%), is equity based and has a high interest coupon.

§  Experience and Track Record is a must.

§  Consider them as short-term Rent Money.

§  Needs to be a lucrative deal to support the expensive terms (Interest Rates 10-18% with Equity Sharing in some instances).

Franchises

§  Does the Franchise offer Coop Purchasing?  This will help to free up money by driving down costs.

§  What discounts can you obtain through the Franchise?  i.e. Software Purchases.

§  The Name Brand of a Franchisor can bring credibility and trustworthiness to the table when you are negotiating a Bank Loan.  i.e.  Is your Franchise a bankable brand?

ü  Especially applicable during bad economies when Commercial Loans are especially hard to obtain.

ü  Don’t forget about using the SBA Guarantee to reduce the Bank’s risk.

Posted in Business Finance. Comment

The Venture Capital Term Sheet

June 14, 2010 by Frank Goley, Business Consultant

If you are a business or venture thinking about obtaining Venture Capital funding, it is very helpful to understand the terms of a venture capital deal. I worked in the private equity business for close to ten years and found many companies didn’t really have a firm understanding what a VC Term Sheet comprised. A Venture capital Term Sheet sets forth the principal terms of the deal, normally agreed to prior to drafting the Operating Agreements.  Here is an example Term Sheet…

v  Offering:  100,000 shares of Convertible Preferred Stock, Series A Represents 45% of Company’s Voting Power.

v  Price per Share:  $10/share; $1M in aggregate proceeds.

v  Preferred Stock Voting Terms:  One vote for each Common Stock Share into which the preferred is convertible on all Company matters, with the following exceptions……

v  Liquidation Provision:  $10/share preference over Common.

v  Conversion:  Subject to Anti-Dilution Adjustments.

v  Anti-Dilution Terms:  Weighted Average for subsequent issuances at a price below Conversion Price.  Anti-Dilution protection for Stock Splits, Stock Dividends.

v  Dividend Payments:  10% accrued and payable quarterly, starting at year 2.

v  Redemption Procedure:  Company may call Redemption at beginning of:

Ø  Acquisition of Company

Ø  IPO at excess of Redemption Price

Ø  3^rd Anniversary of Issue, at the following pricing:  Year 3 and prior- 110% of Conversion Price.  Year 4- 108% of Conversion Price.  Year 5- 104% of Conversion Price.  Year 6- at Conversion Price.

v  Registration Rights:

Ø  Demand Registration:  Two, at Company’s expense, for Series A Preferred.  Conditions:  First Demand exercisable at earlier of Company IPO or 3^rd Anniversary date of issue.  Demand can’t be exercised prior to 12 months following IPO.  Minimum Aggregate Proposed Offering Price of at least $3,500 per share Common Stock.

Ø  Piggyback Registration:  Conditions:  Subject to cut-back at Underwriter’s Discretion.  Company not required to offer opportunity to participate more than once, except for those whose holdings are at least 1% of the Company outstanding Common Stock, at time of registration.

v  Representations & Warranties:  Standard (please see my previous blog post)

v  Financial Information & Inspection Rights:

Ø  Unaudited Monthly & Quarterly statements

Ø  Audited Yearly Statements

Ø  SEC Filings

Ø  Stockholder Communications

Ø  Business Plan Updates

Ø  Visitation Rights (with notice)

Ø  Inspect Properties

Ø  Obtain Non-Proprietary Information on Company’s Affairs

v  Board Representation:  Five Members elected by Class voting.  Common holders elect 2, Preferred elects 3.  After Preferred Conversion, all 5 Directors elected by Common Voting as a single class.

v  Pre-Emptive Rights:  Right to purchase a portion of any subsequent issuance of Company Common Stock (or equivalents), based on ownership percentage of the fully diluted Company Common Stock.

Posted in Business Finance. Comment

Venture Capital Structure and Terms

June 11, 2010 by Frank Goley, Business Consultant

If you are a business or entrepreneur seeking venture capital, then understanding what venture capital is all about will significantly help you in that quest for it. In this blog post I will explore in detail typical Venture Capital Structure and Terms.

Investor Investment Objectives: Please see my previous blog post on Venture Capital Strategy for more details on the Investment Objectives.

–Consult the Fund’s Website and Prospectus for their Investment Objectives’ details to determine your deal strictly matches the Fund’s criteria.

Investor Profile: Obtain additional information on the Venture Capital Firm from industry contacts and its portfolio companies.

Structure Complexity: Often structured as purchases of Convertible Preferred Stock, with grants and contractual right.

–Negotiation of terms mostly occurs at the Term Sheet Phase (see sample term sheet following).Often leaves open the need for future funding as circumstance dictates.

Costs: Travel, Due Diligence, Commitment Fee, Legal, Accounting and Consulting.  $25,000 to $50,000 is typical, depending on size, scope stage and complexity of the deal.

Financial Statement, Cash Flow, Accounting and Tax Impacts

–Early stage Companies are high risk so the pay back must be high in relation to the start-up’s assets, which often results in a Harvest goal of a Company Sale or Buy Out at a much higher valuation.  Carefully determine how the intricacies of the Fund’s investment will affect your financial well-being, growth and exit strategy.

Types of Securities

–Most common are Common Stock, Convertible Preferred Stock and Convertible Debt Structures.

–Convertible Preferred Stock and Convertible Debt are often preferred forms of securities.  Convertible Preferred allows a lower valuation of the underlying Common Stock, giving rise to inexpensive Employee Stock Option Incentive Plans.  There are other accounting advantages and equity negotiation advantages to a lower valuation of Common Stock:  ie. Capital Gains Tax Implications, Equity Participation, etc

Convertible Preferred Stock

–It is convertible into Common Stock per agreed on Ratios, subject to adjustment for Stock Splits, Reverse Stock Splits, Dividends, etc.

–Voting Power is equivalent to the number of Common Stock in which it can be converted.

Liquidation Preference:  Preferred stock receives all liquidation proceeds up to the original sales price of the Preferred Stock, after which the remaining liquidation proceeds are shared among Common and Preferred Stock Holders as per agreement.

–Usually no mandatory dividends or sinking fund arrangement

–Permissive redemption

VC Constraints on a Company

–Company Valuation

–Equity Dilution

–Amount Invested at a time

–Board Representation

Anti-Dilution Protection

–Price-Based:  If the value of a Company fails to achieve expected levels in subsequent financing rounds, investors can seek an increase in the amount of equity for their investment.

–Adjustment triggered by a later valuation of say less than 100-120% of the prior valuation.

–Try to negotiate a less aggressive Anti-Dilution provision such as a Weighted Average Adjustment which considers both the valuation and the equity dilution involved.

–Avoid Price-Based Anti-Dilution Provisions that extend to more than one subsequent finance round, which creates dilution uncertainties for later investors.

--Beware of a Ratcheted Adjustment Provision which only considers the valuation element.

Registration Rights

–Demand Rights:  VC obtains the right to make a Company perform a Public Offering(s).

–Piggyback Rights:  VC reserves the right to participate in Public offerings initiated by the Company or others.

Pre-emptive Rights:  Investor has the right to purchase a Pro-Rata Portion of the Company Securities sold in subsequent offerings.

Covenants and Restrictions

–Contractual restrictions on salaries

–Restriction on outside business activities of principals and management

–Stock Repurchase if Management or Founders leave the Company within a specified time period, usually 2 to 5 years.

Representations and Warranties

–Company’s Valid Existence

–Accurate Due Diligence

–Accurate depiction of Company Organization and Ownership

–Company in Good Standing

–Company/ Principals have the Power & Authority to enter into the Financing transaction

–Litigation Disclosures

–Material Agreements, Contracts, Memorandums

–Contractual Default Disclosures–Compliance with Laws, Regulations and Ordinances

–Adequate Trade Secrets, Propriety Protections, Patent Rights, License Rights and Royalty Rights necessary for Company operations

–Not infringing on the Rights of other Companies

–Property Titles–Financial Statement Accuracy

–Good Faith Preparation of Business Plan

Equity Investor’s Compensation

Income from Company Earnings:  either as Dividends or Drawings (ie. Partnership)

Capital Gains:

–Sale of the Company

–VC sells interest back to Company or to other InvestorsDividend payouts are often minimized or accumulated so Company Cash Flows aren’t severely affected

–Retained Earnings realize a Greater Capital Gain for an Investor which can be more tax advantaged

–A combination of Dividend and Capital Gains payouts is common, creating a balance between Company Growth and tax advantages

Public Offering

Posted in Business Finance. Comment

Venture Capital Strategy

June 10, 2010 by Frank Goley, Business Consultant

Understanding how Venture Capital works is crucial when you are trying to raise venture capital funds. This article gives you inside insights into venture capital so you can develop an effective venture capital strategy. This will go a long way toward the success or failure of your venture capital campaign. You can seek Venture Capital for any growth Phase. VC expects Equity Participation through the use of Stock Ownership, Warrants, Options and Convertible Securities/ Debt.A Venture Capitalist wants just enough Control to justify the investment risk.

Two of the important Risk Models VC Firms use to determine the Risk of an Opportunity are: 

1) The Risk / Return Evaluation

– Product or Service Level:

ü  Level 1:  Idea Stage.  Not Operable.  Market Assumptions.

ü  Level 2:  Pilot/ Test Stage.  Market refined.

ü  Level 3:  Fully Developed.  Few Customers.  Market defined.

ü  Level 4:  Satisfied Customers.  Market Established.

– Management Level:

ü  Level 1:  Entrepreneur.

ü  Level 2:  Few Founders.

ü  Level 3:  Partial Management Team.

ü  Level 4:  Full Management Team.  Highly Experienced.

Note:  The higher the Level from both Determinants (Product or Service & Management), the less Risk for a higher Return.  4/4 would be most desirable and cost the Entrepreneur the least.  1/1 would be the least desirable and cost the Entrepreneur the most.  A 2/2 or 3/3 are good Level Combinations to shoot for prior to approaching Venture Capital if financially feasible.

2) The Present Value / Future Value Evaluation

Scenario:  Expected ROI is 35% per year, without inflation, over 5 years.  Present Value of Earnings is $4.5M.  Future Value Earnings in 5 years is $15M.

ü  VC Equity Share is calculated:  $4.5M divided by $15M = 30%.

ü  Maximum Investment is 10 times first year gross (expected) earnings, which in this example is about $500,000.

ü  Conclusions:  $5M maximum investment for 30% of the Company at 3/3 Level over a 3 year period.  A 1/1 Level, Seed/Start Up Investment would be a 45-50% Equity Stake, with an expected ROI of 60%.

Venture Capital Don’ts

ü  Glossy Business Plans with lots of pictures and graphics, with little substance.  We call these “MBA Graduate Plans” – they look good but little teeth or substance.

ü  Relying too much on an intermediary or broker.  VC wants to know how you think.  Use a Business Plan Consultant to help you develop a Business Plan, VC Proposals, Investment Overviews, Loan Packages and a Financial Strategy.  Use an experienced Loan Broker, specializing in VC, to introduce you to VC networks.  But you approach and negotiate (with the help of a Private Equity Law Firm) with VC.  They are principally interested in you, the entrepreneur, the founders and management.

ü  Not confident.  Confidence in your opportunity shows character- a major deciding factor for VC.

ü  Shop the deal excessively.  Find 5 VC firms and approach 3.  Excessive shopping dilutes a deal’s attractiveness.

Venture Capital Do’s

ü  Hire an experienced Business Consultant from the very early stages of founding your Company.

ü  Develop a Financial Structure & Plan and correlate the Plan to a Strategy in identifying and approaching VC Firms.

ü  Find a VC Firm that will bring more than just money to the table:  Resources, connections, strategic partnerships, etc. in your Industry.

ü  Experienced Management Team, backed by solid track records and successes.  “Sell” your Team.

ü  Develop a Comprehensive Business Plan so your Business Concept is well developed.

ü  Be able to articulate your opportunity in 2 minutes.  Then VC might give an opportunity at an initial 30 minute presentation.

ü  Developed Product Plan, Marketing Plan and Strategic Plan so you can demonstrate realistic, quantitative data and projections.

ü  Highly defined, developed Market Niches.

ü  Demonstrate Competitive Edge and Barriers to Entry.

ü  Minimize Risks:  Strategic & Investment Risks.

ü  Grants of Stock may be the structure which Investors prefer; however, this structure can dilute your ownership significantly, while giving up some control in your Company’s decisions (depending on the amount of stock granted).  By contrast, options can be used to combat the dilution and control factors, yet still make an Investor happy.  Options are just as valuable as stock; can be issued in agreed amounts; and the Investor participates after the money is invested based on the agreed option price- this aligns the Investors returns with performance.

ü  Be flexible with negotiations.  Have your Private Equity Law Firm do a run through VC Role Negotiation Session to prep your negotiating skills.

ü  Look for a VC’s good track record and research their funded companies.  Does this meet your expectations and requirements?

Venture Capital Objectives

ü  It is important to research your potential Venture Capital Funds to determine exactly what they look for in an investment, what their parameters are and what they specialize in.  A VC Fund will have a detailed website which will layout their Fund’s Objectives.  You can also find this information in their Offering Prospectus/ Memorandum to their Investors.  Below is an outline of a VC firm’s Objectives to give you an idea what to look for:

Investment Objectives

ü  Rate of Return expectations.

ü  Long- term or short- term capital appreciation.

ü  Early, Middle or Late Stage Companies.

ü  Sectors interested in.

ü  High growth potential.

ü  Liquidity Options.

ü  Expertise, Experience & Reputation of the Fund.

ü  Advisory Board Members.

ü  Members of the Fund.

Investment Criteria

ü  Evaluate in terms of Management, Product, Markets, Financials, and Business Stage.

ü  Highly competent and motivated management team.

ü  Proprietary Product or service that:  meets a strong market need:  Favorable price and cost relationship.

ü  A market which has a favorable mix of Size, Growth, Competitive Barriers and the potential for high volume sales.

ü  Management:

–People are the most important element in a Company’s success

–Balanced Team–Superior Skills

–Team leader with a track record–Ability to retain and attract talent

–Understands Planning & Control–Can make difficult decisions

–Can work with professional advisors

–Accept assistance from the Fund Members

–Commitment to the Venture

–Clearly understands the Funds’ outlook on liquidity, rate of return and investment objectives.

–Above all, integrity, character, accountability and high business ethics

Product or Service

ü  Types of Products and Services in the Fund’s Sectors which are of interest.

ü  Competitive Edge:  Cost, Quality & Performance.

ü  Premium prices achievable?

ü  High Yield Profit Margins.

ü  Dominate or Control a significant market share.

Market

ü  Young, growing fast and provides opportunity

ü  Defined market niche.

ü  Dominance in that niche.

ü  Niche market should be small enough not to attract big company competitors, yet has a strong potential for expansion.

ü  Realistic Marketing Plan.

ü  Marketing Team Leaders should have extensive industry contacts with sales people, sales reps and distributors.

Financial Outlook (these numbers are based on a technology company):

ü  $20M in Sales & Earnings, after taxes, within 5 years.  Generate Return on Assets greater than 20%.

ü  Venture is not capital intensive.

ü  Project prices & profit margins that can cushion early round obstacles.

ü  Reaching Break Even in 2 years.

ü  If it is a capital intensive deal, should be capable of adding substantial value early on and attract later rounds of funding at higher pricing.

ü  Maximum of 10 to 1 return on investment for startups.

ü  Liquidity in 5 years for startups.

ü  Later stage companies: ROI of 5 to 1 in 5 years or 3 to 1 in 3 years.

Stage

ü  Mostly early stage but will consider later stage with high growth opportunities.

ü  Consider small public companies as well as private.

ü  Spin offs as a result of re-structuring and rejuvenation.

Operating Policies

ü  Can change at the fund’s discretion

ü  Geography:

–Any geographic area but most companies are in the West and Silicon Valley, China, Taiwan and Singapore.

ü  Monitoring Investments:

–Free access to management

–Fund receives Business Plan updates regularly

–Fund will not seek majority ownership or run the venture

–Help the venture attract Management to fill gaps and develop its business plan in the early stages of investment–Board Representation

–Fund will provide expertise and assistance with securing key employees, filling management gaps, operational planning, key customer and supplier relationships, joint ventures, financing, security offerings, acquisitions and harvest strategies

Here is a Video on How to Get Funded in a Recession

See this video on Vator.tv »

Posted in Business Finance. Comment

The Venture Capital Process

June 9, 2010 by Frank Goley, Business Consultant

Posted in Business Finance. Comment

Internal and External Sources of Business Capital

June 8, 2010 by Frank Goley, Business Consultant

Understanding what sources of business capital are available to you will help tremendously in your business finance strategy and quest. I will explore both internal and external sources of more traditional, yet assessable, business capital in this blog post. In subsequent blog posts I will discuss venture capital, private investment and alternative forms of business finance.

1.     Overview: The Different Types and Sources of Business Capital Available

a.     Founders’, Principals’, Management Cash

b.    Business Associates

c.     Family

d.    Individual Investors

e.     Venture Capital

f.     Investment Banks

g.    Banks & Credit Unions

h.     Business Finance Companies

i.      Lease Finance Companies

j.      Suppliers/ Customers/ Industry Lenders

k.     Joint Ventures & Strategic Partnerships

l.      Commercial Loan Brokers

m.   Professional Legal & Accounting Intermediaries

n.     Government Grants, Loans & Guarantees

2.     Internal Sources of Business Capital

a.     Cash Flows

b.    Accelerating Receivables Collections

c.     Changing Collection Terms

d.    Disposing of Surplus Inventory

e.     Retained Earnings

f.     Cost Cutting & Cost Saving Strategies

g.    Change Accounts Payable Terms

h.     Asset Management:  Disposing of old or poor performing Assets

i.      Cost Control Mechanisms

j.      Budgeting Process

k.     Productivity Measures

l.      Personal Investments of Company Principals

3.     External Sources of Business Capital and Finance

a.     Suppliers and Customers Trade Credit Strategies                     

i.        Extension to Invoice Pay Dates                    

ii.        Cash Discounts for Early Payment                   

iii.        Make Payment on last day due if no Cash Discount is allowed                   

 iv.        Extend Payment Terms:  i.e.  30 days after the end of the month verses 30 days from receipt, buying you an average of 15 days.                    

v.        Need a Capital increase in 60-90 days to meet demand.                   

vi.        Reduce Delinquency Late Fees                  

vii.        Issuing a Note (promise to pay) for a shipment, with a prescribed later date payment plan.  Readily available and fast.  Less red-tape.  Use for limited time frames.  Don’t hurt Supplier & Customer relationships.

b.    Debt Capital Overview                     

i.        Term:  30-60-90-120 Day Term1-5-10-15 Year Term                    

ii.        Bank Line of Credit:  Secured & Unsecured                   

iii.        Real Estate Loans                   

iv.        Equipment/ Machinery Purchase                    

v.        Inventory Finance                    

vi.        Accounts Receivables Factoring/ Assignments

c.     Bank / Commercial Lender Finance                     

i.        Local Banks/ Community Banks                    

ii.        Credit Unions:  often much more personal than Banks                   

iii.        Bank Finance can be slow                   

 iv.        A Loan Package is critical to successful, timely Bank Finance.                    

 v.        Develop strong relationships with Bankers.  If your Banker can’t help your Company with a Finance need, he or she knows who can.                   

vi.        Deal with at Least the Vice President level at the Bank or Credit Union.                  

vii.        Use local / Community Banks for Regional needs and Large Banks for National & International needs.                 

viii.        Understand the Bank’s lending process so you can facilitate your loan’s progress.                   

 ix.        Network with Bank Presidents at Chamber of Commerce and Industry Events                    

x.        Consider Syndication for large deal.  Hire Syndication Group.                   

xi.        Banking is a lot about Trust & Track Record.                  

xii.        Network with Attorneys & Accountants to find the right Banker for your Company’s needs.                 

xiii.        Use Trade Associations for strong Banking referrals.                

 xiv.        Find Banks that use SBA Guarantees to reduce risk and leverage Loan to Value & Loan to Cost.                 

xv.        Don’t go with the cheapest terms; go with the right Banking relationship and financial products for your Business.  The Long-Term payoff is much better.                

xvi.        Look for Long-Term relationships.  Make your Banker an integral part of your business.  Invite and include your Banker at Company Events and Announcements.  Send your Banker Business updates on a consistent basis.  Include your Banker when giving Suppliers and Customers Company tours.                

xvii.        Work with Banks that can customize terms for your Commercial Loan Requirements.

Resource: To understand how to use the Zeta Scoring System to your advantage please see my Business Plan Book for a detailed explanation and related formulas on the Bank Zeta Scoring System.

Posted in Business Finance. Comment

The ABCs of Business Capital

June 7, 2010 by Frank Goley, Business Consultant

Understanding the needs, pitfalls and considerations behind business capital is absolutely crucial to running a successful business. If you don’t understand how business capital works and particularly how it works in your business, then please learn it today. It will have a huge pay off for the future success of your business.  

Business Capital Needs

There are many reasons why a Business needs additional Capital.  Some of them are (often in combination):

1.     Cost Saving Opportunities

a.     Obtaining better Equipment which will lower production costs, stream line operations, and results in reduced operating expenses.

b.    Taking advantage of Quantity Discounts or Increasing Stock prior to a supplier’s price increases, to realize substantial savings on your Inventory Purchases.

2.     Growth and Expansion

a.     Take advantage of developed Opportunities.

b.    Growth translates into a larger volume of Receivables and bigger inventories.

c.     Need to hold larger sums of Cash to meet obligations with outside vendors and internal business needs.

d.    Expand new branches, new products or increased capacities.

3.     Inventory Control

a.     Seasonal events which demand building up inventories and staffing in advance- receivables may not be fully collected until well after the season ends.

b.    Mismanagement of Assets have allowed Inventory and Accounts Receivables to be over or under stocked.

4.     Economic Conditions Change

a.     Sales and profits have declined temporarily.

b.    Due to changing Economics, customers are slower and longer to pay.

5.     Cash Crunch

a.     Can’t meet current repayment of obligations and debts.

b.    Failing to keep sufficient Retained Earnings in the Business.

Business Capital Funding Pitfalls

1.     Not using Financial Professionals and Business Consultants to determine the appropriate Business Finance Vehicles and Structures.

2.     The Company’s long-term goals have changed, and its Finance Strategy hasn’t been modified to reflect the changes.

3.     Confusing short-term with long-term Capital needs, thereby, using inappropriate Finance Instruments and Products.

4.     Unaware of changes in Financial Product Offerings and Terms in the Marketplace.

5.     Lack of banking and funding relationship.

6.     Lack of long-term and short-term planning.

7.     Poorly conceived or executed Capital Structure and Finance Strategy.

8.     Equity Finance that has severe Anti-Dilution Provisions; expensive terms in convertible debt, grants, warrants and options; securities law compliance issues; and too many unsophisticated investors.

9.     R & D Structures and Joint Ventures/ Partnerships which cause equity dilution, cash flow drains and expensive licensing agreements.

10.  Involved with a Finance Structure which hampers acquisitions, growth or Public offering alternatives.

11.  Capital and Finance Instruments which aren’t customized to a company’s specific requirements.

12.  Not utilizing specialized Accountants, Attorneys and Finance Professionals to:  formulate long-term and short-term finance strategies and objectives; save considerable time and money in finding appropriate funding instruments and sources; provide realistic transaction and terms perspectives and outlooks; and put together an effective Funding Negotiation Team and Process.

13.  Not being involved in the Finance Strategy Implementation enough and relying on loan brokers and finance intermediaries who don’t know your Short-Term and Long-Term Funding Needs and Requirements adequately.

Business Capital Considerations

Things to consider when formulating and analyzing your Business Finance Strategy:

1.     Short-Term Finance Strategy

a.     Inventory Control

b.    Working Capital & Cash Needs

c.     Accounts Receivables Management

d.    Accounts Payable Management

e.     Contingency Fund

f.     Opportunity Fund

2.     Long-Term Finance Strategy

a.     Equity split arrangements with Founders, Management, Key Employees, Partners and Investors.

b.    Does Present Business Financing meet Long-Term Objectives?

c.     Securities Law Compliance.

d.    Liquidity needs and requirements.

e.     Good fit with Investor Groups and Venture Capital Firms who can help meet long term finance goals and bring needed resources to bear.

f.     Adequately planning Financing Rounds and Stages in your Company’s Growth Plans.  Too many rounds or stages without adequate levels of Capital Infusions can increase transactional costs, absorb too much of your Company’s time, inhibit timely development when needed, cause a strain of low cash reserves and reduce future finance bargaining leverage.

g.    Formulate an Investor/ Venture Capital Profile which meets your Company’s Long-Term goals.

h.     Raising too much Capital or the wrong type of Capital in the Initial Round without using reasonably Staged Funding Strategy.  Too much Capital is as expensive as too little capital, causing similar cash strains on the business.  Not finding a good mix between Debt and Equity Finance can create a severe strain on cash flow (too much Debt) or hamper future long term profitability (too much Equity or the terms are too expensive).

i.      Linking your Strategic Plan Objectives, Goals, Milestones and Performance with your Equity Funding Rounds’ timing, terms and amounts.  Ensure you are not just trying to reach your Financial Goals but also meeting Managements’ Milestones.  Venture Capital’s performance outlook (when considering another round of funding) may not be solely reliant on Financial Performance, as much as, concerns about whether management is reaching its prescribed goals and milestones (quantitative and qualitative).

j.      Link Your Finance Strategy’s Funding Rounds and Events to your Strategic Plan’s growth objectives so that your Business Valuation has increased to a level which allows you to significantly reduce the risk for follow on funding from Investors and Commercial Lenders.

3.     Well Designed Investor Profile

a.     Does the investor share your Company’s Vision,Mission and Objectives?

b.    Do your liquidity goals coincide with the Investor?

c.     Does the Investor bring the added expertise and resources your Company needs to be successful?

d.    Does the Investor have too many other commitments?

e.     Will the Investor be a long term of short term partner?

f.     Can the Investor provide additional capital if required?

g.    Is the prospective Investor Group well connected in your Industry?  Have Credibility in your Industry?  What contacts do they have and how can they assist you in developing important relationships?

h.     Low quality Investors can lower your Company’s credibility in your business Community and discourage future Investor participation.

i.      Unsophisticated Individual Investors:                     

 i.        Can have too many demands on your Executives & Managers.                    

 ii.        Can cause interference with Company Operations.                   

iii.        Won’t stick through the tough times.                   

 iv.        Can be more risk adverse than they originally indicated.                   

  v.        Can create litigation issues.                   

vi.        Can be slow in making additional capital infusions.                  

vii.        Can discourage Sophisticated Investors from coming.                 

viii.        Can be too many individual Investors to effectively manage.

Note:  Groups of Professional Investors or Venture Capital Firms can often alleviate the above problems.

4.     Supplier and Industry Relationships

a.     Will your Lenders, Investors, Joint Venture of Strategic Partners adversely affect potential customer or supplier relationships?

b.    Can any of your Suppliers, Vendors or Industry Relationships be an investor in your Company?  Fit?

c.     Is your Company viewed by any of your Suppliers, Vendors or Alliances as an acquisition target?  Will they thwart any other potential investor interest?  Will it adversely affect a public offering potential?

5.     Finance Structure

a.     Is it closely aligned and a result of your Strategic Plan’s Objectives and Goals?

b.    Is it flexible?

c.     Is there room for negotiation?

d.    What control and performance mechanisms are parts of the structure?

e.     Have you run various Debt & Equity mix combinations and scenarios to see the effect on your Cash Flow and Profit & Loss?

6.     Finance Cost Considerations

a.     Points

b.    Commitment Fee

c.     Loan Broker Fee

d.    Legal Fees

e.     Accounting Fees

f.     Consultant Fees

g.    Equity Compensation

h.     Warrants

i.      Options

j.      Due Diligence Fees

k.     Appraisal & Valuation Fees

l.      Guarantees

m.   Insurance

n.     Misc Costs in Loan Conditions

o.    Pre payment Penalties

p.    Covenants

q.    Advances

r.      Default Provisions

s.     Interest Only

t.      Pay down Schedule

u.     Interest Rate

v.     Loan to Value or Cost

7.     Consider: Business Finance Alternatives Impact on Financial Statements, Cash Flow, Accounting and Taxes

a.     Debt Service/ Debt Capacity

b.    Dividends

c.     Equity Agreements

d.    Redemptions

e.     Sinking Funds

f.     Licensing Fees

g.    Royalty Payments

h.     Debt to Equity Ratio

i.      Working Capital Flow

j.      Acid Test Ratio

k.     Return on Equity

l.      Cost of Debt

m.   Cost of Equity Capital

n.     Zeta Score

Note:  For a detailed explanation of the above Financial Ratios, Formulas and Calculations please see my Comprehensive Business Plan Guide and Workbook.

8.     Funding Schedule and Deadlines

a.     Is your Funding Schedule in synch with your Company’s Strategic Plan?

b.    Is your funding schedule set up to maximize your valuation, thereby, minimizing dilution and lending/ investment risk?

c.     Is your funding schedule set up to coincide with major Company Milestones?

d.    Contingency Plans

e.     How flexible is your Plan?  Back up Alternatives?

9.     Executive and Management Time and Role Requirements

a.     Who is to be involved in the financing process?

b.    Roles to be assumed?

c.     Time constraints.

d.    Use of a Consultant?

10.  Funding Venture / Project / Company Overview and Fact Sheet 

Suggested format for targeting Commercial Lenders:

a.     Company Profile

b.    Product & Service Description

c.     Experience & Track Record

d.    Markete.     Financial

f.     Due Diligence

Posted in Business Finance. Comment

A Proven Business TurnAround Strategy and Process

June 4, 2010 by Frank Goley, Business Consultant

The most important parts of a Turnaround Strategic Development and Deployment are leadership (which we discussed in detail in my previous blog posts), experience and expertise.  As I also discussed in a prior blog post, the success of a Turnaround Plan rests with the people on the Turnaround Team and their ability and willingness to incorporate all Company’s management and employees in the process.  It is important to have Process structure which can achieve this.  As a Business Consultant, I understand process, but I also understand the importance of experience and fresh ideas in a turnaround situation.  It is the expertise of an experienced Business Consultant who can adapt process to a particular situation in order to find unique, creative, successful solutions to a tough situation, using the strengths and experience of the Turnaround Team and the insights of Company Managers and employees, finally putting it all together in an agreed upon, synergistic, effective Turnaround Strategy, Plan and Program.

Going into a Turnaround situation as a Business Consultant, I find that the processes I use to find solutions and options are very similar to the one’s I use when I consult with a non-turnaround Company, except for a few critical differences, like the time factor or creditor pressures; however, I find similar factors and pressures in non-turnaround companies as well.  I go back to the point I made in the first paragraph, you cannot hire a Business Consultant soon enough in any stage of business development or situation your Company may presently occupy.  A Business Consultant should be part of your Company’s success team, just like experienced Management is a key piece of a Company’s success.

You will find that this portion of the article on Turnaround Strategy is very similar in some parts to our article, What does a Good Business Consultant do?, because the processes employed in structural terms are similar when used in a converse situation and then tailored to the particular turnaround situation.  The most important thing a business consultant should do upon entering a turnaround situation is to listen, get to know everyone throughout the organization and give them opportunities and avenues to communicate to you, along with the Company CEO.  The Company CEO should be doing the same exact thing alongside the business consultant to instill trust, integrity and openness to the turnabout process.  If the CEO does not hold a position of high esteem with the employees throughout the organization, it is time for him or her to go and be replaced by either a CEO who specializes in turnaround situations or promote someone from within that has this relationship with the Company’s people and can adjust quickly to being an effective CEO.  With this trust and integrity established, it is time to get to work.

Steps to take in a TurnAround Process

Ø  Step One:  Learn about the Business

ü  Tour the facilities and meet the people.  Spend plenty of time talking to the employees explaining the role of the Business Consultant and Turnaround Team.  Encourage Feedback.

ü  Business Consultant meets with the Board of Directors, Executives, Founders, Owners, Department Heads, Managers and Key People.

ü  Assemble the Turnaround Team.

ü  Get a firm idea of the Company’s history, passions, successes, failures, competitive advantages, processes, organizational structure, trademarks, patents, intellectual property and so forth to fully understand the life blood of the business.

Ø  Step Two:  Meet with Advisors, Creditors, Customers and Suppliers

ü  These critical turnaround players need to have a firm understanding of the turnaround team’s goals and objectives.

ü  Establish credibility.

Ø  Step Three:  Evaluate the Problems and Issues

ü  This can only be done effectively if Step One, spending time with the managers and employees, has been accomplished.

ü  Determine timing factors from the outset.

ü  Identify, quantify and prioritize obstacles to overcome.

ü  Have a clear understanding of what the Market can and cannot support.  Give the Plan a believability factor. 

Ø  Step Four:  Identify the most Pressing and Significant Problems

ü  Segregate the problems which have the most influence on the turnaround situation and concentrate on those.  You can concentrate on the other problems later if your turnabout is successful.

ü  Be sure to identify problems as seen by ownership, executives, managers, advisors, creditors, customers, suppliers and most importantly, the employees.

ü  Prioritize, again, the pressing turnaround issues and problems.  Concentrate on this list and the related areas.  Do not get side tracked.

ü  Identify the revenue points and expense ratios for the products and services which are involved in these key problem areas.

Ø  Step Five:  Identify Opportunities

ü  Yes, I said it, opportunities.  Turnaround Strategy is not all about problems, issues and cutting them out of the organization.  That will result in a band aide which won’t be able to hold for very long. 

ü  Opportunities are what will gain traction with creditors, suppliers, customers and employees alike to bring about positive actions to put the Company on a healthy track or at least have a fighting chance thereof.

ü  Opportunities can be hidden but can effectively be flushed out with a good process and they don’t have to be time consuming to exploit or have to be too resources intensive.  Because, in the end, restructuring and cost cutting alone will not bring about lasting success for a turnaround Company and its creditors, suppliers & customers know that.

ü  Get a firm understanding of the resulting margins these opportunities could present, and whether existing products/ services can be used or need modification.  Note, modification is the key word here.  You will not have the time, resources or support of the major players to develop new products or services.

Ø  Step Six:  Analysis

ü  At this point, you must conduct market research and customer inquiries to determine if the market will support the assumptions you have made in the Opportunities Identification step.

ü  Make sure any supported opportunities have a good fit with the current business’s structure.  Can it be done?

ü  Pick out the opportunity or two or three which can be implemented quickly, efficiently and economically.

ü  Go back to your prioritized Problems list and identify strategies to employ which will cut expenses, restructure and bring the problem/ issue back in balance.

ü  Compare the key opportunities & Problems to determine if they are counterproductive and whether you can simultaneously implement them.

ü  Identify and link certain issues and problems.  Clear winners are those which readily relate.  Keep the others “on ice” until and unless necessary.  Exponential results of linking Problems with opportunities will be far more effective than divergent Opportunity and Problem strategies. 

ü  Best advice:  Remember that Turnaround Strategy is not all about cost cutting, problem identification and re-structuring.  Successful Turnabout Strategies are those which have lasting effects and are not just reactive.  Proactive Strategies will ensure the Company has a future, has a fighting chance and has opportunities in the market to quickly exploit.  Identifying and fixing problems are easy and temporal (i.e. the band aide effect); opportunities and successful exploitation of them brings lasting change; a change which may or may not be completely successful but which gives the Company and its employees a fighting chance.

Ø  Step Seven:  Resource Audit

ü  Do you have the right mix of skills, experience, management and people to suit the turnaround strategy?  If not, can you acquire them?  Cost? 

ü  Financial Audit:  Do you have the necessary financial structure and resources for plan deployment?  Is additional finance necessary, available and timely?

ü  Develop Cost Minimization Strategies for the deployable resources.

ü  Develop Contingency Resources.

Ø  Step Eight:  Risk Assessment

ü  Are the risks involved in the Turnaround Strategy manageable?

ü  Identifying critical milestones which will minimize the plan’s overall risk.

ü  Reprioritize the Strategy by plugging in risk factors and milestone achievement factors.

Ø  Step Nine:   Develop the Turnabout Solutions and the resulting Business Strategy

ü  The Turnaround Team puts together the final Turnaround Plan, which provides step by step solutions and exploits opportunities.

ü  The resulting Plan clearly shows how expenses can be minimized and certain profit areas will be maximized.

ü  A Business Strategy is developed which lays out important schedules, milestones and resource deployment to successfully implement the Turnaround Plan.  This Strategic Plan clearly shows customers, employees, creditors and suppliers how these changes will directly and positively affect them.  The Plan is backed by an experienced Turnaround Team, solid Analysis and Excellent Forward- Looking Market Analysis & Planning.  Lastly, the Strategic Plan will show how the Company will re-establish its Competitive Edge in the Market place.  Sell it!

Ø  Step Ten:  Acquire and Leverage Needed Resources

ü  Establish control systems and mechanisms.

ü  Clearly understand the motivations of Resource Providers.

ü  Understand that Financial Resources are mostly a question of structure, as good structure can minimize resulting costs and be strategically leveraged.  An expert Financial Consultant is absolutely necessary.

ü  Look to fill human resource needs inside the company before going outside.  Too many outsiders can breed distrust and unmotivated current employees.  Build in incentives and profit sharing to cut human resource salary and benefit costs.

Ø  Step Eleven:  Deploy and Don’t Look Back

ü  Confidence, leadership and direction are key at this point.

ü  Hindsight is 20/20 and looking back won’t help.  You have a good plan; people are sold on the plan; look and implement the plan.

ü  Deploy Management Systems, Control Systems and Performance systems.

ü  Re-work/ adjust the Turnaround Strategy and Plan as necessary as you progress and learn better, more effective strategies.

ü  The Turnaround Team should meet on a consistent basis and ensure the Turnaround Plan is being implemented as agreed and schedules are kept.  The Team keeps close communications with employees, customers, suppliers and creditors, updating them on progress and changes.

ü  Management is fully delegated and trusted to implement the Plan.

Ø  Step Twelve:  Obtaining and Distributing Value

ü  Along the way, when Plan milestones and successes are met, harvesting options should be considered and deployed to meet company obligations.

ü  Should have a clear understanding and agreement among all parties involved and contained in the Turnaround Strategy exactly what factors will trigger or prevent a harvest, and how that harvest is to occur and value distributed.

ü  This is the stage to remember who got your Company to this point (don’t forget about them):

1.     Your Employees

2.     Your Managers

3.     Your Resource Providers

4.     The Cooperation of your Customers, Suppliers and Creditors

The End Game

If you follow a similar process as prescribed and have a strong leadership qualities and skills, then, more often than not, will the Turnaround Plan be successful.  However, it isn’t always so; sometimes it is too little, too late, depending on the activity and stage of the dire situation.  If that is the case, a Major Re-Structuring, Quick Sale, Bankruptcy, Liquidation or other end result will become the End Game, replacing the Turnaround Strategic Plan with a business dismantling Strategy.   While this can leave a hollow feeling among the Turnaround Team, you will find that if a good Turnaround Process was developed and implemented, yet failed, employees and customers will understand.  They will adapt and move on and so should you.  Holding on to what “could be” is toxic to any future career or new venture.  Knowing you deployed a good Plan and gave it your all has to be and should be enough for you and your employees to move on to a productive future.  While many may see this as failure and defeat, as a Business Consultant, I see this as a learning experience.  Something which will not be revisited as owners and employees alike clearly understand, in the end, how they got there.  The learning experience is invaluable and should be leveraged into many successes in the future.  But remember, if you follow a good Turnaround Process, with an experienced Turnaround Team, the end result will very often lead to great success and renewed future growth.

Parting Advice

Three things I want to leave with you, which are critical to the success of a Turnaround Strategy and Plan:

Ø  Business Consultant’s Importance:  An experienced Business Consultant should head up and coordinate the numerous roles, duties and responsibilities of the Turnaround Team; not the business owner, CEO, lead investor, turnaround specialist, interim CEO, Board of Directors or Key Advisors.  It is the experience, objectivity and expertise which a good Business Consultant can employ to effectively manage a diverse team of Turnaround Experts and Players.  Give the Business Consultant the authority and negotiating room to achieve this and ensure the entire team is on board with this structure.  The Business Consultant is the one player who can be objectively accepted by all the parties involved in the Turnaround Plan- utilize that synergizing power and advantage.

Ø  The Turnaround Team Runs the Show:  It is the team’s role, responsibility and authority to ensure the Plan is well implemented, re-worked when necessary and performance controls are in place along the way.  However, remember the Team’s accountability to the employees, owners, investors, suppliers, customers and creditors is paramount.  Clear lines of authority and responsibility are critically important for the Turnaround Plan’s success, but the team must delegate and trust management with the day to day implementation and management of the Plan.

Ø  Gut Instincts:  Gut instincts are so very important in a turnaround situation.  Process works and is fine and dandy, but turnaround talent also depends on excellent business instincts.  This is where experience plays a major role.  Recruiting experience up front into the Turnaround Team will increase the “gut” factor and be the most successful element of a Turnaround Process, Strategy & Plan.

Please Note:  This is a general outline of a Turnaround Process to employ but must be adapted and expanded for the situation at hand.  This is a good starting point but by no means the final, resulting Turnaround Process.

Posted in Business TurnAround Strategies. Comment

Business TurnAround Leadership Tips

June 3, 2010 by Frank Goley, Business Consultant

In my last blog post, I wrote about Business Turnaround Leadership Qualities. Good Leadership is absolutely essential in a business turnaround situation.  Depending on your role, the entire Company is looking to you for direction, options and a viable future.  It is good leadership that gets a Company through the tough times.  In this blog post I provide some valuable leadership tips that can be applied to the Company CEO, Turnaround Specialist, Business Consultant and / or the Interim / Turnaround / Restructuring CEO.  Extensive experience within the Turnaround Team is essential, but it must be linked with excellent leadership.  Having previously discussed the essential qualities, characteristics and traits of a good Leader, in this post I will examine Leadership skills and roles to employ in order to successfully execute a Turnaround Strategy.

ü  Earn Trust and Instill Confidence:  Give it to the employees straight on and be completely honest and straight-forward with them.  Win them over- you can’t have a successful turnaround without having the “soul” of the Company behind you, the employees.

ü  Openness, Frankness and Honesty:  Carefully and fully disclose the entire situation to Company Management and the employees.  Develop a reputation for being completely open.  This gives employees a realistic picture and expectation, making them more willing to sacrifice for the good of the Company as a whole.

ü  Integrity:  The turnaround business is ALL ABOUT integrity and ethics.  It is NOT ABOUT quickly slashing numerous jobs, selling off assets and selling the remainder to a Private Equity Firm.  Turnaround is about saving the Company with sound strategies and having the support of the entire company behind the development and implementation of the Turnaround Strategic Plan.  Developing a reputation of integrity and ethics allows people to trust and then follow with hard work to make the turnaround a success.

ü  Transparency:  Secrecy and behind the door dealing are often the chief reasons for failure in a Company turnaround.  You need the input and assistance of the entire Company to successfully pull off a Company rebound and turnabout.  Transparency of the Company leadership and Turnaround Team is extremely important in encouraging this critical teamwork.

ü  Clear Communications:  Clearly communicating the Company problems is the first step in winning over the trust, confidence and support of Company Management and Employees.  Clear communications play into the transparency factor, dispelling any impression of secrecy or underhandedness.  Also, as important, are clear, open communications with customers, suppliers and bankers, as without them, no Turnaround Strategy can succeed.

ü  Listen:  This is probably the most important skill to have in a turnaround situation.  Listen to everyone in the Company- they all have valuable insight, ideas and experience, while also instilling strong ties of trust and confidence between the executive management and staff/ worker ranks.  Listen first, advise later.

ü  Availability and Accessibility:  The Turnaround Team should be available via cell phone and email to all employees.  Be sure to answer each email and call people back.  Particularly, if done by the CEO himself, this instills incredible espirt de corps, which is essential to a turnaround being successful.  Also, it is important the entire turnaround team is accessible as some employees may prefer to speak to certain people, versus going straight to the CEO.

ü  Hard Work:  There should be a clear understanding throughout the entire enterprise that a lot of time and endless hours of work are necessary at all levels of the Company, without the merit of additional pay, for a Turnaround Strategy to be successfully developed and implemented.

ü  Sacrifice:  Sacrifice starts at the top and if top echelon of the Company leads by example, then the rest of the Company’s employees will be willing to make the sacrifices necessary to successfully rebound.

ü  Control and Performance Systems:  Accountability and results are very important in a Turnaround Strategy implementation.  Control and performance structure, processes and systems for the Company turnaround must be installed throughout the entire Company.  Power and control in the hands of a few breeds distrust and poor results in a rebound situation.  Having systems in place to gauge the performance of the Company in terms of Turnaround Strategic Goals and Milestones is quite important to keeping things on track an making sure clear communications flow.

ü  Discipline:  Once the Turnaround Strategy is developed, you must have the discipline and constitution to see it through.  Second guessing and lack of confidence in the Rebound Plan will end in failure every time.  Once the plan is developed and agreed on, with the input of the entire Company, have the fortitude to carry it out.  This is where having a CEO with the necessary qualities (as discussed in the previous section) is so vitally important.

ü  Rewards:  A successful turnaround situation will be the most rewarding part of any business career.  This is why as a Business Consultant I absolutely love working on a Turnaround Team.  When times get tough (and they certainly will), remember the end game and the employees and the turnaround team is accountable to and for.

Best Advice 

There should be no fine lines or grey areas.  Transparency, honesty, openness, trustworthiness, integrity and ethics are critically important because, remember, that a Turnaround may end in a Re-Structuring, Bankruptcy, Liquidation and/ or Sale if the Company is too far gone to recover.  If the Turnaround Team is open and honest from the beginning with employees, customers, and suppliers, then no matter what happens, if your actions were guided by integrity, people will understand and be accepting of the result.  And don’t forget this applies to the Banks and Creditors involved.  If people lose their jobs, it is important to have in your Turnaround Plan a job placement service, at the expense of the Company, to place displaced employees in other jobs.  If you have a good relationship with your bankers, a little money and resources spent in this area is an easy sell, especially if a Bankruptcy Judge and Trustee are involved.

Posted in Business TurnAround Strategies. Comment