IT’S TIME TO ADAPT
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” — Charles Darwin
Just as adaptability is key to the survival of the human race, it is equally vital to business survival. In tough economic times, the speed and effectiveness with which business leaders respond to changing conditions can determine whether an enterprise will survive or fail.
If you find that sales are slowing, profits declining or cash trickling rather than flowing, it’s time to adapt to the new reality. Addressing the challenges of today’s markets requires adjusting focus and strategies. A restructuring plan can help you position your enterprise to adapt and thrive in a new environment. Here’s how to begin.
KNOW YOUR FINANCIAL SITUATION
Managing your financial situation effectively is critical to orchestrating change within an organization. Forecasting cash and financing needs and assessing the likely financial consequences of various strategies require projections. Financial projections can help to avoid costly mistakes, evaluate opportunities, attract funding, and benchmark progress.
Create monthly projections for your balance sheet, statement of operations, and cash flow for one year as well as quarterly projections for the next one to two years. It’s helpful to include worst-case financial scenarios to anticipate potential problems and appropriate solutions.
When you review financial statements each month, compare these with projections to determine whether you are on track and to flag any emerging issues.
CAPITALIZE ON YOUR CORE BUSINESS
Adapting also requires examining your business model and determining whether the core business needs strengthening, expanding, or redefining.
Which aspect of your enterprise—products, services, customers, markets—generates the largest, most reliable, recurring profit stream? Study each area of the company to determine what changes may be required to capitalize on this asset
- Strategic—expansion, diversification or refocusing of product/service lines, brands, processes, markets
- Management—structure, compensation
- Workforce—quantity, quality, compensation
- Operations—cost reductions, outsourcing, rationalizing, integrating
- Information systems—updating, reinforcing, replacing
- Financial—equity, debt, dividends
DEVELOP A STRATEGY TO FUND THE NECESSARY CHANGES
If your assessment determines the core business is sound and a restructuring plan can optimize this asset, capital will often be necessary to make this happen. There are a variety of ways to access funds. It may be possible, for example, to free up capital through balance sheet restructuring—renegotiating the terms of loans or leases, exchanging debt for equity or executing a sale-leaseback of equipment or property.
If you require external financing, it’s important to match the sources and forms of capital to your specific goals, requirements, and type of business.
Through the Canada Small Business Financing Program it may be possible to access funds to finance up to 90% of the cost of purchasing or improving buildings or equipment or buying land. As well, the January 2009 federal budget responded to gaps in credit markets by proposing to provide up to $200 billion though the Extraordinary Financing Framework. These include increasing the maximum eligible loan amount under the Small Business Financing Program by $100,000 to a total of $350,000 ($500,000 for the acquisition of real property), and increasing the lending capital of the Business Development Bank of Canada. The BDC offers a wide range of financings including term loans to purchase fixed assets and working capital loans to extend short-term financing or lines of credit. As well, the Export Development
Corporation will now be permitted to temporarily support financing in the domestic market, including accounts receivable insurance.
The banks offer cash flow loans, asset-based loans, secured term loans, and secured operating lines of credit— although in return they expect predictable, positive cash flow and solid security backed by covenants.
If you have saleable assets, asset-based loans structured as a revolving line of credit or term debt of two to five years can be used for working capital, acquisitions, mergers, or letters of credit.
Some companies sell accounts receivable to a factor in return for an advance of capital of up to 90% of the invoice value.
Private equity investors often fund expansions, new product lines, acquisitions, buyouts, and restructurings. Some from the US and other countries are looking to invest in mid size companies with products that are in demand or that have distribution rights to popular goods or services.
Mezzanine financing, which is generally structured as subordinated debt or preferred equity, may be an option for acquisitions, leveraged buyouts, new product lines, or new distribution channels or plant expansion.
In this tight credit market, you will need to be prepared with a detailed financial plan that includes:
Five years of historical financial statements
- Projected financial statements for three years
- Current aging of accounts receivable and payable
- Inventory listing
- Summary of fixed assets
- Summary of major contracts
- Schedule of debts and loan balances, payment and maturity schedules.
If you determine that adapting your operation will take some time but cash flow is diminishing, a proposal to creditors may be an option. This is an agreement with creditors arranged under the Bankruptcy and Insolvency Act. A trustee in bankruptcy assists in preparing an offer to creditors asking them to accept less than the amount owed to them and/or an extension of time to repay debts. The trustee assists in negotiating a compromise with creditors and can work with management to restructure the company and maintain operations.
If you determine that your core business is failing, and turning the company around is unlikely, you may be able to preserve some value by seeking a purchaser that can act quickly. Customers, suppliers, or others in the same or a related industry are often interested in acquiring competitive advantages such as an established customer base, brands, trademarks, or a trained workforce. A professional transaction advisor can assist with identifying potential acquisitions, developing the appropriate transaction structure, and facilitating the sale process.
No matter which course of action you choose, it’s important to keep in mind that economic uncertainty requires creativity and agility. By adapting when you have some time, room to maneuver, and value in the company, your business is more likely to emerge with renewed vigor when the economy accelerates once again.
Stephen Meek, FCA, is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting and advisory firms, BDO helps entrepreneurs and family businesses succeed. You can reach Stephen in the Markham office at 905-946-1066 or smeek@bdo.ca