Capacity

Old school bank training – The 3 C’s of Credit:

Character – Show past history of meeting obligations of all kinds

Capacity – Demonstrate capability of business under new owner to throw off sufficient cash flow to service the debt.

Capital or Collateral – Fall back position for lender if first two C’s do not materialize

 

Capacity – Demonstrate capability of business under new owner to throw off sufficient cash flow to service the debt.

Are you doing annual budgets of revenue and expenses? How long have you been doing them? Have you been meeting them? If your financial system is a historical document prepared only for purposes of filing your tax return, now is the time to start creating a track record of meeting profit objectives that were set in advance. Don’t try to get too detailed with the first one. It will ugly and likely full of gross assumptions and rough estimates. Only in the second and third years will you be able to fine tune this process into a reliable business planning tool. Add additional detail and sophistication each time it is redone.  Make sure you are tracking separately any crucial expense lines.

Revenue projections should not be taken verbatim from the sales staff. Let them set their own goals first and then corroborate that with outside analytics. If you are fortunate to be in an industry where a trade group or a quasi-governmental agency makes long-term trend forecasts, by all means take advantage of that. It doesn’t take a rocket scientist statistician to look backward and find correlation matchups.

Once you are comfortable with detailed annual budgets, start doing summary 5-year and 10-year projections. Spend the largest part of your time here validating and second-guessing your assumptions about market share, pricing strategy, competitive changes……  This is an excellent place to do a thorough review of your customer base to check for out of balance concentration of revenue in a few accounts. Balance is key, especially if the departing management has been the handler for the large accounts.

Finally, do a modification of your 5-year projection (Let’s call it a pro forma) where you adjust status quo to reflect conditions under the new owner. If you are serving as sales manager, how is that function going to be replaced? If you are counting on the new owner filling that role you will limit the marketability of the company to a sub-set of the potential buyers available. Do you look at contract position or employed? Will one of your sales staff be able to be promoted? This is just one example of the type of analysis that needs to get done. Get help. It will be worth the effort.

Jim Peters
Peterspective
(317) 372-2304

 

The instant a private thought is communicated to another in any form, compromises begin to be made in the confidentiality, integrity and availability of the information shared. Yet the appropriate sharing of information is critical to the operation and success of every organization. The purpose of our relationship will be for me to assist with the safeguarding of the information critical to the continuation of your business. My role in our relationship will be similar to that of the sailor in the crow’s nest. I am not there to steer the ship nor am I there to read the compass or do soundings. I am there to keep a watch out for storms or pirates on the horizon and to keep an eye on the distant shore.

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