From time to time as lenders, you will have a face-to-face meeting with a borrower who is in trouble. If you have not had this opportunity, it is because you have not been in the industry long enough or you have not lent enough. This will also be a requirement that many lenders will have soon, especially those in post boom oil regions or those in troubled ag areas.
I recently had one of these meetings. Basically, the meetings are made up of three things: (1) what has happened to get the company to where you are now, (2) where are you at now, and (3) what is the plan to move forward? I find that utilizing financial analysis tools available to the lender can help with the process, especially parts 1 and 2. Many problem business owners need some assistance to show exactly where they are currently and how they got there.
It is amazing how many firms have not had a full written down business plan that they refer to on a consistent basis and update as often as necessary. When your economy is booming, planning is often thrown out the window. All the focus is on how to handle the mass of business that is coming in today. There is no strategy for the future. Each day is an exciting journey as the rudderless ship is blown to and fro as the strong winds of customer business push the sails as they want.
But when the economy turns, a multitude of weaknesses will show up. Warren Buffett once said, “When the tide goes out, you can see who was swimming naked!” Well, when the business goes out, you get to see which owners are exposed! Hopefully it is not ones you have lent to, but as luck will have it, you may undoubtedly have a few bare bottoms showing up in the sand that are your borrowers. I believe the biggest single item that causes this exposure, is a lack of an executable plan for the firm.
So, it was with my borrower. They had a great idea of what caused the problem and where they were currently. They had even made some positive changes with restructuring debts, lowering supply and labor costs, and beginning to find new lines of business. Good, good, good. But when asked about what the plan was, the owners had some ideas, but nothing written down and nothing established that they were following. They were in a lot of ways, the rudderless ship.
Undoubtedly you will face this circumstance in lending. It is up to you to provide guidance, but it must be done without directing the borrower into actions that can cause you lender liability. You need to carefully lay out some options and allow the borrower to select. This plan must be theirs, it cannot be yours. However, if the plan requires debt restructuring, it must have the lender buy-in as well.
The business required a shift from customers from one industry to customers who are not dominated by that one industry. This way, any industrial downturn will insulate the company if they are diversified. Our goal was to help identify factors that would be required to put in place to begin to put a rudder on the ship and steer the company forward. We left the borrower with several questions and ideas to follow up on.
Eventually, we hope this will be the impetus for a workable business plan that can be shared among the organization and will help steer the company out of their problems.
About ten years ago, I had a similar discussion with another problem borrower. We showed our financial spreads to the company with industry averages. In the meeting, we identified three problems, low gross margins, inadequate capital, and too much debt. That borrower took all we had to heart. They installed better bidding software and set a more realistic threshold for profit margin. Then they brought in money from family to help recapitalize the company. The final piece was to sell off a division of the company that was profitable, but kept them from their core business. These proceeds were used to retire debt.
In my last meeting with the owners, they informed me of a new problem. They did not know what to do with all the extra money they had! The company had reinstalled their employer match to the 401k and made up for some of the lean years. They also began some strategic expansion in areas that made sense with their business plan.
A failure to plan is a plan to fail. I do not know of many people who wake up and say, “Today, I am really going to fall flat on my face!” But I do know of many who have no direction as to where they are going. It goes back to the old adage, if you aim at nothing, you will surely hit your target!