Conquering the Financial Side of Your BusinessPresented by

Rich RussakoffBottom Line Consultants

www.russakoff.com

6 Keys to Evaluate Growth

1. Revenue growth (top line)2. Earnings growth (bottom line)3. Cash flow4. Debt5. Creating value6. Access to capital

Projecting Your Cash Flow and Capital Needs

Assessing Your Short and Long Term Financial Needs

The Cost of Growth Capital for expansion of: Geographical expansion - national &

international Mergers and acquisitions

Assessing Your Short and Long Term Financial Needs

Capital for expansion of: Plant/equipment Technology (hardware,

software, etc.) Inventory HR

Assessing Your Short and Long Term Financial Needs The Cost of Growth -

Human Resources

Hiring Training Salaries Outsourcing Support personnel Head hunters

Hidden Costs of Employee Turnover

Recruiting Interviewing Testing Training Lost knowledge Ramp up time Do you have the right fit

Assessing Your Short and Long Term

Financial Needs The Cost of Growth - Market

Development Advertising, promotion and PR Surveys/focus groups Mailing lists Materials (printing, Web sites, etc.) Associations/trade shows Travel & entertainment

Assessing Your Short and Long Term Financial Needs

The Cost of Growth - Planning Consultant’s Market research Venture Capital providers Investment Bankers

Assessing Your Tools for Growth

Do you have state-of-the-art systems in place to: Maximize

purchasing dollars Finance

receivables Collect receivables

on a timely basis

Assessing the Best Wayfor Your Company to Grow

What is the cost of capital/growth(time & dollars), including: Self Financing Growth Debt service Giving up equity Mergers and acquisitions Your business focus

How do you guarantee ongoing cash flow?

Self Financed Growth

Cash flow management Better receivable management Lower COG’s – Higher prices/margins Cost reductions/change business

model Cash flow cycle

Boost Your Cash Flow By…

Increasing your sales Raising your prices Getting paid up-front Using vendor financing Offering attractive add-ons Implementing just-in-time inventory

management

Boost Your Cash Flow By…

Bartering instead of buying Making your money in the buying Outsourcing Reducing employee theft by

reducing temptation Achieving greater and longer

retention rates Creating timely, meaningful and

user-friendly financial information

Cash Flow Drivers

When do you pay your bills? Rent Federal withholding Salaries Notes Vendors

Cash Drivers

Negotiation of favorable terms Invoices sent out on a timely basis Discounts for early payment Late fees Follow-up phone calls

Vital Measures

Aging receivable schedule Aging of payable Earnings – accrual/cash Inventory turns COGs of services Top 20 clients (today/historical)

Identifying Value Drivers

Revenue run rates from all sources Solid recruiting / high retention rates High Gross Margins High Net Income High Growth Rates Good Management/Solid

Infrastructure Diversified Customer Base

Measuring Critical NumbersWholesale Warehouse Operation Current

Inventory - $1,000,000

Gross Profit - 40% Turnover - 2x Net Profit - 5%

Goal for Continued Operation Inventory -

$500,000 Gross Profit - 45 % Turnover - 4x Net Profit - 15 %

Possible Action Items

Identify your current value drivers and determine others

Compare your profit and gross revenue per employee with industry averages

Have appropriate value drivers calculated and presented to you on a monthly basis

Financing Opportunity Assessment

Determine what you need. Do you have a viable loan

opportunity? Is there a gap between what you

need and what you can get? Are there other and/or better

options?

The 5 Cs of Credit

1. Character: Are you trustworthy?2. Capital: How much have you

invested?3. Conditions: How is the

economy/industry?4. Collateral: How are you securing

the loan?5. Capacity: Can you repay the

money?

Securing Financing - The 4 Phases

1. Prepare (the five Ps)

2. Present3. Persist4. Perfect

Typical Financial Products and Services

Equipment acquisition facilities Cash flow-based lines of credit Note and contract receivable

financing

Typical Financial Products and Services

Refinancing and consolidations Acquisitions Growth Turnarounds Purchase orders

So Many Choices, So Little Time

The 3 “F’s” Credit card financing Bank financing Factoring / Asset-based lenders SBA guaranteed programs Leasing

So Many Choices, So Little Time

Federal, City and State programs Vendor financing Mergers Strategic/ joint partner financing

So Many Choices, So Little Time

Purchase order financing Institutions/mezzanine financing Seller financing in acquisitions Withholding Federal withholding Creative programs

What Turns Bankers & Investors On?

A clear business plan with: Realistic projections Showing revenues Expenses Appealing bottom

line Long-range strategic

plan A mission: “This

business is founded because…”

What Turns Bankers & Investors On?

Backup or “what if” plan Evidence that you have clearly

researched and even tested the market strategy

Clearly defined market niche & marketing plan

Solid oral presentation

What Makes a Viable Loan?

Rate of Growth Profitability Credit History Quality of the

management team

Industry Trends Use of Money Experience

Why Fund Requests are Most Often Rejected

Unrealistic, low expense forecasts A lack of a total plan Inability to take and handle criticism Underestimating capital

requirements Overstated revenue projections

Why Fund Requests are Most Often Rejected

Insufficient testing of concept or business model

Little or no experience in the business field

Seeking more than is expected Inability to learn rapidly

Why Fund Requests are Most Often Rejected

Lack of trust of others Poor communication skills Ability to give and take Lack of a sense of caution Lack of appreciation for “value of

money”

Find the “Red Flags”

A downturn in your industry A poor credit rating Increasing accounts payables A declining balance sheet Ratios that aren’t in line with

industry averages New competition

Do I Really Want Your Money?

“…do a lot of diligence on the people that are trying to give it to you. Money is a commodity.

Figure out what specifically you need and look for money with that specific extra value.” Martin Tobias, founder of Loudeye,

Business 2.0, March 2000

Now is Still a Good Time to Finance a Growing Business

There are many banks targeting small business loans!

Many banks are still “buying” businesses.

What turns banks/investor on/assessing opp/putting together knock sox/red flags/searching for lender/presentation/negotiation/making banks happy/keys for success

Why Banks Want You

Millions of employers in the U.S. employ between 10 and 250 employees, which represents over 100 million employees.

Banks make money providing services including direct payroll deposits and 401Ks.

SBA-Guaranteed Loan Program

Examples: Low DOC 7(a) Program 504 Program (Real Estate) Myth of Direct Loans

SBA-Guaranteed Loan Program

Examples: Export Working Capital Loan Guarantee

Program Small Business Investment Company

Financing Economic Development Loan Fund

Special State & County Programs

Export Financing Assistance Enterprise Zone Assistance Job Creation Programs

Factoring

Benefits: Improve cash flow Eliminate bad debts Reduce operating cost Increase sales Improve management information

Factoring

Benefits: Credit protection Accounts receivable bookkeeping Collection services Financing

What Creates the Perception of Value/Higher Multiples?

Rate of Growth Current

Profitability Future Profitability Quality of

Management Credit History Advisory Board Balance Sheet

Industry Trends Quality of

Competition Learning Curve Market Brand Board of Directors Deal Structure Cost of Entry

Searching for the Right Bank, Investor or Both

The telephone blitz What to say when they say “NO” Investors rarely read unsolicited

packages

10 Reasons to Shop 10 Banks

1. The first two are practice runs2. To receive better pricing3. You fine tune your presentation

each time4. Learn how banks work and bankers

think5. Learn the different personalities and

approaches

10 Reasons to Shop 10 Banks(cont.)

6. Get better interest rates7. Less restricting covenants8. Minimize or eliminate bank

fees/charges9. Create a sense of urgency10.Create a buyer’s market

Bank Analysis I: Proposal for DiscussionLine of Credit Term Loan

Bank Amount Term Interest

Fee Calculation

Amount Term Interest

Fee Covenants

1 Unity $450,000

2 Years

P + 1.5%

None 80% - 90 days

$300,000

7 Years

P + 1.75%

None Rolling 4 quarters cash flow coverage 1.4%; Max debt to worth: 2.0X

2 Quality

$500,000

1 Year

P + 1% - 2%

1% 75% - 90 days

$300,000

5 Years+

P + 1.5%-2%

None A/R aging monthly, financials quarterly

3 Only $300,000

1 Year

P + 1%

None 80% - 90 days

$300,000

3 Years

P + 1%

None To be Negotiated

4 First $300,000

1 Year

P + 1%

0.5% 80% - 90 days

$300,000

7 Years

P + 1%

$7500 SBA

Max debt to worth 1.75X Min net worth $500M; $300M Life assignment

5 Nature’s

$500,000

1 Year

P + 1%

½% Up front

80% - 90 days

$150,000

3 Years

P + 1.25%

1% up front

Max Liab to tang net worth 1.5X; Current ratio 1.25X; Current maturity coverage 1.5X; No dividends or distributions

6 Hastings

$400,000

1 Year

P + 1%

None 80% - 90 Days

$200,000

1 Year +

P + 1%

None Min. Net worth $550M, Max debt to worth 1.4X: Max owner’s comp. $175M; $600M life assignment

Bank Analysis II: Actual offers: Line of Credit Term Loan

Bank Amount Term Interest

Fee Calculation

Amount Term Interest

Fee Covenants

1 Only

$400,000

1 Year

P + 1%

No 80% - 90 days

$300,000

5 Years

P + 1%

No Max debt to worth 2.0X; Min. net worth $500M Cash flow coverage 1.25X.

2Hastings’

$300,000

1 Year

P + 1%

No 80% - 90 days

$300,000

3 Years+

P + 1%

No Min net worth % $500M; Max debt to worth 1.4X; $600 Life assignment

3Quality

$500,000

1 Year

P + 1.5%

1% 80% - 90 days

$200,000

3 Years

P + 1.5%

No A/R ages monthly; Financials monthly; Internal Audit Team

4Unity

$450,000

2 Years

P + 1.25%

No 80% - 90 days

$300,000

7 Years

P + 1.5%

SBA ½: $3375

Rolling 4 quart. Cash flow coverage 1.4X; Max debt to worth 2.0X

5 First

$300,000

1 Year

P + 1%

0.5% 80% - 90 days

$300,000

7 Years

P + 1.5%

SBA $7500

Max debt to worth 1.75X; Min current ratio 1.25X; Min net worth $500M; $300M life assignment

6Nature

$500,000

1 Year

P + 1%

½% up front

80% - 90 days

$150,000

3 Years

P + 1.25%

1% up front

Max liab tang. Net worth 1.5X; Current ratio 1.25X; Current maturity coverage 1.5X; No dividends or distribution

Putting Together a“Knock Your Socks Off”

Loan Package for any Lender or Investor

The Key to Success is Your

Package Research & Preparation Do you have sufficient information:

The Industry Your Company Historical Info Financial

Projections Exhibits

Management Expertise

Competitive Strategy

Marketing Plan Profit Centers Executive

Summary

How It Should Look

Professionally produced Packaged in a 3-ring binder Table of contents Graphics (preferably color) Appropriate exhibits

Table of Contents

Executive Summary The Industry The Company Management and Ownership

Table of Contents

Marketing Plan Financial Information/Projections Purpose of Loan/Loan Request Exhibits

Table of Contents

Profit centers/market niche Growth opportunities Financial information/projections Purpose of loan Exhibits

Pre-Testing Your Loan Package

Your first two presentations should be to banks or investors who will probably say “No”

Make the lender part of your team

The Keys To Make A Winning Presentation

Determine the best way to present your package in the future

Learn to speak the lender's language

The Keys To Make A Winning Presentation

Explain with confidence your loan request and fall back position

Meet lenders at your headquarters You don’t have to make the

presentation, but be prepared when called upon

Questions to Ask Bankers During The Loan Presentation

What are your exit strategies? How competitive are you? What are your terms & interest rate

options? What are your covenants? How flexible are you? How will the decision be made?

How To Answer the 8 Most Important Questions

1. How big of a loan do you need?

2. How will you use the money?

3. How will the loan benefit your business?

4. When will you repay the loan?

5. How will you pay the loan back?

6. Why are you and your company a good credit risk?

7. What if the business fails or you can’t repay the loan?

8. Are you growing too fast?

The Negotiation ProcessHow to Get the Best Terms and Conditions

The power of other offers Competition is the wild card Know what different lenders are

looking for Remember, you are negotiating the

cost of the entire deal

The Negotiation ProcessHow to Get the Best Terms and Conditions

A Loan Officer’s Key Considerations Interest Rate Maintenance Cost Balances Kept Loan and Other Fees Risk of Credit

The Negotiation ProcessHow to Get the Best Terms and Conditions - The 5 Levels of Risk

1. The transaction2. The industry3. Borrower’s financial position4. Quality of collateral5. Buyers experience/track record

7 Keys to Success

1. The wisdom to know your strengths and how to highlight them.

2. The endurance and patience to go the distance.

3. The awareness of your limitations and how to downplay them.

7 Keys to Success (cont.)

4. The ability to clearly demonstrate that you have the:

Vision Competence Commitment

to execute your plan and achieve and accomplish your goals.

7 Keys to Success (cont.)

5. Become a master of the system.6. Be confident; no one lender knows

enough about your business to tell you it can’t work.

7. Instill an attitude of confidence on the part of the lenders.