Everything is Alright – Until it Isn’t!

By Mark Borkowski

Professional fighters (boxers and MMA) will tell you that it is the unforeseen punch that causes the most damage and may ultimately end the fight. The direct hits obviously hurt but the hits out of nowhere have the most effect.

The same sort of thing could be applied to a business owner and the operations. While yearly planning and the adoption of budgets is carried with some degree of caution, most are focused on driving revenues and watching costs so noted Michael Kavanagh of Ariem.

When things are going well there is little motivation to second guess or plan for emergencies unless there is some pressure from either a bank a lending company or investor.

Everything is alright until it isn’t!

Big picture planning is secondary and in most cases ignored, in Kavanagh’s experience. While it is impossible to foresee all the “punches” coming out of nowhere, taking a critical review of the operations and drilling down into all aspects of the business will enable the business owner to enact strategies to lessen the effect of any unforeseen issues.

Kavanagh, with 35 years of commercial lending experience, noted that he has seen many situations of clients who have had a major negative event (loss of a major customer, production problems, etc.) and in most instances, management was not prepared. The reaction of the business partners i.e. banks, term lenders, suppliers etc. seeing this unpreparedness, caused them to protect their position which compounded the problem.

If you don’t have an engaged board of advisors, it may be advisable to bring an outside consultant to provide an unbiased view of the business. It is Kavanagh’s belief that an independent person is needed since the current advisors (accountants, lawyers, etc.) could be too close to the operation/owner based on current and past dealings. Hard facts may be couched to maintain the relationship.

Owners are busy with all aspects of the business, that they sometimes do not see things that could be done better or changed i.e. cannot see the forest for the trees.

Businesses/Owners with the help of Ariem should consider the following items, on an ongoing basis. While by all means not all inclusive, it is a good starting point.

Do you really know your costs? Very important as there may be cost misallocations among your total product line which inflates profit on one product at the expense of other products. The other effect is that you incorrectly spend more time and marketing dollars with the product that appears to more profitable to the detriment of others.

Dependence on a major customer. There maybe a great business relationship now, but if that customer decides to put pressure on pricing or threaten to go to another supplier, it will have major negative effects on the business. General rule of thumb is not to have more than 10% of total revenue from any one customer.

Having all your financial eggs in one basket. The relationship with the lender maybe great now but there are many instances where a lender has announced that they want to reduce exposure in certain industries and could restrict credit or worse, demand payment. Trying to get financing after a lender has demanded payment, will be extremely difficult, or at higher rates and more restrictive terms, or not at all.

While not sexy, a thorough line by line review may help to identify issues for correction or improvement.

Proactive owners can better position their businesses by critically reviewing all aspects of the operations so that any outside “punches” can be mitigated and minimized. It will still hurt, but not business ending. Reacting especially to a major event (Loss of a customer, Bank line demand etc.) will consume valuable time to the detriment of the business.

While no one can predict in totality what will happen including that unforeseen punch, taking steps to improve operations and build up your liquidity, will, we believe, enable you to ride out the unforeseen negatives that inevitably will come.

As an independent advisor with much experience in small to medium sized businesses, the principals at Ariem, Shamit Khosla, CPA, CA or Michael Kavanagh can objectively review and ask why things are being done the way they are. In addition, a comprehensive independent review of the lending arrangements could result in negotiation of more favorable terms and amounts. It may be recommended that the financing be separated so that the business has multiple sources of financing or we could review the current arrangements with multiple sources to ensure that the terms are in aligned with what the business can achieve.

Ariem is an Independent advisory firm whose purpose is to assist small and medium business to increase profitability and grow. The main focus is the business and the owner to provide independent and objective advice. Please check web site at www.ariem.ca

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile is a mid-market M&A brokerage www.mercantilemergersacquisitions.com