I'm Out Of Compliance... Now What?

67 %
33 %
Information about I'm Out Of Compliance... Now What?
Business & Mgmt

Published on December 12, 2008

Author: tomstocker

Source: slideshare.net


Critical tips to help you face your banker when you are not in compliance with your loan covenents

The Chairman’s View: I’m Out of Compliance. Now What? by R. Thomas Stocker The potential for a larger financial storm able to meet the terms of your loan than many private business owners are agreement, you must have a credible written expecting may occur during the next several short-term strategic plan to discuss with months if you are not proactive. And it your banker. There may be little they can do could be personal. For those of you who for you if you don’t. But don’t wait for the have business loans outstanding, end of year due date or for them to find out. You need to financial statements and covenant talk with them as early as possible. compliance certifications are generally due So, what should you do to prepare? First, to your lenders within 120 days after your understand your current ratios and covenant fiscal year end. For many of you that is positions. If you don’t know much about April 30. The current state of your that part of the business, familiarize company’s results and outlook is more yourself. Understand where you are now. important than ever. If you don’t plan now Do the math (have your financial staff do it you may need to be ready for significant for you). If you are in compliance with all change to your loan deal and in some cases of your agreed ratios and covenants you are banking relationship. Under most fine. If not you need to start getting into circumstances, most banks are not going to compliance now. If you won’t be able to be give waivers for missing their deadline for in compliance by year end, your plan must supplying financial statements and covenant be in enough detail to get you there in a very certifications. short period of time. “Technical defaults” Since October, there have been a significant are enough to get you in trouble. Address number of seminars and panel discussions them. around the subject of credit and lending. I As a business advisor and member of the would venture a guess it is the number one Board of Directors of the RI EDC’s Small topic for seminars right now, and rightly so. Business Loan Fund Corp. I evaluate It is very important for business owners to companies’ credit-worthiness on a fairly get started on understanding where you are frequent basis. I’m not a banker, I’m an right now if you haven’t done so already. operating guy. A business owner. I do Sponsors of these events are targeting their review the ratios, historical income customers and constituents who need to statements, balance sheets and cash flow know how to face this situation. The statements. Once I have an idea of how number one message from the speakers, your company has operated and performed bankers and panelists I heard was historically, the most important part of my “communicate, communicate, review is to understand how you are going communicate”. This is all well and good if to spend the money and how it relates to you have a positive relationship with your where you plan to take your company. If banker and you are in full compliance with that is not clear, I’m not comfortable. If you your agreements, but if not I say “hold on a want your banker to help you there are minute”. You need to do some work first. If several things you must do now. you are out of compliance and/or won’t be 10 Larkspur Road, East Greenwich, RI 02818 401-451-9799 www.boardroomadvisorygroup.com

standing, add significantly to risk Lenders and investors hate surprises. • reduction and company credibility. The horse is already out of the barn, so now you must show tangible Make sure your financial team is • evidence you are being proactive. credible. Do you have a bookkeeper You must show you have recognized when you need a controller? Make you have a problem and are doing the change and make sure that something about it. controller is good. I’ve seen many owners call their bookkeepers You must re-earn your credibility. • controllers. They are not the same. That’s right, re-earn. Your plans Your Chairman and CPA are both must match your projections. good advisors to use to help find that Deviations must be explained resource. You won’t regret it. This completely and coherently. Be step will take out risk, help make confident in your understanding of your banker more comfortable and the numbers. By being up front with will also help you as you grow. your banker, you are adding to your credibility. The best way back to As the leader and owner of your • credibility is to “under promise and company you should already be over deliver”… always. cutting costs. If personal costs are in your company, take them out first. Your financial statements must be • Bankers don’t want to see your timely. I’m talking about operating personal mortgages, utility bills, statements, the ones you should be family car loans and tuition using on a monthly basis to help payments in your company’s guide your company, not tax expenses. After personal expenses, statements. If you can’t get your right-size the business. This point operating financial statements to the really hurts but is necessary. bank on time, it will be an automatic red flag, and potentially an Articulate your market, competitive • opportunity for the bank to position and marketing plan. Again, renegotiate your agreement, or make sure the projections hang worse. together with your financial statements. Make sure any growth is Any covenant violations should be • real. addressed in detail. Reasons why you are out of compliance, what you Highlight the tactics you are using to • have done to address it (and results) execute your plan. Especially the so far and any additional action plans tactics already implemented and any to be implemented. Although it is tangible results. prudent to have intermediate and If you are trying to form a new • long term plans, the banks are only relationship, the reasons you are interested in short term results right looking for a new bank need to be now. disclosed. Spotlight your management team, • Once you have a credible plan, it is time to including key advisors and talk to your banker. Let them know where consultants. Next to history, bankers you are as early as you can. They will be (and investors) want to know who is better able to provide assistance if you have doing the work. Having people on a plan than if you don’t. They most board who they trust, have been in certainly will be more willing to work with this situation before and successfully you. Many bankers are working hard right brought a company back to good now to reach out to their customers to

prepare and to try to get an early warning if During my discussions with bankers, owner there are problems they aren’t aware of. distributions were a frequent topic of Even if you are in compliance, talk with concern. Many owners take out funds from your banker early. They don’t want to have the company as a matter of course. S Corps to concentrate on you right now (actually were cited the most in examples. These they would rather concentrate on helping distributions are really not unlike public or you be successful). What I mean is they private equity “professionally run” don’t want to worry you may be a problem. companies giving themselves excessive A key to remember here is you can’t hide bonuses or “special dividends”. The net from your banker. They will find out the result is higher risk for the lenders, investors truth. or bond-holders. In the current environment, banks are in a position to take Keep in mind that any violations to on a more aggressive stance. As a small or covenants or unacceptable ratios may trigger mid-market business, you will now be your bank to renegotiate your deal, or worse. expected to live by a higher standard to meet So be prepared. I can assure you your the measures you signed up for when you relationship manager does not want to have agreed to borrow funds. Distributions that discussion with you but is obligated, in higher than the annual profit of the entity many cases by regulation. Only a few short will raise a red flag. Banks are expecting years ago banks were very aggressive in owners to leave more cash in the business their lending practices. Many didn’t price in for growth, investment and emergencies. It risk and the spreads on many current deals may be safe to assume your banker won’t don’t make sense in the current have much sympathy on your company if environment. Some are still more they deem those owner distributions aggressive than others, but very few are excessive. Keep your ratio above 1.2:1. offering deals anywhere near as aggressive. Another ratio several banks use as a major So, what are the current requirements indicator is the Leverage Ratio, a Balance bankers are looking at to assess risk? Sheet measure. It is calculated by dividing Although risk factors are industry specific, total debt by tangible net worth. Tangible the number one ratio criteria I heard for net worth is reduced by officer and owner deciding a business’s credit-worthiness is loans and other intangibles. Bank consensus debt coverage. Nothing new there, but was that a 3x ratio was generally the max perhaps the ratio is a bit tighter. All the acceptable. As this ratio rises, additional banks I talked to require at least a 1.2:1 covenants and guarantees are introduced. ratio, and several require 1.25:1 ratio. Generally, this ratio is calculated by Almost everyone I talked to suggested dividing EBITDA less owner distributions owner personal guarantees are part of most divided by the current portion of long term deals and always have been. All deals start debt plus interest. From the bank’s point of with them in but are sometimes removed view, the higher the ratio, the less risk of through negotiation, if the company has default. Many banks will pass on lending to significant liquidity and low risk. Most a company if that ratio is below the 1.2:1. articulated that the owner needed skin in the Some high-risk industries such as game and saw no reason to remove that construction, fishing, retail, consumer goods dynamic. Likewise, the personal credit and auto dealerships may require history of owners is always taken into significantly higher coverage ratios. consideration. Because of the dynamic between owners and their businesses,

historically both have been found to be industries or factors specific to your closely correlated. situation, you should have a sense of what you may be looking at from a generic sense. In many cases you probably use one bank I didn’t discuss size of banks and specific for all of your “go to” needs; deposits, requirements because there are just too checking, savings, credit line etc. Pattern many and in some cases personal bias changes such as running balances down toward specific types of deals. Bottom line, significantly can be another red flag to the communicate with your banker early and bank that all is not well. However, having often, try very hard to keep your end of the all of your business with one bank is a deal and have a plan you can share to show positive and shows you have a commitment short term improvements when you are to your bank. unable to achieve acceptable ratios or covenant certifications. And most Although this article does not cover all of importantly, be prepared to have those the variables in dealing with your banker, discussions soon. types of loans, credit lines, specific To comment on this or other topics important to private business owners, access my blog at www.boardroomadvisorygroup.com. About the author; Tom is a Principal of Boardroom Advisory Group, LLC, an owner advisory and consulting firm. Tom serves on the Board of Directors for the RI Economic Development Corp’s Small Business Loan Fund Corporation (SBLFC), the finance arm of the RI EDC. He writes a monthly article for the RI EDC’s Every Company Counts initiative. His articles focus on areas that can add significant value for business owners. Contact Tom directly at 401-451-9799 or tstocker@boardroomadvisorygroup.com. Boardroom Advisory Group, LLC is a business advisory and consulting firm specializing in helping both growing and underperforming small to mid-market private companies resolve day-to-day systemic issues that interfere with cash flow and profitability attainment. The firm’s team of hands-on professionals find and implement solutions to improve top-line and bottom-line growth, cost reduction, cash flow, process and structure improvements, and owner transition strategies. The firm also has experience doing business restructures and workouts. Boardroom Advisory Group’s core focus on developing strategies to drive and measure performance has resulted in a history of sustainable top and bottom line growth, healthy cash flow and meaningful company value for their clients. For more information about how we can help you build a more valuable business visit our website at www.boardroomadvisorygroup.com . ©2008-09 Boardroom Advisory Group, LLC All Rights Reserved. No part of this document may be reproduced without the express permission of the author. All registered trademarks mentioned in this document are the property of their respective owners. Additional articles written by Mr. Stocker include: Start Forecasting Now! Do You Have Contingency Plans? I’m Out of Compliance. Now What? Have You Thought About Your Future Lately? Are you in a Foxhole? Metrics Should Be Everywhere (Part I) Are You an Octopus? Metrics Should Be Everywhere (Part II) What is Value? It’s All About Growth These articles can be accessed at www.boardroomadvisorygroup.com/pages/pubs.php. You can also request to be added to his email list to receive his latest articles on a monthly basis on the Company website. Contact Tom at tstocker@boardroomadvisorygroup.com.

Add a comment

Related presentations

Related pages

Customer compliance officer - Parenting advice and ...

I'm a single parent and ... does anyone know if theres any way of finding out ... I had a customer compliance officer come out to my adress because ...
Read more

PCI Compliance: Frequently Asked Questions | Practical ...

Failure to understand the PCI compliance ... for PCI DSS compliance.” How do I know if my ... out of scope for PCI DSS compliance" but still ...
Read more

KissCompliance.com - OSHA Compliance Made Simple

The following items are compliance and safety related: ... They may spread your costs out over several ... All they know is that their insurance fees go up ...
Read more

I - Wikipedia, the free encyclopedia

I is the 9th letter and the third vowel in the ISO basic Latin alphabet. Contents 1 History 2 Use in writing systems 2.1 English 2.2 Other languages 3 ...
Read more

C-Block - So strung out 1996 **HQ Video* + Lyrics* - YouTube

"So Strung Out" [Chorus] I'm so strung out And now I don't know what to do Should I take my life away Dear God or will you pull me through I'm ...
Read more

NCLB Compliance? - A to Z Teacher Stuff Forums

NCLB compliance in California would mean that you've passed ... However, I'm still uncertain ... I'm pretty sure I should have all my bases covered by now!
Read more

PCI Compliance Guide Frequently Asked Questions | PCI ...

We recommend you first reach out to the organization that you feel is out of compliance, ... to maintain PCI DSS compliance and ... I’m running a ...
Read more

Home visit from a compliance officer, what's that about ...

I'm freaking out, but he's got his own ... i had a couple of visits from the customer compliance officer when claiming IS ... So because he's left and I'm ...
Read more

Pulp Fiction (1994) - Quotes - IMDb

Pulp Fiction (1994) Quotes on ... See, now I'm thinking: ... your boss, told you to take ME out and do WHATEVER I WANTED. Now I wanna dance, I wanna win.
Read more