A Tale of Two Companies and Their Banks

"It was the best of times, it was the worst of times, it was... ", well, you get the picture. Over the past several months I've been consulting with two separate companies as an outsourced CFO. Both companies need bank financing to stabilize their operations and achieve growth, both companies have struggled through trying economic times, both companies know they need to invest in processes, procedures and personnel in order to grow and achieve desired returns for their owners. I want to share with you how these two companies have been working through the process of structuring bank loans, hiring personnel and investing in internal systems in order to develop companies that can deliver desired shareholder returns. But first, some background information.
Company A has been in existence for just over 4 years. The company acquired the assets of an existing business and in the first 3 years grew the operations in excess of 15% per year. Coupled with a strategic acquisition, Company A is now almost twice the size of the business it acquired.
Margins have been good and the company has been able to distribute cash to the owner each year. With the rapid rise in the business the company was stretching its internal processes and personnel to the limit. Additionally, existing systems and equipment needed to be upgraded in order to support future growth.
In the middle of year 4 the storm clouds began forming for Company A. The company needed to hire additional personnel to manage the growth it had experienced and to support anticipated continued increases in revenue.
Unfortunately the rapid rise of the business meant that woefully stressed systems and personnel lead to quality lapses which resulted in several large customers leaving for competitors. Additionally, two management team members left the company and started a competing business. They took other customers by offering cheaper prices for similar services. Hurried investments in capital equipment th`t were designed to reduce labor costs were being run inefficiently and had resulted in large increases in supply expense. Company A was now losing money and needed to make changes quickly in order to right the ship. Additionally, the company's current bank debt needed to be refinanced in order to alleviate cash flow concerns.
Company B has been in existence for just over 5 years. The company was a start-up that the owner was able to bootstrap to achieve recurring revenue levels that allowed the company to achieve profitability quickly. Cash flow was the focus and the company had been able to return cash to the owner each year. The company had been built with the owner overseeing all strategic initiatives and managing all activities of the company. As the company grew the operations of the business could no longer be effectively managed by an individual person.
During year 5 the owner of Company B realized that experienced personnel needed to be brought on board to effectively manage the business. Prior growth had been funded through customer advance payments and the company had no bank debt.
As recurring revenue was building it was time to make the appropriate investments in personnel and systems in order to take the company to the next level. Personnel hiring would be critically managed and coincide with incoming cash in order to manage the new expenses on a cash positive basis. New customer opportunities were growing and would be funded in part by bank debt along with customer advance payments. Company B was beginning to show profitable operations and needed to make the right investments in order to manage growth.
Both companies needed assistance in order to manage through the difficult times they were experiencing. So which one would fair better in discussions with the bank given their circumstances?
Things were looking rather bleak for Company A. Various missteps resulted in losing customers and allowing former management team members to start a competing business. Personnel were hired too late to alleviate quality concerns and now there were too many employees to support the existing business. Capital equipment investments that were supposed to reduce labor costs had dramatically increased supply costs and further draining cash from the company. Current bank terms had put the company in a position where the line of credit was continuing to increase because of the losses from operations. The company needed to refinance existing bank agreements in order to avert a situation that could cripple the business.
In order to see how Company A managed through this difficult time, we have to look back to when the company was initially formed. At that time the new owner realized that there was a unique opportunity to grow the business quickly based on the business environment. This meant that it was imperative from the beginning to have a core management team lead by a strong CEO. The CEO knew that it was important to develop strong banking relationships and put in place processes for managing the financial performance of the business. The new owner put cash in the business to fund a substantial portion of the acquisition and the CEO negotiated the banking relationship. The bank provided term debt to help fund the transaction and a line of credit to finance working capital needs.
Because the new owner put adequate cash in the business, the bank didn't require any personal guarantees related to the loans and financial covenants were set at reasonable levels. Company A was required to have annual audits as part of the bank financing but this was something the new owner and CEO viewed as necessary for the business even if it wasn't a bank requirement.

When difficult times hit, Company A had a good track record with the bank and had made substantial principal payments on the existing term debt facilities. The CEO met periodically with the bank to explain what the company was going through and what management was doing to address those issues, including bringing in an experienced CFO to assist in working through the tight liquidity situation. The CEO and CFO showed the bank that there were adequate assets in the company to refinance the existing debt and line of credit in order to free up cash flow. Personnel levels were reduced primarily through attrition but through this process the company was actually able to upgrade the quality of the overall workforce. The company worked with the manufacturer of the new equipment to address the issues that had lead to increased supply costs and was able to fix those issues over a few months.