Why - not surprisingly - is it that so many SME businesses are now going down this route, and (much) more importantly, how are they achieving it ?   

A relevant case study

The Background - A long-established and latterly financially-successful building contracting firm with approx. seventy employees and approx. £6m turnover, was hammered by its bankers during the recession, via the said bankers demanding suddenly (and with no sensible valid reason whatsoever being offered which related directly to the business in question) a 50% reduction over six months on all of their lending to the company

The company was in fact surviving the recession rather well, with only a modest reduction in turnover, and with gross margins having been increased substantially following a recently-requested series of non-executive interventions by an OMSG Group Non Exec, and thence with an appropriate level of net profitability having been restored

The problem - The business needed to find some £300k at short notice, to settle the bank demand, and was in serious danger

The first aspiration - The Owner / Founder / Chairman / CEO, who with his family had done an amazing job in starting and building and developing this significant enterprise over many years, found himself facing the ghastly prospect of pretty well immediate closure, or of a trade sale or of a merger, or of VC / Angel investment, and with all of that applying in a virtually non-existent investment market place

The family took the view that closure was an unacceptable scenario, and the OMSG Group Non Exec was asked to examine with them all of the other possible strategic and tactical options which might avoid that course of action

The second aspiration - A family-wide agreement might be reached which would involve the raising of the required £300k via the sale of the now-unnecessarily large family home of the semi-retired business founder and his wife, in order to be able to repay, in the short term, the said 50% lending demand to the bank, ,,,,,,,,,,,,,,,,,,,,  but critically and simultaneously to draw up and implement a new three / five year business plan and financial model and budget, which would see also (if possible) the repaying in very short order of the other 50% of bank lending, ie £600k in total

The third aspiration - Also to plan to place the business going forward over the next x many years in a situation within which it would if possible NEVER EVER want or need any bank or any other borrowing ever again !

The action - The OMSG Group Non Exec worked very closely with the family, using a highly-simplified financial-modelling tool covering 36 months of future Monthly P & L, Monthly Cash Flow and Monthly Balance Sheets, which he (the Non Exec) had built up himself, from a standard OMSG Non Exec Group template, this to confirm totally to the MD and his family that any form of financial and / or corporate suicide was indeed being avoided by this means, and that they were indeed securing the long term future of the business in exactly the manner that they wished, ie for the business to be, and to remain permanently, entirely borrowing-free

In this regard, the nature of the business was that it was always going to have an underlying inherently negative cash flow financial model, in that it paid out a large percentage of its total costs (mostly wages and salaries) in Month One, whilst not collecting its debtor invoice payments until the end of Month Two, or sometimes later. However, after all of the previous restructuring of the financials, the business was now making approx. £40k per month pre-tax net profit (and still rising) instead of approx. £30k and more of monthly net losses

The business was as a result in a much better position than previously within which to look seriously at a new-style business plan and at a new-style financial model for the business. Furthermore, it was proved via the financial re-modelling exercises worked though with the OMSG Group Non Exec that if such net profits were left in the business, (ie a revolutionary option that the family had never considered seriously before !), then the remaining indebtedness to the bank could be cleared within approx. two years, maybe less, via that route if necessary    

Also, that if they continued thereafter and permanently so –

• To make the same sort of level of monthly net profits (and rising), and -

• To then most religiously and scrupulously to ALWAYS leave those net profits in the business

The outcome -

• The family bit the bullet, and totally so, in that they decided to blow out the bank 100% completely and immediately, ie they in fact repaid the full 100% of the bank lending, including overdrafts, loans, and the debtor invoice discounting as well, via paying in the full £600k, this as they had cleared much more than £600k in net realisation funds from the family home downsizing operation

• They also agreed, family-wide, no matter what blandishments might be forthcoming from their own or other banks over the next ten / twenty years plus, that they would NEVER EVER borrow from any of them ever again !

• In fact, they wanted and planned to NEVER EVER borrow again, from anyone !

then the business should indeed never need any borrowing to take place, from the banks or from anywhere / anyone else !

The moral of this story / case study - Having a strong-minded, independent detached objective and highly-experienced and expertised OMSG Group Non Exec on board right from the start from years earlier could and would have made all the difference to the Chairman / CEO - and to the Executive Directors - and to the staff - and to their business - and to their peace of mind ! 

• This in order to be able to be analysing monthly with the Chairman and Directors - and clearly and speedily - the detailed nuts and bolts of all of the perceived strategic and tactical problems and opportunities within their business
  
  
• And, to be discussing and examining with them - and validating and proving appropriately - the relevant and workable alternative strategies and tactics with which to deal successfully with those problems and opportunities
  
  
• And for the said OMSG Group Non Exec to be willing to commit to stay with and support the client firm and all of its people throughout the whole of the three or four years involved, (if of course that were to be their wish), and to be planning with them and then supporting (and cajoling) them through the various implementation stages of the changes which had been jointly discussed and agreed
  
  
• And, to then be working with them to be growing the business once again strongly and safely for the medium and long term
  
  
• And, to provide the business owners with a massive Return on Investment on the outlay of fees to OMSG Non Exec Group for the services of the said Non Exec - of some 28 times in Year One alone  !

And, Yes, we would say all of that wouldn’t we !  , ,,,,,,,,,,,,,,,,,,,,, but true it is !

More next month, on another topical issue for SME businesses

August 2011

©OMSG Non Exec Group Ltd – 2011