Why is it that SME businesses are now going down this route, and more importantly, how are they achieving it ? 

A relevant case study

A long-established and latterly financially-successful building contracting firm with approx fifty employees and approx £3m 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 was relating 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 recent requested intervention by an OMSG Group Non Exec, and with net profitability having been restored

The company therefore needed to find some £150k at very short notice, and was in serious danger

The Owner / Founder / Chairman / CEO, who with his family had done an absolutely 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 VC / Angel investment, and with all of that in a virtually non-existent investment market place        

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

The first outcome ?

A family decision to raise the £150k (and more) via the sale of a now unnecessarily large family home to repay, in the short term, the said 50% lending to the bank, but critically and simultaneously to draw up and implement a new 3/5 year business plan and financial model and budget, which would see also (if possible) the repaying in short order of the other 50% of bank lending

Also to place the business in a situation where it would NEVER EVER want or need any bank or other borrowing ever again !

The OMSG 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 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 bank free !

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

However, after all of the previous restructuring of the business financials, the business was now making approx £10k per month pre-tax net profit (and still rising) instead of approx £10k 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 new-style financial model for the business

Furthermore, it was proved via the re-modelling exercises worked though with the OMSG 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 18/24 months, (even if they did choose not to clear in one go and immediately the full 100% (£300k) of total bank lending to the business)  

Also, that if they continued thereafter and permanently so –

1. To make the same sort of level of monthly net profits (and rising)
2. To then most religiously and scrupulously to ALWAYS leave those net profits in the business

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

The final outcome –

• The family bit the bullet, and totally so, in that they blew the bank out completely and immediately, ie they in fact repaid the full 100% of the bank lending, including the debtor invoice discounting as well, via paying in the full £300k, this as they had cleared £600k plus in net equity funds realisation from the family home downsizing operation

• They also agreed, no matter what blandishments might be forthcoming from the bank(s) over the next ten years plus, that they would NEVER EVER borrow from banks again !

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

The moral of this story ? –

• Having a strong-minded, independent detached and objective Non Exec on board made all the difference, in order to be analysing clearly the problem, and to be examining and proving appropriate relevant and workable strategies and tactics with which to deal successfully with those problems and opportunities – and “to have one’s hand held” throughout - ,,,,,,,,,,,,,,,,,,,,,,,  and Yes, we would say that wouldn’t we ! – but it’s true, nonetheless

More next month, on another topical issue for SME businesses.

May 2010