 Sometimes things really are too good to be true and a swift reality check is often needed when running an SME.
When faced with that golden offer, you should ask yourself some hard questions before accepting any apparently generous offers of help. This is especially true when considering possible inward investment in your business involving the release of equity.
This was the case for a home-counties logistics company, operating in a niche market. The business suffered from intermittent pressure on its overdraft and the directors were looking for £250K to alleviate the financial stress.
From a less-than-auspicious start the two directors (mother and son) had built the business over five years with the support of other family members. Periodic, but regular, pressure on the overdraft had led to the need for frequent financial juggling which in turn was resulting in lots of stress – and leading to understandable conflict between operations and finance. The 50ish FD was keen to retire and step aside if the company’s future stability could be secured.
The chief solution being considered was an investment and/or a loan, offered by the owner of a complementary business. It was at this point that Mercantile was called in to advise on the planned expansion.
Our initial Appraisal showed that the “helpful offer” was not as good as it first appeared – the “friendly” investor was actually rather predatory and was attempting to acquire a majority stake for a minor investment.
But our Appraisal also revealed that stronger cash-flow management would remove the need for new funds all together. The main requirement for the business was for a more formal management structure to reinforce and communicate the enthusiastic and effective leadership of the directors.
Mercantile suggested that changes to operating systems and the management structure -including the appointment of two new members of staff and the introduction of more robust credit control - would ease the financial pressure on the business. Additionally the new structure allowed real responsibility to be passed to a newly appointed Operations Director with the MD reviewing his role and taking on more general management duties beyond his operational activities.
These changes resulted in a more dynamic business and allowed us the opportunity to re-negotiate the bank facility on better terms and without the need for any personal guarantees. No inward investment was required.
Further longer-term advice enabled the majority shareholder to take early retirement and complete the handover to her son with the support of a non-executive director, who was now familiar with the business as a result of his involvement in the Appraisal process.
Increasing sales, a move to more prestigious premises and exciting diversification plans bode well for the future – with financial stability and no dilution of the family’s equity position.
This story serves as a good example of how an outside perspective can help prevent relatively innocent minnows being swallowed up by apparently friendly sharks as well as demonstrating that new funds are not always the only answer!
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