A couple of years ago, I got a call from a private equity firm, asking me to jump into a public to private transaction.
At the time, they were 10 days from a scheduled close.
At first blush, the fundamentals looked great - so great, in fact, that the firm was not planning on putting cash in the transaction short of legal fees and tender offer expenses. Per the 10K, cash in the bank approximated market capitalization.
And, perfect for asset based financing, the target company had lots of receivables with blue chip companies and inventory the company could "put" to their customers. Yes, EBITDA was slightly negative, but some easy fixes seemed obvious. Concerned about a management counter offer and potential bidding war, the private equity firm minimized due diligence. Upon preparing for the close, unfortunately, it was learned that cash in the bank was less than cash on the 10K and EBITDA was lower than expected (and trending south).
It looked like a cash investment would be needed that would require limited partner notification. Not a good thing to discover, 10 days before a scheduled close. That's when I got the call with the charge to either waive off the deal or close without cash.
After a quick analysis of cash and EBITDA trends, I recommended proceeding. The company was swimming in cash (at least until the close)... it just needed a bit more of it. First, I took the usual steps
for this kind of situation, such as postponing payments. Then I went about jacking up working capital
so that maximum funds would be available from the lender whose loan was based on working capital (a standard asset based revolver). Next stop... senior management.
Problem. They were off in Atlantic City, playing Blackjack with the expected proceeds from the sale. Quite literally, nobody home in the senior management corner. So I went to the employees that mattered: the controller and national sales manager.
I explained how asset based financing worked and our need to maximize receivables and inventory on the books in the near term and collect any receivables if possible. As it turned out, my Asset Based Financing 101 session was time well spent.
Because the very next morning, the national sales manager stopped by with one of his sales reps. It seems that one of the company's mega blue chip clients owned a large amount and that amount had not been invoiced.
(The CEO had not wanted to upset mega blue chip with contractually obligated charges after the customer made some significant changes.)
How much was owed? How about 2X the projected cash shortfall at close. 48 hours later, mega blue chip wired the funds to the company.
Things progressed quickly from there and the transaction closed less than a week later, with cash left in the bank and ample loan availability from the lender.
Here's the point. When solving urgent business financial problems, one of the obvious (but often overlooked) tricks of the trade in getting to your goal is to enlist employees.
They can be tremendously useful in helping you get there, provided they know where "there" is. Benefits may include:
- Speeding up execution. Employees can start doing what needs to be done long before an outsider can figure out the necessary action steps. When time is of the essence, an outsider simply won't know enough operational details to move as quickly.
In the example above, only an insider (i.e. sales manager and sales person) would have known about receivables that were not even on the books.
- Leading you down a better path. Employees will often pick the best path to goal completion. They know how the company works; they know the players involved.
In our example, employees knew which customers to focus on for the biggest bang and which items had not been invoiced. They also knew who to talk to so inventory would be received in the books and records when it was physically received.
- Leading you to a better outcome. When employees know where you want to go, the outcome can be better than if they follow in the dark.
In this case, the client would have been happy if the deal closed and closing day loan covenants were met by deferral of legal fees and/or a modest six-figure equity infusion. Instead, the outcome was cash in the bank at close and only half of the loan was drawn down.
By the way, if the idea of sharing too much information makes you squeamish, keep in mind that employees can be helpful without knowing all (or any) of the Why involved.
In this example, they were never told that the deal was short of cash - only how the company would be different in terms of its financing under the new ownership and what that meant from an operating perspective. In addition, employees didn't know "how much was enough," so they overachieved and never knew it. Remember, when you're faced with an urgent situation, don't ignore the benefit of enlisting employees and clearly articulating where you're trying to go!