I understand the allure of fixing things. Growing up I spent a lot of time with my grandfather, an electrician (he’s the one in the foreground of this photo) and rewired a broken fan before I hit eight. I get it. It’s exhilarating to find an object (or a company) in rough shape and know it can be fixed. Probably. Maybe.
As SBA lenders we frequently receive request for SBA loans to finance turnarounds and I thought it might be useful to give our perspective on what we look for when we consider financing turnarounds.
Let’s begin with a general observation and if you go no further reading, consider this – it always takes longer and requires more capital than anticipated to return a company to profitability. With that in mind, and stating the obvious, plan for it.
More specifically, here is what we like to see:
- Prepare a 2-year weekly or monthly cash flow model. Not net income and not EBITDA, but real free cash flow taking into consideration working capital and capital expenditures. Stress that model by extending the loss-period and loss-depth.
- Using that model, realistically analyze how much capital it would take to affect the turnaround. Look at the cumulative loss at its lowest point and be sure to reserve enough liquidity with some cushion to fund it.
- Determine what went wrong in the first place. We would like to understand the experience, insight, and resources you bring to the project to make sure the turnaround is accomplished and the company returns to profitability.
- Turnarounds, like startups, require a higher injection of cash equity relative to the debt they take on. Amortizing term debt in particular is inflexible once it is disbursed and should be used sparingly.
Got a turnaround you’d like us to look at? Reach out to us today and we will quickly tell you whether we can help.