20 Jun When things aren’t going so well – How to talk to your investors and creditors

Another in a series of the realities of “Adventures in Entrepreneurism” from Pasadena Private Lending President Mike McAdams

Living the dream of an entrepreneur has many rewards… even beyond the economic rewards that come at the end of the road. But as in all aspects of life, not everything goes exactly as planned. Take, for example, your best (and inevitably biggest) client cancels orders for its own reasons or starts paying slow. Or your firm is faced with unseen legal or tax issues, a ransomware attack, labor shortages, fires, floods, product “copycatting…” or, unlikely as it would once would have seemed… a pandemic followed by input availability issues… or more currently, high tariffs on your production inputs.

Then, there are the really hard and unexpected problems. For instance, learning of the incapacity or death of your most trusted partner or employee. Or still worse, finding out that person has been cooking the books to hide theft from you – his dear friend and partner – that you graduated college with!

There are countless real-life issues that come up in all businesses and frankly dealing with them big and small is what managing a business is all about. But the “big, bad ones,” issues that impact other constituents and may result in your company having a hard time paying on time sums you owe or have promised other people, like minority owners, regulators, landlords, suppliers and lenders, requires providing timely and complete information in a careful way. While everyone who expects money prefers “just to be paid without having to listen to a story,” if all you have is a story, it has to be a very, very good one. And it must be credible, confirmable, backed up by a sound financial and operating plan and be accomplishable in a reasonable timeframe. It also needs to be legally and structurally sound.

Every such story, or better put, explanation and plan of action, has five parts:

1. Background. Be prepared to tell how you got into the mess to begin with. Resist a “life story” and stick to the direct causes that set up the later unfortunate circumstances highlighting how your firm (hopefully) took the normal precautions to minimize the impact of whatever happened.
2. Event. Be specific with what happened. Say when it was discovered, who discovered it, how and who reported it and what were the immediate business decisions to respond. Were people replaced, authorities called, accountants brought in, was the insurance company called, and so forth. It may be necessary to begin trying to analyze the cause of the event, it may be premature to draw an accurate conclusion, and that may need to be said as well.
3. Impact & Response. What is the likely impact on operations and therefore financials for the current month, quarter and year? What will be the impact on cash, loan payments, or loan covenants, if any, payables timeliness, planned investments, planned acquisitions, or anticipated dividends/distributions to shareholders? Providing actual financial projections and projected financials adds significant credibility (and admittedly brings in deadlines and targets to be answered for down the road). You may also need to ask financial partners for specific waivers/amendments/increases to get you through this unexpected event. Know if you still have unused credit capacity with your lender(s), but also develop a back-up plan if one or another of the constituents doesn’t agree to your requests. Can you sell excess business, personal assets, or a minority interest in the firm to a friendly party? Can you delay expected investments or establish extended payment plans with parties that have more flexibility? This is a time to not try to go it alone but to call your trusted professionals to your side: lawyers, accountants, mentors, trusted partners of any type.
4. Correction & Resolution. How do constituents know that your firm is on top of all the issues to minimize the damage, this won’t happen again and that the firm can “return to business as usual” here?
5. Structure. Your plans, whatever you settle on (hopefully) with your trusted advisors, also needs to conform to a structure that is not at odds with any third party agreements you or the firm may have in pre-existing shareholder agreements, corporate bylaws, credit or security agreements or tax or regulatory policies.

In the end, it is far easier for everyone involved as owners of and creditors to a company to deal with problems if open lines of communication are maintained both in good times and when challenges inevitably arise. Of course, no one can look the other way when payments are not being made. While there can be no guarantee that all will end well, clearly communicating company issues and strategies may provide a better opportunity to amicably restructure agreements between parties, allowing your company to get back to doing what you have otherwise guided it to do so well.