Get Prepared to Finance Your BusinessLast month, I discussed that cataloging appears to be entering one of its roughest periods in years. While we have heard this prediction before, this time the combination of many factors -- the economy, new competition and a historic lack of funding for catalogers -- makes it seem this dire prediction is coming true.
The combination of these factors will result in a greater number of catalogers seeking either a savior or succumbing to these pressures and closing. This has been seen dramatically in the horticulture segment. Foster & Gallagher closed in July, and now Burpee has filed for Chapter 11. Fortunately, no other catalog segment has experienced the same level of distress to date.
As consultants, from time to time we receive requests for help in finding money. Now the calls are coming more frequently and with greater urgency. The calls usually start, "We've got a great catalog business, but last season was rough. We're looking for some outside investment. We're willing to sell 30 percent of the company."
A little cursory drilling down usually uncovers facts like:
· The company is desperately short on cash, causing it to play games with vendors.
· Its bank is refusing to fund the next season, and the catalog has insufficient capital to mail its next books.
Too often we receive these calls far too late to help. The entrepreneur or owner has either denied the existence of the problem or refused to act, except for tentative steps, until it is too late to salvage the business. Typically, it will take six months from start of planning to securing funding, so time is critical. Financing sources, be they banks, investment banks, private investors or venture capitalists, do not like to be rushed to decisions. The easiest response financiers can give is "no," and they do not hesitate to give that answer.
Raising capital for your business is not easy in the best of times. Nor is it a fun process. Nonetheless, keeping adequate capital in your business is a prime responsibility of the CEO and management team. Given the troubles of this year, it is imperative for all catalogers to review their options and get ready to ensure that they are among the survivors of next year's shakeout. Because many have neglected this responsibility, they may not know what steps to take.
My partner, Mark Swedlund, and I have prepared some suggestions on how to be financially sound in both good and bad times.
Always have a solid business plan in place. Thousands of articles have been written about why formal business planning is important, yet we are continually amazed by the number of catalog entities that lack a formal planning process. The process need not be prohibitively expensive or overly time-consuming, but it does require work and priorities on the part of top management. If your company does not have a formal planning process or has never done one, a good start is to engage a professional to assist you in pushing the process forward.
The elements of a business plan are straightforward:
· An accurate and compelling mission. Is this a business that would attract you if you were an investor? Does the mission accurately reflect what the business does or plans to do?
· Key management buy-in. Does the management team support the plan? Does the team think it is achievable? Every financier will gauge the level of involvement and commitment by your management team.
· Organized and lucid history. Do planning documents accurately tell the story of the company? If results have been less than stellar in certain years, are the reasons adequately explained? Having audited financial statements is a very big plus in any transaction, but financial statements alone do not tell the story of most companies.
· Realistic projections for the next two to five years. Focus on where growth will be seen, what cash needs will be and why this will be an attractive investment for the financier.
· An honest discussion of your risks and opportunities. You are striving for the financier to become your partner. Put yourself in the financier's shoes. Just as you need to know the risks and opportunities, so does the financier. If you are honest, the financier is more likely to stay with you in tough times. The plan needs to be updated at least once a year. Actual results should be compared to your planning assumptions.
Make sure you have realistic assumptions going forward. Your planning document need not be pessimistic, but it needs to be completely supportable. For example, a plan for year 2002 must include increases in postage rates, whether or not they occur, and probable increases in shipping rates.
If your company has necessary capital needs, spell them out and discuss the rationale. If you know you will experience a rise in the cost of goods, present the situation honestly. Similarly, if you know that with financing you can take advantage of better sourcing, resulting in a lower cost of goods, show that as well. Ignoring well-known cost-increase factors in presenting your plan is the quickest way to turn off potential financiers.
Plan for your short-term cash needs now. Obtaining new financing is usually a longer process than anyone would like to believe. Given today's uncertain scenarios, companies need to project accurately where their cash can take them, under both realistic and pessimistic scenarios. If cuts need to be made to stay solvent under a pessimistic scenario, we recommend that you make them now. If business conditions improve, you will only have a greater upside.
Think about who would likely invest in your company and focus efforts on them. Finding new money is a challenge. There are many potential sources, but each has its own criteria for investment. Some like turnarounds, some lend only on assets, some require major size, some like consumer concepts, some business-to-business. You can waste an immense amount of time contacting potential financing sources that will have no interest in your business.
If you are the typical cataloger, you spend your time in managing your company's daily business: the marketing, merchandising and getting the orders filled and out the door. The responsibility for ensuring there is adequate funding is left to the head of finance, who often has no knowledge of the problems and opportunities facing the company. Retaining professional advice in your search is the most realistic option, particularly if you are considering equity investment.
Plan ahead and allow ample time. This is a difficult financing market. Equity deals are very likely to take six months or more. Even some of the biggest players in the industry have had quality properties on the market for eight, 10 or 12 months without consummating a deal.
The message is clear. Being prepared to seek additional financing must be a top priority for most catalogers today. Now is the time to prepare yourself and explore options. Do not wait until it is too late.