February 16, 2015
By Ben T. Nicholson
President of Fortis Business Advisors
SBA Hot Topic Tuesday — The Elements of a Workout Strategy in a Defaulted SBA Loan
Borrowers of SBA loans default from time to time. As a result, if the borrower wants to resolve the delinquency, it is prudent for the lender and borrower to execute an agreed upon workout strategy, or the borrower may be forced into debt collection and liquidation of the assets. To begin an effective strategy, the borrower and lender are encouraged to:
- Order a certified valuation/appraisal of the business
- Consult a CPA and Attorney
- Authorize a thorough and comprehensive business analysis
Following a systemic and systematic approach to the workout plan drives an efficient and effective strategy to prevent a continuation or return to default status.
Holes in the Bucket
In order to ensure that measures lead to an effective course correction, it is imperative that the source of the business challenges be correctly identified. When a firm engages in an objective and comprehensive business analysis, it is not uncommon to discover that the problems thought to be afflicting the business have been incorrectly assessed or are part of a greater challenge.
A business analysis is an exhaustive diagnostic study and assessment of the qualitative and quantitative factors affecting a business. Performed properly, the analysis will explore the unique business situation, identify challenges and concerns, and quantify the costs of the challenges to the bottom line. To ensure a quality analysis has been performed, expected results from a thorough examination should include, but are not limited to:
- Operations: Are operating statements understood and utilized, and what key performance indicators are tracked to measure productivity? What are the basis budgets and cost control effectiveness?
- Inventory and Merchandising: Are the inventory levels adequate for maximum turn rates and efficient cost of goods? Is the inventory properly merchandised for maximum exposure and profitability?
- Labor Costs: Are labor cost and scheduling fluctuations budgeted? How are employees rewarded? Is the cost impact of employee turnover measured?
- Marketing and Sales: Have costs been budgeted and a reasonable return earned on advertising and promotional investments?
- Business Ratios: Are applicable business ratios understood for identifying trends in the business and overall business performance?
- Cost Controls: Are costs measured and benchmarked against predetermined standards for the business, and what control systems are in place?
- Break-even Utilization: Is the break-even point analyzed and tracked for the business, product groups, sales personnel and service offerings? Are predictive analytics used to measure the increased cost impact on the business?
- Cash Flow Management: What systems are in place to forecast and manage payables and receivables to maximize current assets and increase leverage?
- Organization: Do both the business owner and the employees have a clear understanding of their roles in the success of the business?
This is only part of the complete picture of a thorough business analysis, but at a minimum, answers to these questions will identify the short and long-term effects the challenges are having on the business.