Note:  The content of this post has been extracted from a Corporate Finance Journal I published in early 2009, in the context of the severe credit crunch.  As I continue to receive requests for the article, I thought it would be useful to repost it here.  The fundamentals of preparing an information package are of course relevant to any economy.

  • Focus on management and their ability to plan, execute and adapt to change
  • Aggressively manage controllable variables, such as expenses and credit risk
  • Provide lenders with a comprehensive and dynamic financial model

What are senior lenders looking for when evaluating new business in this troubled economy and how should our financing proposal / business plan (“information package”) evolve to accommodate additional scrutiny?

The purpose of an information package is to:  i) introduce the lending opportunity; ii) identify and quantify risk; iii) demonstrate that management understands and can manage the risk; and, iv) assist the banker to prepare their own analysis for internal credit review.  In our role as financial advisor, we have the opportunity to review numerous information packages intended for distribution to senior lenders to support additional or new credit facilities.  For the most part, we find they are inadequate documents for the task. Most information packages we see are far too heavily weighted with a dump of background material, including company history, industry description and historical financial information.  While all of this information is important, presented in a concise, easy to digest format, it fails on its own to provide a story as to why there is an opportunity for the lender and, most importantly, that senior personnel are able to identify, quantify and manage risk.  In difficult economic times, a back to basics lending approach effectively includes an assumption by the bank that everything that can go wrong, undoubtedly will.  Management’s ability to handle difficulties is therefore of primary importance to the evaluation process and should be specifically addressed in the information package provided by the company. In our experience, virtually all information packages can be improved with:  i) the inclusion of a forward looking, dynamic financial model; ii) a written discussion of financial risks and how management is dealing with them; and, iii) a personalized discussion of key management personnel, and their specific ability to adapt to rapidly changing market influences. A financial model, specifically an excel spread sheet providing a monthly projection of the company’s balance sheets, income statements and cash flow statements, together with detailed schedules and assumptions, presented in a easy to understand and printable format, is critical to all transactions.   Providing a dynamic financial model to the prospective lender communicates that the applicant has a degree of financial sophistication and understands the economic drivers of the business.  By including a sensitivity module in the model, we can demonstrate that management understands and can quantify and manage various risks.  Further, the model is also a dynamic tool for the prospective lender to readily assess debt serviceability under a variety of assumptions and can serve as a significant assist to the bank representative in preparing his or her own credit submission.  By contrast, providing the lender only historical financial statements, an operating budget and perhaps a static multi-year operating plan fails to accomplish any of the above.

Using a dynamic financial projection model as a base, we now focus our information packages to a much greater degree on a written analysis of financial risk and on demonstrating that management is relentlessly managing the controllable variables.  For example, in most circumstances we now re-present all operating financial information in a break-even format, separating variable from fixed costs, so that we can readily calculate the sensitivity of debt serviceability to various risks, such as actual revenue being less than planned.  In this economic climate, lenders and sophisticated management are forced to assume the top line of the business may suffer, perhaps substantially.   The key to survival is to quantify the financial impact and to proactively reduce expenses and working capital demands.  We recently prepared a financial model that allowed us to present sensitivities whereby it could be assumed that any number of the company’s key customers reduced their purchases, quarter by quarter.  The model automatically recalculated the impact on earnings and working capital and also provided appropriate debt service calculations.  The process forced management to reconsider its expense and capital structures and, in the end, we were able to speak to profitability in almost any reasonable circumstance.

The dynamic financial model and accompanying written analysis of risk serves many purposes in an information package, but none more important than demonstrating the sophistication and skill of management to survive, make a profit and service its debt.  To augment this case, we are including substantially increased management disclosure in our information packages, beyond the usual short bio on key personnel.  A written description of the key managerial challenges of the game beetle frenzy slot review,  facing each key manager in the next several years, together with evidence of the manager’s capability for the task, can materially improve the confidence prospective lenders have in the team and the deal. In an economic crisis, companies are simply unable to present to a bank a financial plan that carries any degree of certainty or reliability.  To compensate, we must focus on management; specifically, their understanding of the risks, their willingness to confront the issues and, their ability to adapt quickly in a rapidly changing marketplace. Posted by Scott Sinclair, Range Corporate Advisors