In the 1990’s a children’s clothing business nearby to me in Vancouver BC suddenly collapsed. Revenues and profits had grown at a breakneck speed with a multi-location expansion project. But they did not take into account that expansion vacuums up a ton of immediate cash that can only be replaced by profits generated over time. The company simply ran out of cash and would have benefited from a better CFO and a better bank.
Also in the 1990’s Wang Labs collapsed after failing to compete with PC clones suddenly entering the market. As market share collapsed, the accountants argued for an increase in prices, pricing them out of the market and leading to further loss of market share. No amount of cash injection would have saved Wang.
In this millennium, my team restructured a failing contract manufacturer. The debt was dealt with by negotiation and postponement. Extra cash was injected into the company removing the crippling cash calls for materials. The amount was not large but in its absence, the company would have failed. That showed up in examining a forward looking cash flow analysis. The company survived.
The ideal company for investors is one that has
- temporary problems,
- a clear need for the funds and
- a return on that investment,
- respectable and stable profits and sales, and
- a good customer list.
But these companies could have found a partner. Sometimes that is the only alternative, but equity participation (another shareholder) is expensive simply because that partner is with you for ever. Debt on the other hand will demand repayment but at least after the debt is paid, that expense is gone for good.
Which way would you go? To make the decision, you will need:
- the services of an expert in analysing the company prospects, someone who has no emotional commitment to the company
- the services of an expert attracting a lender with a presentation that demonstrates how a cash injection will make the company thrive.
- The services of an experienced broker to find that right lender or investor.