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When Should You Put Money Back Into Your Business?
By Troy Taylor, Larry Comegys and Travis Hendren, The Algon Group
As signs of a housing recovery slowly start to emerge, stronger builders are begining to consider when they can safely begin putting money back into their business and re-invest their equity so they can position their company to take advantage of any upticks in the market.
Although individual situations require different solutions and decisions, one general rule of thumb business owners should follow is to never put money into a business until the balance sheet is “ready” — essentially, when debt is structured with the flexibility and capacity to grow the business when the markets return.
The first step in readying the balance sheet is to prepare an updated business plan with a detailed 12-month (ideally 24-month or more) cash flow model. Create the model with realistic assumptions for a base case and then develop a downside scenario based on more onerous assumptions.
Next, do an honest assessment of your balance sheet. As part of the assessment, ask yourself if your assets are properly priced and if your debt burdens and covenants are appropriate, given your financial projections.
If you determine that your assets are properly priced and your debt is appropriate, then you may be ready to put more capital into your business.
If not, then you should approach your lenders about restructuring your loans.
Put in as Little Cash as Possible
Many lenders will ask owners or managers to put money into the business as part of a balance sheet restructure. Don’t do it unless you are sure you are creating a structure that will provide your business with the cash and liquidity it needs to operate for the next 24 to 36 months, with or without a recovery.
Also, when you put cash into the business, put in the minimum amount of equity possible.
Conserve your cash when negotiating with banks because you’ll need cash in the future to fund your business or to take advantage of new opportunities. Your available cash in hand gives you needed leverage during lender negotiations as well as the flexibility to pursue several different strategies.
One strategy might be to use your cash to fund new opportunities until construction financing becomes more readily available. Another might be to use your cash to wind your business down if you can’t come to agreement with your lenders. Your cash will give you the flexibility to re-enter the business as conditions improve.
Most importantly, cash is your best survival tool and you shouldn’t waste it by funding a business that is no longer competitive.
No matter what strategies you pursue during a restructuring, stay unemotional and honest about the business and its future prospects. With the housing market in the condition it is, every decision you make must be made with the mindset that you may have to start over.
Many builders find it is helpful to have the assistance of legal counsel and a financial advisor. You and your team’s primary focus must be on the business — so don’t be embarrassed to ask for help as the goal is clearly worth the effort.
A properly structured balance sheet will provide you the liquidity you need to take advantage of the many opportunities we all expect to see when the market begins to recover.
The Algon Group is a financial advisor and investment banking firm based in Atlanta that specializes in distressed situations. During the last 12 months, the Algon Group has successfully advised home builders and developers on restructuring a combined debt of more than $3 billion. For more information, e-mail Troy Taylor, president, or Larry Comegys or Travis Hendren, managing directors; call them at 813-220-4630; or visit the Algon Group Web site at www.algongroup.com.
 Take Control of Your Finances
“Accounting & Financial Management for Residential Construction,” available through BuilderBooks.com, is a solid resource for builders, remodelers, developers and contractors that provides detailed information on how an accounting system operates and the basic principles for processing financial data.
To view or purchase this publication online, click here, or call 800-223-2665.
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