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Ben T. Nicholson

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At a Glance

The following presentation was first delivered at the national conference for America's Small Business Development Centers.

Given the current economic volatility being driven by interest rate adjustments, wage pressures and other business challenges, many small business will fall into distress. If the right strategy is employed, some will be able to turn around.

But before a turnaround can happen, the causes of distress must be understood with tools to help quantify the situation and the path forward. Or if it is too late, what to expect from a liquidation. 

I really enjoyed your presentation on the financials of a distressed business. I liked the template that you used for businesses to prioritize payments and strategize how they navigate their livelihood by 13-week increments. That type of clarity and simplicity is crucial during a crisis when biz owners are likely to feel pulled in a million directions.   -Attendee 

SLIDE 1 – REIMAGINE MAIN STREET at America's SBDC Annual Conference

Hello, everyone - Thank you for viewing the following presentation. It was first delivered at the Annual Conference for America’s SBDC held in Nashville in September 2023.


Welcome to an introduction to working in the dark arts.

So let’s start with a thought-jogging question that I asked in the presentation:

Who believes that, except for certain sectors, we are largely on the other side of business challenges, inflation is under control, and business growth is on the horizon?

Who believes we ain’t seen nothing yet?

As you can imagine, most hands went up in response to the latter question.

Depending on the lens through which you are viewing the economy, many small businesses are falling into distress. In fact, I know a workout officer who specializes in working with distressed small businesses, and as of our last conversation, his default portfolio has increased by over 10x in just the last 12 months. Pause and let that sink in. This is just one lender. There are likely many others facing a similar circumstance.

For M&A advisors, if defaults continue at that pace, be prepared for business acquisition loans to potentially slow as standards get tighter.

If it has not started already, my belief is that SBDC offices will see an increase in calls from small businesses that are beginning to feel the pressure of distress. I hope that what I am presenting today will provide a better understanding of the macro and micro economic situations and their effect on small businesses, how a small business gets into trouble, tools to help identify where the problems are to assess if they can be fixed before it is too late, and if it is too late, what to expect.


Quick bio about myself – You will find plenty of information about me and the work I do at Fortis Business Advisors on the website,, but in short, I come from the small business and startup world. My first company was a gourmet food store on Madison Avenue in New York City. It was an 180sqft space that generated over $550k in revenue per year. And more recently, I developed 4 temporary “Pop-Up” stores from Atlanta across to Dallas liquidating the inventory from a defaulted apparel company. If you annualized the revenue from all 4 stores, my team and I built a $3.5mm revenue company in 3.5 months.

I have owned or been a partner in multiple businesses in multiple verticals that include food service, publishing and marketing, multiple retail stores, and advisory firms.

Among the services that I provide clients, I am most recognized as a turnaround management and liquidation advisor focused on helping small businesses in distressed situations find a path forward or an exit with the least amount of collateral damage and the highest possible level of capital preservation. Collateral, of course, has some ambiguity to it, especially for a bank.

I am a champion for small businesses and maintain a belief that many are lost that could have been saved if the opportunity to help had come sooner.


I would bet that everyone watching has dealt with clients who are masters of their craft, but they have little to no formal or informal training on how to run a business.

For some, the lack of knowledge can work itself out as the business becomes one of the 25% of new businesses that make it to 15 years or even becomes one of the 4% of businesses that sell or get acquired.

However, that is not the fate for all businesses, and for some small businesses that fall into distress, if the right mix of timing and complete buy-in towards correcting the situation occurs, the business can undergo a turnaround and ultimately emerge as a healthier, more robust company with a better understanding of the causes of distress and how to prevent it in the future.

So, let’s talk about what turnaround management is…

Put simply, turnaround management is about finding profit in a failing business.

It is about presenting knowledgeable and predictable answers to a small business’s fear of the unknown by focusing attention on internal and external challenges and providing time-tested solutions to solve them.


Causes and symptoms that lead a business to a turnaround situation are countless, but commonalities include:

  • Customers changing their relationships with the business,

  • Vendors cutting off product lines,

  • A current one many deal with today is increased debt service on variable-rate loans

  • And many others


This can lead to some of the points you see here:

  • Declining profitability

  • Tightening cash flow

  • Pressure from a lender to find a new bank

  • Expensive or unavailable access to credit

  • And debts that exceed the value of the Assets


If a turnaround is an option, fundamental concepts requisite to each situation that will determine if a small business can survive include:

  • Incredible dedication to change and becoming efficient

  • Setting realistic and achievable goals

  • A reliable financial reporting system – even if a new one has to be developed

  • Opportunities to increase revenues

  • Improved cost efficiency

  • Cash flow management

  • A sell-off of non-performing assets to raise quick cash

  • Working capital performance optimization

  • If it can be, restructured debt

  • Continuous improvement towards break even


When we normally think of strategy consulting, perhaps an easy way to think of it is by looking at a business from where it currently is, imagining what it can become, and implementing action plans to reach those goals:

  • Business and model planning

  • New product, service, or market launches

  • Executing an effective marketing strategy

  • Team development

  • Performance Improvements to support growth

  • Capital Expenditures for Growth

  • Strategic Management Strategies

  • And more


Alternatively, Turnaround Consulting looks at a business from where it is today, analyzes where it has been to identify challenges, then looks backward to better understand where the business could go in the worst-case scenario – this is a liquidation valuation - then from there, project where it could be in the near future, particularly over 13-weeks.


In this gap is where a turnaround is found!


Covid was the largest shock we have had to the way we live since WWII. After WWII, the economy was undergoing a rapid change as soldiers who had been overseas returned home to their families that had been managing without them. The US had effectively become the last economy standing, and post-Bretton Woods, the economic leader of the world. As the Baby Boomer generation quite literally came to life, families expanded into the suburbs leading to new and different business opportunities.  This period was unsettling and led well into the 1950s.


Fast forward to today, we have an immensely large generation of retirees, many of whom are Baby Boomers, who are looking to sell their businesses – some stats say 40% of the businesses out there are owned by baby boomers and 30% want the sale of their business to fund their retirement.


When you look at demographics, the challenge is further shifting. By 2034, there will be more Americans over 65 than children. When you couple this with the challenges and time it takes for manufacturing reshoring with the requisite expenses to do so, and increased wage pressures, we are facing an era where we will arguably be living with less.


Let’s apply the demographics to what we could anticipate with the tech sector. If you want to do tech at scale you need people in their 20s and 30s to imagine the future, develop and prototype the tech, and then bring its operalization to mass manufacturing before going to market. To do this, you need a huge amount of cheap capital, which has been flowing into tech since the early 90s, because operating expenses need to be paid until when, and if, the company takes off. But the days of cheap capital are over. Baby boomers are retiring and shifting focus, the oldest millennials turn 44 this year, people in their 20s and 30s are demographically shrinking, and GenZ is the most educated but smallest generation we have ever had. Demographically speaking, if you are a tech company and aren’t at operalization today, you may be too late.


Now let’s touch on inflation and interest rates. The US response to Covid authorized $5t in govt spending. This coupled with rising commodity prices and supply chain disruptions were the principal triggers of the burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increases.


In February of 2021, CPI was 1.7% but rose to 5% in June 2021 to peak at 9% in June 2022. Or viewed differently since May 2020 our currency has lost 19.7% of its purchasing power.


These inflation numbers would likely abate over time without Fed intervention, but that doesn’t happen. Historically, and these days this is potentially subject to adjustment, the Fed aims to have inflation at 2% and short-term interest rates 2%-3% above inflation for an extended period. Once there, then and only then will the Fed decrease rates if necessary. Unless a crisis strikes, don’t expect this to happen anytime soon.


Also, historically speaking, one can argue we are actually returning to normal rates. Over the last 700+ years, average global nominal interest rates clocked in at 5.98% with inflation at 1.59%. For comparison, the current risk-free rate is 5.3% with inflation at 3.18%.


Also, for history buffs, the Fed stopped raising rates in July 2006. Then they held steady until August 2007. New Century Financial declared bankruptcy in April 2007. Bear Sterns collapsed in March 2008. The entire financial industry collapsed in September 2008 – There was a 2-year lag.


Now going back to today, when you consider the $5t plugged into the economy coupled with access to cheap capital, you can see the link that has led to massive malinvestments in businesses fast approaching distress.


One of the things that makes the US economy so vibrant is what you could theorize as viewing it from the Edge of the Cliff. What I mean by this is that when you think about business, risk leads to growth. You try new things, some of which the market accepts, and others of which are rejected.


As more and more risk is taken, the proverbial edge of the cliff gets pushed out.


This gap from where the edge was to where it goes is where innovation, efficiency, and improvement that leads to better living standards lie. We all benefit from the edge being pushed.


Now, some companies will fall off. And that’s ok. The turnaround management and liquidation industries are there to catch those who fall and help them get back up.


But also, a big cushion at the bottom is our Bankruptcy system, which is one of the main drivers that separates us from every other country in the world. Because of our bankruptcy system, people can fall then get back up and try again.


And another analogy to consider is that sometimes getting a cold is not so bad when you think of it as a means of cleansing the system. It is all part of the process that pushes the edge.


This is largely what ties this theme together.


Cheap credit, while beneficial for rapid growth, has also led to malinvestment over a long period of time. Now rates are returning to normal levels with realistic risk-free rates.


This will be a period where businesses with little market share, tight cash flow, and low margins will not have an easy time, but it also allows for risk-averse people to have a place to park money that earns interest.


And look businesses, nor economies, nor much of anything for that matter, flows in a singular direction. Science tells us this. Another analogy I like to use is how water freezes. As water gets colder, it becomes more dense, yet at the very moment before it freezes, for a split moment, water actually becomes less dense. Think of a frozen lake, although the deeper you go, the colder it gets, a lake clearly freezes from the top, not the bottom. If it froze from the bottom, life would effectively cease. My point with the analogy is that no matter how much we favor predictability, nothing moves in a singular direction, including and especially business.


These are the three main drivers that get a business in trouble.


Recessions are out of small businesses’ control. All management can do is be aware of the conditions that lead to them, and, while they should be doing this anyways, prepare by

  • building robustness

  • understanding operational efficiencies and working towards those goals

  • optimizing cash flow and working capital

  • and ensuring liquidity and access to capital


Fraud is a different animal that can catch even the most well-intentioned.

  • Of course, some people are outright fraudulent and intend to rob the bank or their investors – these are the bad actors.

  • Others start making bad decisions in a moment of desperation.

  • And unbeknownst to an owner, other employees could be engaging in fraudulent activity.


And the third one can colloquially be called stupidity. This can happen to anyone, especially in desperation when destructive decisions are being made. The list can be endless:

  • Taking on debt the business cannot afford without a clear path to pay it back.

  • Running up high-interest credit cards to fund losses.

  • Not keeping taxes or retirement plans paid.

  • Not acknowledging limitations and taking on a sale that cannot be fulfilled under the current circumstances.

  • Letting an ego and pride bury a business as staff loses their jobs and livelihoods.


While rewarding at times, owning a business is not easy, and there are plenty of opportunities business owners engage in that make it even more difficult.


And the only way to control it is to:

  • Take massive action and change how the business is being run.

  • Grab the reins to reestablish control.

  • But get ready for a very bumpy ride.


  • Smaller Creditors

  • Payroll and Sales Taxes

  • Retirement Plans

  • Seller Notes

  • Lines of Credit

  • And more



When you think of a distressed business analysis, consider it a Quality Test of the Cash as it flows through the Cash Cycle

  • If there are losses in profitability, then there is a good chance there are even more problems with cash; this is a gut check on the quality of a P&L - think booking a sale on account that never gets paid and the company does not have a bad debt policy to write off the receivables that were not collected.

  • A distressed business analysis forces the business to not only see the problem but know and understand the effect the problem is causing on cash flow. The results can give a better understanding of if a business can be resuscitated, sold, or refinanced.


There are countless businesses with strong revenue and healthy margins, but the business comes up short on cash month after month.


Yes, sales are necessary to survive – without them, there is no cash flow to manage - but if the cash necessary to complete the transaction is not managed properly, sales can’t fix the issue.


Imagine taking a large order from Home Depot.

  • The business may not have enough cash for supplies and needs to find financing to help – this can be expensive and not always easily accessible.

  • Home Depot may have 90-day terms, so the business needs the cash to pay operating expenses tied to the sale until they get paid.


These are the types of issues a business not properly managing cash flow can face that can result in a distressed situation or something worse - imagine being an unsecured vendor with 60-day terms delivering merchandise to Bed Bath and Beyond 2 weeks before they declared bankruptcy.


Let’s say hypothetically the revenue stream for a small business has been flat, and while sales are still coming in a confluence of internal and external compressions are affecting the business, most of which are out of the business’s control:

  • Sales are distorted because inflation is driving price increases.

  • Cash conversion cycles have lengthened due to increased material lead times, production line labor shortages, and A/R stretched by other customers facing the same issues.

  • Increased finished goods costs are hitting core business products, lead times are disrupted, and as consumer demand changes, inventory management is challenged.

  • Wage pressure is increasing as businesses pay more to incentivize retention.

  • Higher insurance coverage.

  • Diminishing marketing effectiveness as social media spends are growing faster than user growth.

  • Increasing rents on both space and equipment.

  • And as interest rates adjust, interest coverage is challenged.


As these issues arise and build, their Debt Service Coverage – the available cash for the business to cover debt payments – can drop, potentially sending the company into the eponymous Zombie status.

In the analysis, if you are looking at a business through the Debt Coverage ratio, most lenders consider 1.2 to 1.25 to be a healthy ratio. SBA has been known to go down to 1.15. There is one lender that will still go down to 1.1.


But here’s the reality - if the ratio drops below 1.0, the business is looking to other sources of cash to pay their note which means someone else is not going to get paid.


In conclusion consider this - if a business took out a floating rate loan in March 2020 at 7%, the interest rate is now upwards of 11.25%. And if a business is looking to get a loan today, some lenders are already rate sensitivity testing up to 14%. Businesses need cash flow to support this, or the bank may turn away.


Most people think of B/E as the point where all expenses are paid and everything else is profit.


That is correct, but another way to look at break-even is by considering it the point where all fixed expenses are paid for the period being analyzed, and all variable expenses have been paid up to that point.


Think of it on a calendar – It is the day of the year that a business could effectively shut its doors and upon return on January 1, no additional expenses will have been incurred while the door was shut.


For retailers, this was traditionally known as black Friday. Or for Walmart, who understands their line-item break even, it is the little yellow character buzzing around slashing prices below all their competitors as they turn their inventory into profit quickly.


It is important to understand break even and how a business can use it because they can execute cost containment measures that create a buffer when margin compressions are having an impact.


It can be crucial for a small business to understand its larger competitor’s operating ratios so that they can set a target to achieve. If I am a Pizza Shop, by knowing the operating ratios for Dominos or Papa Johns, I can target their benchmarks. When available these ratios can also help guide a turnaround.


Additionally, some of the key ratios perhaps more focused on in a turnaround  include:

  • Growth Ratios – Revenue; Gross Profit; EBITDA; Total Asset Growth; Total Liability Growth

  • Liquidity Ratios – Working Capital; Current Ratio; Days Working Capital

  • Leverage Ratios – Debt to Equity; Debt to Asset

  • Coverage Ratios – Interest Coverage Ratio (Zombie Ratio)

  • Efficiency Ratios – Asset Turnover; Inventory Turnover (Including Optimal Inventory Turnover); A/R Turnover; A/P Turnover

  • Return on Assets

  • Return on Equity

  • Operating Cash Flow


The Cash Conversion Cycle is the metric that expresses in days the time it takes for a company to convert its investments in inventory and resources into cash flow from sales. The formula is Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payables Outstanding (DPO).


If a business understands its Cash Conversion Cycle and how cash flows through each component, it can identify where changes can be made to optimize the cash cycle and ensure access to capital in times of need. This touches on preventing the selling to Home Depot problem from earlier.


When optimizing the cycle, strategies include

  • Eliminating obsolete inventory to ensure optimized inventory turnover.

  • Cleaning up an aging A/R report, liquidating bad debt or writing it off, and making sure payment policy is in place and honored by customers.

  • Paying payables at the time they are due while meeting vendor payment policies to ensure there are no disruptions.


Optimizing the cash conversion cycle will assist in ensuring that working capital requirements are met, or at the very least, working capital needs are understood so financing sources can be identified.


There is a link at the top of this page where you can download an example.


Compared to other types of financial statements, the 13-week cash flow statement presents the most granular view of the money moving in and out of a business. This model instills, in fact, forces, a sense of financial discipline when organizations need it most.


It is an objective, repeatable model that helps dispel false optimism.


What makes or breaks this model:

  • Ownership and management support – everyone must be involved, and everyone needs to buy in

  • Accuracy Control – use checks and balances to confirm accuracy. Test the model and adjust as necessary.

  • Actionable insights – businesses in distress can link assumptions in the model to tangible business decisions and contingency preparations. At 13 weeks, it is too short to see the effects of pricing adjustments, but it is long enough to see if a cash hole is on the horizon.


Consider some actionable steps to improve the cash flow in the model:

  • Every marketing channel needs to be reviewed and every opportunity to generate a sale uncovered.

  • Every expenditure should be utilized for the sole purpose of generating revenue.

  • Use purchase orders where possible.

  • Optimize inventory and assets– target the optimal inventory level, sell off the excess at a discount, buy only what is needed, and avoid large orders that may have a tempting discount attached.

  • Sell off any assets that are not being used.

  • When looking at new capital expenditures, target the payback at 3 years with a 30-45% Return on Investment projection to make it make sense.

  • With A/R, review delinquent accounts and customer relationships, and if accounts are simply never going to get paid, send them to collections. If not, propose discounts to pay off or increase payments to 110% on future orders until the delinquency is paid off.


Now let’s go through the model starting at the first column and going down…

  • Set a start date for the first week.

  • At the top line red number, enter the opening cash balance.

  • Enter sales projections for the week.

  • Next, enter how much cash is expected to be collected over the week, and if available funding sources need to be tapped, how much needs to be tapped.

  • Next, enter disbursements - for the cost of goods, how much inventory must be purchased that week COD, or how much is the payable that week for inventory already purchased.

  • Next up is payroll. If not paid weekly, enter it into the week it will be paid.

  • The same goes for each of the remaining categories with the intent being first to identify what must be paid and when, and if there is a problem, can the payment be moved around and where.

  • The next category is other disbursements, which include interest that must be paid during the period. If rates go up, make the adjustments.

  • And finally, principal payments on any short or long-term liabilities.

  • When all these inputs are entered, the total disbursements are subtracted from the total cash available to arrive at the cash on hand at the end of the week.

  • That cash on hand will start the cash on hand at the beginning of the following week and the cycle starts again.


As the inputs build, and the cycle develops, cash holes will reveal themselves at the end of each week that can be addressed to determine if the business can be turned around, what adjustments must be made to do so, and if outside or additional sources of capital need to be tapped, how much and what are the options.


Before we get into capital for a business in distress, let’s quickly go through why a business has challenges with secure financing in the first place. It would not be unusual to discover a direct path to distress linked to why a lender would not originate a loan from the very outset of the business.


There is a name for people who simply walk into a bank and ask for money – they are called bank robbers.

In today’s environment, business owners and bankers find themselves in agreement less and less about what is bankable.


Business owners rightfully believe in their business, but they often can’t get into the mind of a lender and overcome challenges like:

  • An overleveraged balance sheet

  • Working capital issues

  • Tightening coverage and operating ratios

  • Industry turmoil

  • Market share erosion

  • And tech advancements that haven’t been adopted

  • And more


And finally, there is always a belief that a banker can be “convinced” that the business is credit-worthy because projections are “always accurate” even if they are clearly unrealistic when compared to previous years.


The fact is, while there is a symbiotic relationship, entrepreneurs should recognize that lenders simply do not operate the same in risky business environments. Although entrepreneurs put everything on the line, literally, lenders invariably have more skin in the game, and while they are not looking to knock one out of the park, they do want their money back, with interest and fees.


Let’s now skip over to loan workout, also known as special assets. This is where distressed businesses can end up.

When things sour, lenders want their money back and will go through the process to get it back with an aim towards taking the least amount of a haircut possible.


When it comes to dealing with a workout officer, or someone who specializes in recovery from distressed businesses, expect a very different experience than the one when the business owner first walked into the bank.


They will be very matter-of-fact, the math has to make sense, and if you are looking for a shoulder to cry on, this is probably not the place. While they will give rope, banks want to be profitable, too, and they recognize that the capital that may be burning in one business needs to be recovered so it can be redeployed into another, much more profitable business.


And depending on the type of lender, many deal with regulations that tie their hands no matter how empathetic or how much they want to help, and many face procedures that they must follow to the letter in order to ensure all options for recovery are met.


While certain types of asset lending are utilized in healthy business situations, practically all distressed lending is based on lending on eligible assets in the business.


These types of loans are generally lines of credit that allow a lender to be patient to allow the business to correct challenges while also revolving the loan. Key considerations include:

  • The loan is collateralized by the first priority lien on the business and/or borrower’s assets.

  • There is generally a requirement for a borrowing base, which we will discuss, which is reported to the lender monthly or as frequently as needed.

  • Collateral will be monitored through periodic field exams and updated appraisals of the assets.

  • And depending on the situation, the lender may require dominion and control over the cash accounts, or a Factor may want to control of the receivables.


There is a strong argument that asset-based lending is a purer form of lending because it can be flexible for businesses that are growing with increasing inventory and/or A/R where the borrowing base goes up as asset levels rise, and it improves liquidity as the cash conversion cycle is funded by the loan. The business will be able to get cash sooner and more repeatedly throughout the business cycle.


In some circumstances, even for a healthy business, an optimal capital structure, even for small businesses, may include a term loan for larger expenditures – acquisition of the business or real estate - and a line of credit backed by the current assets to ensure access to cash.


Consider a manufacturer where a piece of equipment goes down that requires an expensive part for the repair. By accessing the line of credit, the business avoids depleting cash in the bank that is used to cover payroll and other operating expenses.


However, access can be expensive, as the lines are not meant to be drawn down indefinitely, and they can be a challenge to exit if the cash is repeatedly covering short-term expenses.


But they can be a lifeline.


In the event you are unfamiliar, a Merchant Cash Advance, or MCA, is a form of lending that provides a lump sum of capital in exchange for future sales with the business using the sales to repay the funds. Repayment includes fees as a factor rate that can range from 1.09x to as high as 1.5x - the higher the factor rate you receive the higher the fees.


Let’s go through a quick example:

  • A small business takes out an MCA loan for $100k which is to be paid back in 180 days at a factor rate of 1.25 = the repayment is 125k.

  • Fees are the difference between the repayment amount and the advance amount – 25k/100k or .25.

  • That rate is then annualized - .25 x 365 or 91.25.

  • Then lastly, calculate the annualized interest rate by dividing the percentage cost by the number of days, which is 180.

  • What these calculations show is if the business takes a cash advance of $100k with a factor rate at 1.25 to be paid back in six months, the interest rate is 50.69%.


Throw that cash along with the interest expense into your 13-week cash flow and see if it helps the business stay cash-positive – don’t be surprised if it doesn’t.


MCAs largely target small businesses because of their quick turnaround time, and they require very little information from the business to get access to the cash.


The bankruptcy courts are still working through cases to shake out how to deal with MCA’s and if they are considered predatory lending, and how they sit in priority in front or behind other lenders.


Because they take dominion of the business’s bank account, they prime other lenders. And in bankruptcy, possession is 9/10 of the law.


And something else to consider – I have been taking a loose survey of Factors I know about how often they see MCAs on potential borrower’s balance sheets. The consensus has been roughly 60%. This presents a challenge with getting a loan through underwriting.


I know there are situations where people have gotten out of MCAs, but in most cases where an MCA is present, the business is usually on its way toward its grave.


There is also a link at the top of this page where you can download an example.


The borrowing base gives a snapshot of the value of the cash that is tied up into the assets in a business.


By assessing each of the categories listed that are applicable, you will be able to identify if there is a problem in the working capital.


And if the company is taking on losses, there are likely more problems to be found with the cash.


Also, for those of you dealing with both the buy side and sell side of a transaction, the Borrowing Base can be used as a quick Quality of Earnings analysis by isolating and determining if the quality of the assets has been challenged.


Put another way, by effectively deducting the ineligible Accounts Receivable from revenue, or logging it as bad debt in the operating expenses, then taking the total ineligible inventory and adding it as an expense line in the cost of goods, you may find a drastically different, albeit more realistic, bottom line more reflective of the company’s true condition. Then take the results and reapply the EBITDA multiple to test the result.


As P&L takes a gut check, don’t be surprised if the math becomes more realistic and the deal becomes more bankable as the offering price adjusts.


Nevertheless, while even healthy businesses benefit from monitoring their Borrowing Base, for distressed businesses it is imperative. The borrowing base is the basis by which new capital may be raised in the event the 13-week Cash Flow Statement shows a cash hole that needs to be filled.


You can see structurally how the certificate works. You take the total of the asset category and strip out any of the assets that are suspect. In the case of A/R, accounts that run the risk of not being paid, and in the case of Inventory, goods that may be compromised that cannot be sold in the normal course of business.


Once the ineligible assets have been stripped out, what is left over is the eligible amount for a lender to consider.


Also, it is worth noting that each lender’s criteria can be different with their advance rates, and how they treat the assets that make up the borrowing base. Some are more conservative, like regulated banks, versus other alternative lenders who specialize in this type of lending.

SLIDE 29 – A/R

This exercise helps assign and quantify value, and the components tend to make perfect sense.


Accounts over 90 days delinquent signal there is a good chance the receivable won’t get paid.


Concentration is akin to having too many eggs in one basket - If one account has over 25% (50% for some lenders), there is a greater risk that if the customer takes their business elsewhere, the business will be challenged with replacing the customer.


Cross-Age is another one – if a certain amount, normally 25%, is overdue, there is a good chance the entire account will ultimately become overdue, the risk of which makes the entire account ineligible.


Then, once the ineligibles are taken out, the advance rate is applied to the balance.


Now let’s dive into inventory.


Work in Process inventory may or may not have value to it because it is not a finished product that is recoverable in the open market.


Obsolescence and slow-moving are big ones because they can be controlled when monitored properly. As inventory gets older, it can lose its value, thereby making it ineligible to a lender.


Custom merchandise may not have marketability outside of a certain sector, and a lender is not likely to advance capital on bananas.


And same as before with the Receivables, once the ineligibles are taken out, the advance rate is applied to the balance.


Once all the ineligibles are stripped out, and the advance rate is applied to the remaining eligible balances, which as mentioned can vary depending on the lender, the resultant value will guide you to what the lender is willing to open as a line of credit. There may be some nuances but getting a handle on this before going to a lender can help manage expectations.

Now let’s assume the line of credit has been approved. It is imperative that the business owner understand that this is not a term loan that annualizes over a long period. A line of credit must revolve annually. If it does not revolve, the lender can and oftentimes will take steps to liquidate the assets and recover their capital.



This is the point where panic sets in. In acknowledging that no business goes in a singular direction, given a long enough timeline this is practically an inevitability. It’s just part of being in business, no matter what the size.

  • For some, this is the point where the bank has called.

  • Vendors have stopped shipping because payables have been stretched too far.

  • Customers have stopped ordering because orders are slow to deliver or even unfulfilled.

  • Personal assets are on the line.

  • No one knows what could or what is going to happen next.


First, identify what must be paid to stay alive.


Put it on paper, so to speak, so a realistic plan can be organized. Even if one vendor may be barking louder, if another can help fulfill an order, pay that one to get the patch.


Also, when blood is in the water, expect the sharks to come in hopes of finding anything left on the carcass. They can kill a company before there is even a chance to reemerge…think MCA.


If cash is needed, be prepared by projecting out 13 weeks to find out how much, make cuts to get what is needed as low and as manageable as possible, and analyze the borrowing base to see what is realistic.


And keep stakeholders in the loop. People who know what is going on are more apt to help. No stakeholder wants to see a business go down, but they definitely don’t want to get shocked.


Forbearance – this is a notice that a bank will give indicating they will refrain from enforcement so long as certain criteria are met.


Foreclosure – this happens when those criteria are not met.


When a foreclosure is on the brink, consider bankruptcy.

  • Chapter 7 is liquidation. A trustee is appointed by the court, keys are handed over, and liquidation of the assets begins with the intent to pay creditors. This can sometimes be forced on a business.

  • Chapter 11 is a reorganization and is usually reserved for larger companies. The intent is to put a stay on the debts so the company can organize a path forward and re-emerge as healthy and more robust. For some small businesses, this path can be cost-prohibitive. 

  • Therefore, Subchapter V was started to help small businesses specifically have an opportunity to reorganize with the guidance of an advisor. Currently, this is reserved for companies with up to $7.5 million in debt but may revert to the original $2.7mm.

  • And lastly, assignment for the benefit of creditors, or ABC. This is effectively a bankruptcy outside of bankruptcy where a fiduciary, oftentimes an attorney, takes possession of the business, organizes the debt obligations, negotiates on the debtor’s behalf, and proceeds to monetize the assets to pay down the debts. This is all done without having to appear in court.


It is good to be familiar with each chapter to make sure expectations are being managed in the process. There is a benefit in that Bankruptcy has an organizing aspect to it, but it can be expensive.


Unfortunately, hope is not a business plan and there is a point of no return – if the business can’t make payroll and does not have access to cash, the business is practically there already. If there is an MCA, it is getting even closer. If the assets have been compromised, there may not be any additional access to capital no matter what the plan may be.


Once there, get help because the situation can get worse. Professional help can solve a lot of problems directly related to recovery. They can communicate with stakeholders who want to better understand the situation and a realistic path forward.


When the decision is finally made or the business is forced to liquidate, unless there is immediate time sensitivity, most stakeholders prefer an orderly liquidation over a reasonable period to maximize the recovery. However, others may just want to get out as soon as possible or need to get out for procedural reasons. Each situation is different.


Also, liquidation, especially retail, is not normal business. Business owners try to self-liquidate and oftentimes recoverable cash is left on the table as mistakes are made. Professional liquidators exist to help prevent the problems that a business owner may not see coming, including future lawsuits tied to deficiencies in the debt.  


And finally, realistic returns – on Retail liquidations a good benchmark measure is 100% sales to inventory cost before expenses are taken out; Pop-Up Liquidations can yield a 35% free-and-clear return on sales; Bulk buyouts can range from .03 to .15 cents on the dollar – same goes with auctions.


We worked with a family-owned business selling consumer products online through Amazon, and in stores, including Walmart and Buy Buy Baby.


The company generated $4.3 million in revenue with a negative net profit of $957,000; $600,000 thousand in A/R, $750,000 in inventory, and an evergreen line of credit for $721,000.


Their bank was ready to send a Forbearance agreement but gave them the option to explore working with a turnaround consultant.


After the initial meeting, the owner agreed to a comprehensive analysis which included a 13-week cash flow statement, borrowing base certificate, cash conversion cycle assessment, inventory assessment, and a whole host of other vials of blood drawn for testing.


After the 13-week statement came out, the issues started to surface as the owner bought in and made corrective measures. Management recognized that there could not be negative cash flow and worked towards adjusting aspects of the business to stay positive, including accelerating A/R collections, adjusting payroll cycles, halting inventory buys, prioritizing A/P, and moving payments around to conserve cash.


As actual cash flow results were being reported, the lender saw the progress and agreed to another set of 13-week projections.


A new marketing program was devised with sales staff training focused on selling higher margin items while also selling excess merchandise at discounts.


The inventory assets were analyzed to help better understand what to sell through to optimize turnover.


The owner underwent comprehensive CEO training.


Within 6 months, the business was repositioned for a new lender arrangement and exited the original lender while avoiding foreclosure.


The business is still in operation and profitable today.


It is imperative to understand the banks, and all the stakeholders, needs. And communicate with them.


The analysis is not cursory. It must be comprehensive so that problems can be identified, and corrective actions can be implemented.


Cash flow projections should be conservative to remain as close to accurate as possible. If they are way off, credibility can get shot.


As a better understanding of the situation materializes, the business can be stabilized as issues are prioritized and addressed.


The assets can be optimized as idle assets are sold off to raise cash flow.


Which can lead to a maximized cash conversion cycle and a clean P&L.


And as positive results emerge, stress testing can be implemented to see where further improvements can be made.


I started Fortis Business Advisors because there is limited access to affordable help for small businesses in distress situations – most small businesses are simply dead on arrival, and unwinding the situation can be very challenging.


But as mentioned in the beginning, there are a number of small businesses that if help comes in time, can be saved, or at a minimum, the maximum amount of capital can be recovered.


Also as mentioned before, my belief is that SBDCs will see a lot of distress in the near future, and while you will no doubt do what you can to help, I would like the opportunity to support you when, where, and if I can. Or if the business is too far gone, I am a resource you can access to help monetize assets when liquidation is the last and best option.


Speaking for myself, I am going to try and help as many small businesses as possible survive as economic volatility continues through the near and potentially not-so-near future.


Fortis Business Advisors specializes in helping small businesses with $500k-$20mm in revenue in healthy or distressed situations directly or through their lenders and professional service advisors.


We operate in 3 different verticals:

  • Performance Advisory which includes Turnaround Management and Restructuring, Performance Improvement, M&A and Transaction Advisory, and Valuation Validation

  • Retail Solutions and Asset Maximization, which includes promotional services, asset monetization, and liquidation services

  • And we are pioneers in the “Pop-Up” liquidation concept, creating unique selling environments to liquidate inventory assets.


Each service specializes in achieving a distinct outcome but is wholly integrable given the nature of the complexity being addressed.


And perhaps most importantly, we approach challenges from an owner’s perspective, which drives our uniqueness.

SLIDE 41 – Q&A

If you have any questions about the information presented, please contact Ben Nicholson at, or feel free to call or text directly at 321-948-9615.

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