I am once again reminded this week of how procrastination has a real dollar cost to a business. I recently spent time doing some work for a client that had less than 120 days to arrange for some senior debt that would be used to payout some private debt that was put into the company when it was started. Aside from the accounting work that needed to be completed (the client required Review Engagement financial statements), the client chose to delay speaking with the individual who provided the money in hopes that new financing would be readily and easily available. As a result, the individual will be exercising their option to convert their private debt to equity in the company and will begin receiving a portion of profits on a go forward basis.
On the surface this may not seem like a big deal. For this client however the conversion from debt to equity is significant. In the last year, the client has not only improved their business from an operational perspective but has also signed up a series of new large customers that will be very profitable. In the eyes of the president (and major shareholder), the conversion of the private debt to equity means that the all future revenue and value will be shared with someone that until recently was prepared to limit their return to the annual rate of interest being paid on the private debt. This transaction did not need to unfold this way had the president of our client taken the steps necessary to potentially prevent the conversion or at least take an opportunity to re-negotiate the deal.
In my experience in dealing with private investors, they certainly want to be paid for their risk but are also real people that enjoy business, deals and human interaction. In speaking to this example, our client should have taken steps a year in advance of the deadline for conversion to begin working out different scenarios. At the very least a conversation with the private investor even 120 days before the deadline would have been helpful in determining a new course of action should the president have decided that the conversion was inequitable or required renegotiating. I cannot guess at what the reaction of the private investor would have been however I am confident that a conversation between the parties well in advance of the deadline could have produced a better outcome for our client.
Waiting until the 11th hour is not always the best business strategy. Certainly not the best strategy if you stand to lose more than can be gained by a critical event occurring. If you have a obstacle, obligation, problem or challenge in your business that specifically relates to its money or finances, get in front of it while you may have options before you no longer do and are forced into a transaction that is not as equitable to your business as it may have been.
We have a website – http://www.businessmoney.ca – that offers a FREE Business Health Check for businesses that want to know where they stand financially and what they could be doing in their business to get a better result. Registering for an account is free and there are downloadable reports that will also give you some information about business finance. The FREE Business Health Check is also a great tool for working through different scenarios that your business could be in financially if changes were to be made.
We will continue to work with this client as they do have some options that they can consider but none of the options will benefit our client the way other options could had they gotten in front of their deadline.
“Never put off until tomorrow that which can be done today”