Your advisors need to talk to each other

Most businesses have a set of professionals around them. A banker, an accountant, a lawyer, sometimes even a mentor. In my experience, those relationships almost always run as separate spokes, with the owner in the middle translating between them, usually imperfectly and under time pressure.

Getting your advisors to know your business as well as you, and to work from the same set of facts, is worth the effort it requires.

Banking relationships have evolved

Banking has changed immensely from where it was a decade ago. Relationship managers moved on every couple of years, and the knowledge of your business went with them. Lending decisions were heavily based on security and property values than on an understanding of how the business made its money.

We now work with relationship managers who are commercially capable, understand the industries their clients operate in, and want to know where a business is exposed before a problem arises. The result has been better structured facilities and products that fit the way businesses trade. It has also changed the relationship between the banker and the accountant, which now runs in both directions. The accountant brings the bank information it can use. The bank brings us options we would not have known were available.

This still depends far more on the individual than on the specific bank, and when a capable relationship manager moves on, you can still lose a great deal of the accumulated understanding of your business. This is why your accountant belongs in the room. It is also why the bank needs something worth working with, because it can only be as commercial as the information it is given.

A generic covenant fails your business

A covenant (a financial condition your bank requires you to keep meeting for the life of a loan) exists for a reason, and banks should require them. Most take the form of a ratio, such as debt measured against earnings or profit measured against interest, that the bank calculates from your latest figures at set dates. But often, they’re written generically, and a generic test applied to a specific business can constrain that business in ways that have nothing to do with its health. If your business builds stock seasonally, a ratio tested monthly will show stress in exactly the months when you are doing what you should be doing. The stock has been paid for, usually on borrowed money, and the sales that pay for it have not yet come through, so on paper the business looks over-borrowed. Owners frequently feel these pressures without being able to identify where they are coming from.

This is where a commercially capable accountant comes in. We see the same covenants across many businesses. We can identify the difference between constraint that is the design of the test and one that is the performance of the business, and we can articulate that to your lender with the analysis behind it.

This isn’t a confession. Ask about the frequency of testing, whether it can be measured on a rolling twelve months rather than at a single date. Ask how the definitions treat shareholder funding and lease obligations. Ask how much headroom you have. All of it is negotiable at origination and renewal, but considerably harder to move at any other point.

Sometimes, this provides a different answer from the one you went looking for. Funding a seasonal stock build on the trading overdraft is a common example, because a generic ratio reads that borrowing as core debt. Moving the funding to a trade or receivables finance line can remove the distortion without renegotiating anything.

The same reasoning applies to term lending repaid over the working life of the asset rather than a standard five years, an interest only period through a capital project, asset finance for equipment instead of a drawdown on the overdraft, a bond facility instead of cash retentions, or a fixed and floating mix designed with an interest cover test in mind. These are ordinary products and banks are generally willing to restructure. They need to understand where the constraints are.

It is worth remembering that your relationship manager is usually your advocate rather than your decision maker. The proposal goes to a credit function that will never meet you. Give your banker material that survives being passed on without you in the room.

Who does this work?

All of this assumes that somebody in the business is doing the work of a Chief Financial Officer (CFO). Reading the covenants against the cash cycle. Modelling the next twelve months rather than reporting the last twelve. Preparing the material that the credit function will be seeing. Sitting in the room when the facility is negotiated. Most businesses of the size I am describing cannot justify a Chief Financial Officer, and a good number of them do not need one full time. What they do need is the capability, at intervals, and at the points where the decisions are being made.

That is the thinking behind bringing CFO4U into the Gilligan Sheppard firm. We now provide Fractional CFO support alongside the compliance and advisory work, at a cost that makes sense for a business that cannot carry a full-time appointment. If your business doesn’t have someone doing this work, it is worth thinking about, because the banking conversation is only just one of the many places it shows up.

Without the relevant financial information, accompanied by the commercial explanations and analysis, the banking conversation will be reactive, and the covenant will continue to be somebody ’else’s design.

Two sides of the same coin: Your Lawyer and Accountant

Your lawyer and your accountant are two sides of the same coin, but they need to pull in the same direction. A lawyer produces a document that is legally sound and commercially sensible on its own terms. The accountant is the only person who can say what that document does to the tax position, but they’re usually brought into the loop after it has been signed. We’ve witnessed it play out in many ways:

Selling a business

In some cases, the parties are required to agree to a consistent allocation of the purchase price across the assets being sold, and to follow that allocation in their tax returns. If the agreement is silent about it, one party can end up determining the allocation for both, and the vendor can be left accounting for depreciation recovered that was never in ’anybody’s numbers. The allocation sits in a clause in the ’lawyer’s agreement. The only person who can produce the figures that go in that clause is the accountant, and it needs to happen before signing rather than after settlement.

Shareholders’ agreements

Exit provisions are often drafted as fair value, or as a multiple of earnings with no definition of earnings. There is no treatment of owner salaries drawn below market rates, adjustments for surplus cash or shareholder current accounts, and an answer for who prepares the figures. Those clauses read as complete and become unworkable on the day someone wants out. While the mechanism is legal drafting, the definition is accounting, and they need to be written at the same time. The same applies to how a buyout is funded, because the ownership of an insurance policy changes the tax outcome.

Succession in Tranches

We are seeing a great deal more staged succession, where shares move to the next generation of owners in tranches over several years. It is a sensible way to do it and needs careful management of continuity. Cumulative changes in shareholding can reach a threshold where carried-forward tax losses or imputation credits (the tax value the company has built up over the years) are lost, and the tranche that causes it is often not the one anybody was expecting. The sequence and timing matter just as much as the price, and that analysis belongs at the beginning, when the succession plan is being documented. Not mid-way through the third tranche. The same care applies to moving shares into a trust for protection, and the bank belongs in that conversation too, because guarantees given across a group can undo the separation the lawyer has just built.

Earnouts

A lawyer will negotiate hard on the percentage and period. If the trigger is defined as earnings and the purchaser controls the accounting after completion, what determines whether the earnout is worth anything is the detail the accountant supplies: the policies that apply, what is added back, who prepares the accounts, and who reviews them.

Do this deliberately

There is one more reason to make the introductions. When professionals have never met each other, they tend to defend their own patch. A structure gets marked up rather than queried. An assumption gets criticised in front of the client rather than tested with the person who made it. Advice arrives with implications that whoever advised you last did not know what they were doing. The business pays for the same ground to be covered twice.

Introduce them to each other and most of that stops. Professionals who know each other and understand what the others are responsible for behave differently. They ask before they assume. They understand when somebody else has better information. The business sits at the centre of the group instead of acting as the go between.

The benefits matter

So, this is not only a matter of not treating your advisors as sequential steps. They should not be treated as separate relationships at all. Set it up on purpose, with your business as the agenda. We recommend it without any hesitation, because we have seen what it produces. The fees are usually lower, since nobody is rediscovering what somebody else already knew. There are fewer surprises, since four people looking at the same facts will see more than one person looking at a summary. And when something does happen, in the business or in the lives of the people who own it, the relationships are already there, and nobody has to start at the beginning.

If you’ve been feeling like the translator between your bank, lawyer, and accountant,the more you ignore it, the more it costs you: in covenant pressure, succession tranches nobody’s watching, and agreements that only reveal their flaws when someone tries to exist. Our CFO4U service and specialist tax services are designed to close that gap. Talk to us before your next renewal or your next tranche, not after.

Author: Joshna Mistry