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Hennepin, IL | Honestly he really has 2 problems: 1. Cash flow and 2. profitability and fixing one won't necessarily fix the other. I say that because if you back the clock up and he were to pass on this real estate deal, he'd have a better working capital position, but I don't know that it would be a lot better. You have to remember by walking away from that deal, he would've lost out on the income from that farm as well (assuming it would've made money given a fair rental rate during those 5 years). So like I said, WC would be better, but guaranteed he'd have tapped into it heavily by now. Wouldn't surprise me if it was still a negative number, just not as big. That all said, we break it down into 2 parts/conversations about how to move forward.
Conversation 1: Profitability/Overhead
This probably would help with cash flow as well, but basically I'd start with a list of assets with book value, amount owed, and % capacity being utilized (i.e. is the combine sized for twice the acres, etc). Take a clean sheet approach and see what opportunities there are eliminate this, downsize that, swap the neighbor for doing this by doing that for him, etc. Whatever you can come up with. Run numbers on what certain high overhead operations would cost to have custom done in the short term. Next would be a list of rental farms with expected profitability for each. See if there are any opportunities there to axe something that doesn't fit well, is a suck to resources/overhead, will be farming for free, etc. You might find enough opportunities between the two to get accrual earnings back to a decent positive number even with the bleak outlook. Or maybe it will be an exercise in futility. It is amazing the obvious things that don't seem obvious until you have to look for them. Ask that to any decent salesman that's had a make a yearly sales plan.
Conversation 2: Cash flow
After the first conversation, it's pretty likely that earnings won't be high enough to service the debt AND get WC to a comfortable level immediately, or within a year in all reality. That's when he needs to look at owned farms, profitiability, how they fit into the operation, amount owed, payments, and market value of each. Maybe there's one that stands out as a poor fit for the operation and has some equity. Then we have a conversation about axing it and adding that equity to WC and what that looks like. Maybe they all work well in the operation and are all profitable (when assigning a fair market rent). From there I'd imagine it's time to look at the highest payment and axe it. There's probably an argument to be made about looking for the one with the most equity and that may not be the wrong answer either. Kinda depends on how big of a bomb you still need to drop after Convo #1.
Take all this for what it's worth as I've only ever sat on 1 side of the banker's desk. I actually look forward to reading the thoughts from the guys in the business as the other thread showed there's a few out there in NAT land. | |
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Real World/Real life Financials Course 102
