by Roger Stageberg

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My business has grown nicely over the last couple of years, but the bottom line has not been very impressive. What can I do to improve the bottom line and the appearance of my balance sheet for upcoming discussions with (i) a possible merger partner, or (ii) a commercial lender for needed capital to expand the business?

To improve the bottom line (after tax profit), you need to continue to focus on the top line (sales). Before considering a possible merger, you should wait until your business has shown at least two years of increased sales, because the merger partner will want to project sales for at least the next two years and a steady four year uptrend will be most impressive. Once the top line is looking good, there are the usual cost cutting steps that can be taken like reductions in unnecessary fringe benefits such as expensive retreats, athletic tickets and first class travel and accommodations. Cutting salaries of officers who are also major shareholders (members in an LLC) is a frequently used tactic. Avoidable expenses that are often large are the salaries and benefits paid to family members on the payroll who contribute little to the day-to-day operations.

 

Improvements to the balance sheet are important to potential merger partners, but are essential when a bank or other commercial lender is considering whether to loan funds to your business. Any new lender will want to hold a first security interest in the assets of the business, so arrangements should be made to repay outstanding loans or to use a portion of the new loan to repay older loans. Many companies’ balance sheets show loans from management or major shareholders/members. It can be helpful before approaching a merger partner or a lender to discuss with such shareholders/members the possibility of converting the loans into more shares of stock (or membership interests). If such loans remain on the books, a merger partner may want to modify the terms and a commercial lender will want the loans subordinated to its loan.

 

If merger discussions are desired, it is essential to meet with the outside accountants and lawyers who are familiar with the business before approaching a possible merger partner. Such a meeting can also be helpful before approaching a commercial lender for a loan. After such meetings, a determination may be made to engage a merger broker to study the wide range of potential merger partners.

 

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Roger Stageberg