Seth Yakatan offers a merchant banker’s perspective on what investors and lenders want to see in contingency planning.
One of the most important lessons that I have learned in corporate finance is that hedging doesn’t always make you better off. Some things just can’t be predicted. Instead, you have to figure things out, and in a previous post, I mentioned the importance of businesses having people who can figure things out. But we can learn from evaluating companies that have successfully weathered this year.
Among the characteristics of companies that have endured are those having a sufficient amount of cash reserves on hand—at least three months, preferably six. This should allow businesses to figure things out and make adjustments.
When developing a contingency plan, businesses should consider their net burn if they have to stop conducting business for 3 to 6 months. This, of course, involves a thorough review of your P&L statement, discretionary and necessary spending—and a host of other considerations.
Ultimately, solvency is always a concern and having sufficient reserves affords businesses enough time to adapt to evolving market dynamics. It is also something lenders or investors like to see, making it easier to access capital at favorable terms.
Now, as businesses reopen following guidelines, management will be under pressure and concerned about their recovery. They will also be concerned about surviving another shutdown—or another unexpected disruption. With the pandemic, social unrest and the upcoming election, the one constant we can count on is constant change.
At these times, cash flow is key. Companies experiencing disrupted operations, higher operating costs or lost revenues may need to obtain additional financing or amend terms of debt agreements. In such cases, they will need to consider whether any changes to existing contractual arrangements represent a substantial modification—or potentially a contract extinguishment.
This may involve lenders, banks, insurance companies and real estate owners providing relief on cash-flow obligations. These companies will have to consider the consequences if they provide relief.
If your company is seeking financing or looking to invest, Seth Yakatan offers a real-world perspective from a merchant banker’s perspective
Known for solutions that yield results, Seth Yakatan has completed or advised on acquisitions and corporate finance transactions totaling over $3 billion. He is CEO of Katan Associates International—a financial strategy and merchant banking firm specializing in commercialization and asset monetization—especially those within life-science and e-commerce sectors.