A management consultant friend of Art’s called and asked if he would be interested in taking over a steel fabrication company. He went on to explain that the business made the structural supports for the signs on highways as well as the expansion joints for bridges and the walkways that went over the roads. It had been doing several million a year with a nice net profit but sales fell and it was now losing money. In addition the bank changed the terms of its loan so that it was now on a thirty-day call basis. The management consultant said the owner couldn't handle the sales problem and the financing stress - he wanted to sell.
Art met with the owner who was older and not in good health. He paid over a million dollars for the company and built it up so that he was enjoying a 15% ROI. He then became ill and was forced to bring in a manager. The result was the current situation.
Consoli reviewed the report prepared by the management consultant and determined that the business strategy had to focus on making bids which would produce profitable work, volumn was a secondary issue. He knew he needed time to get a handle on the bid process and the competitors - and the co-operation of the lender. He concluded that the only approach was to structure an option to buy and step in as the manager while it was still owned by the present owner. They struck a deal and set a year out to close the transaction.
The business strategy was very straightforward; work on improving profits even if it meant reducing the revenue, make timly payments on the debt and build a relationship with the banker.The financing strategy was to get a conforming five-year loan.
As the option date came closer so did the need for a decision. He could buy and gamble on ultimately restructuring the financing or walk away from a year’s work. As he considered the possibilities he decided to confront the banker.
“In a year we've gone from a loss of several hundred thousand dollars to one with increasing monthly profits. Every month’s payment has been on time and we've reduced the outstanding balance by ten per cent. What will it take to make a new arrangement?”
“Why should we?” Said the banker. “The equipment we have as security is worth very little. You keep reducing the debt every month, so our exposure diminishes. You won't walk away from this opportunity and when you buy it we will just call the loan. You'll bring in another lender to take us out. This is something we really don’t want to be involved with at this point.”
That was certainly a possibilty, but it didn't fit Consoli's overall financing strategy. He'd have too much of his resources in this one situation
That was when he developed his unique financing startegy; where possible borrow from those who want you to succeed, like your suppliers and your customers. Borrowing from someone whose only interest is making money always sets up an adversarial relationship - it’s just a question of when the fight begins.
Financial institutions are eager to provide a loan when you don't need it and aggresively try to get it back when you do. They have no vested interest in your success.
