Case Studies: Debt Management

Debt Management

A client was referred to us by a lender in the “managed asset” area of a local bank.  The marching orders were to identify areas suitable for cost reduction and to assist management to develop a strategy to become consistently profitable.  These objectives were accomplished in short order, but it became evident that the debt the business had incurred was more than it could realistically support if it were to become self sufficient.

In light of these factors, we examined the net liquidation value of the primary assets of the business and determined that their value was substantially less than might be obtained in a sale of those assets.  Having worked for the FDIC and being familiar with the credit quality standards being imposed on member banks, we asked the lender what he felt might be an appropriate amount to agree upon if he were to walk away from the credit.  After consultation with his colleagues, he informed us that he would accept approximately one half of what was owed.  With those marching orders, we sought out a lender that would consider the retention of jobs and the prospect of future success as a more compelling factor to lending than more standard criteria then in evidence.  We were able to secure most of the financing necessary from a quasi-public lender that had a much stronger public purpose in its charter and the balance was obtained be securing an equity loan on the home of the principal shareholders.

The result was the elimination of a crushing level of debt that was unsustainable and the insertion of a low interest source of capital that served as the catalyst for a more manageable cost structure.  In the process, the tax implication on the forgiveness of debt was offset from a tax perspective by the cumulative tax losses earlier sustained.  We were also able to secure a federal grant to support the sales initiatives contemplated at the onset of the engagement.  The business is currently debt free and looking forward to developing a strategy to transfer ownership to the next generation of the family.


Case Study: Sale of Losing Division and Replacement with Royalty Payments

A long standing client was faced with a dilemma of eliminating a “bleeding” division if it was to survive and support the operations of its profitable division.  After much soul searching, it was ultimately decided to sell the “loser” and concentrate on the “winner”.  A prospective buyer was identified and discussions began in earnest concerning its acquisition.  The problem was that the buyer needed to see the financial history in order to make an informed offer.  We informed the buyer that how well or badly this division had been managed, had no bearing on its value and in turn offered to share the customer list and the formulas that had formed the basis for the value of the business after certain confidentiality agreements had been executed.

The result was an offer that included only a royalty based set of payments on the sales of the products previously serviced by our client and a management contract for the owner.  The elimination of the expenses previously incurred by our client and their replacement with a stream of royalties served as the catalyst for a complete turnaround of our client.  The remaining division thrived and was ultimately sold to a major international player in the adhesives market at a substantial profit.  Three years later, the original buyer, who had realized substantial success in purchasing the business for a management contract and a stream of royalties and building a substantial international presence, called us for help with their banking relationship and the implementation of an acquisition strategy.  Nine years later, we continue to work with the acquiring company whose revenues are approaching $90 million.

Solving the Problem of Working Capital

Working Capital

A client approached us to request assistance in obtaining working capital in the form of a line of credit with its bank.  The lender and borrower knew each other well and the lender challenged the borrower to “match” the working capital it was asked to provide.

In the absence of additional capital investment, the client was unable to fulfill this “challenge” match.  We reviewed the balance sheet of the client and immediately observed that the accounts payable were substantially past their ordinary due dates and in fact, many vendors had shut off credit and were considering legal action to secure payment.  Total vendor debt was in excess of $400,000.  We began the process of identifying a solution which we refer to as the 1,2,3 plan.

All vendors were contacted and advised that the company could not bring its obligations current in any other manner than to pay the balance at the rate of 1% per month for the first 12 months, 2% per month for the second 12 months and 3% per month for the third twelve months and thereafter until the balance shall have been paid in full.  The overall repayment program would have consumed just under 47 months but full payment could be made which included a nominal rate of interest.  In exchange, the client pledged to make all future purchases on a COD basis until all past due balances had been paid in full.

The effect of this strategy was to give the client over $352,000 of working capital by switching a short term liability (accounts payable) to a long term liability in the form of a note payable.  The bank used the improvement in liquidity to make available a line of $350,000 secured by accounts receivable that were previously unencumbered by liens.  This line was used to meet operating needs and the COD commitment on future purchases with its vendors.  Payment terms were met, the company worked from a stronger balance sheet and profits improved commensurately.  The result was a win/win for all affected parties and a strong and loyal customer for the bank and the beginning of a long standing relationship with our client.


SBANE Presentation March 1, 2012

Boston Financial Resources is taking part in the presentation:

“Pathway to Asset Recovery With Your Bank”

Details are below:

ADDRESS:Reservoir Place
1601 Trapelo Road
Edgartown Room
Waltham, MA


TIME:7:30 AM – 9:30 AM

Price: $59.00

“Pathway to Asset Recovery With Your Bank”

“Work Out…Work Through…Asset Recovery” are terms that describe companies that are transitioning back to profitability with their lenders.  Some lenders such as Eastern Bank and Middlesex Savings Bank take a patient approach to toward companies undergoing a transformation.  If you haven’t experienced a transfer of your loan from the conventional lending platform to an expert who specializes in rehabilitating troubled assets, this seminar is an excellent guide to that runway.

We have secured two seasoned bank veterans that concentrate on helping companies reposition their debt to a successful exit back to the commercial lending platform.  We also tapped two experienced turnaround management consultants that work with operating companies restructuring trade and bank debt toward aligning the company’s existing cash flow to their ability to satisfy a revised debt service capability.

John Farmer, Senior Vice President, Eastern Bank, Lynn, MA
Chuck Merrill, Vice President, Middlesex Savings Bank, Natick, MA
John Weeks, Principal, Boston Financial Resources, Boston, MA
Jim O’Connor, Principal, The O’Connor Group, Bedford, MA

Reservations can be made by visiting: