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University of Massachusetts Amherst

Family Business Center

Family Business Can Take It To the Bank

by Ira Bryck

Family businesses are a closely-held lot, that don't often or easily seek outside advice or direction. Research reveals that just 7% of family businesses have ever used a consultant or counselor to resolve conflict. Only 31% have confided in their accountant, 9% in their attorney, and the insurance agent or banker 3-4%.

It is no wonder that at talks to local organizations, professionals ask me "How can I have a deeper, more helpful discussion with family business clients?" Also not surprisingly, family business owners ask, " How can we look better to our suppliers and lenders?" There is fear that vendors and lenders will want all kinds of information the family business holds dear, possibly requesting to know more than an owner wants to disclose.

However, there is reason to suppose that a more open relationship with a service provider can result in increased service and satisfaction on both sides. How might that relationship be developed?

First, it is important to realize that you share common ground with the majority of your suppliers, frequently family owned businesses. Also, though many family businesses view themselves as unique, even unusual, lenders will treat you like any other business. In one way, your family ownership is almost immaterial.

According to Jeremy Weir, Manager of Bank of Boston's Closely Held Business Group, of the 15 million businesses in the US, only about 50,000 are publicly traded. Strong public companies are unlikely to be standing in line with you. Rather you will be in the good company of the vast majority of businesses that are family owned.

At the same time, part of any credit decision relates to the quality of management and ownership, including skills and talents of family members, enthusiasm, and willingness to disclose information. Some of the issues affecting the financial picture are delicate, such as: are family members overpaid, burdening the fiscal health of the business? Are they underpaid, meaning (among other things) that the cost to replace them may be very high?

Though figures don't lie, family businesses must strive to make a frank and enthusiastic presentation to their bank.

Second, lenders are in business to do business. Mary Beth Haut, Senior Private Banking officer at Bank of Boston, says "Banks are willing to explore creative ways to provide financing to businesses. We work hard to get to know the management of a company and to understand their particular industry. Within a family business, it is important to understand who is making day-to-day management decisions. The father may hold the title of company president, but essentially be retired; his granddaughter may actually be running the business. The bank is also eager to understand the impact of a management team change, especially when there is a single family member who functions as the key decision maker or principal manager." A family business that has faced these issues and developed a plan will be a far more likely to have its credit request met with approval.

The entrepreneur who believes in the business financing itself should realize that it may be prudent to have some level of debt. But says Mary Beth Haut, it's critical that the business person sleep comfortably. A wise lender might explain the benefits of some leverage , but won't push people past their comfort range.

The real estate debacle that caused a great reluctance among lenders has given way to a credit environment very receptive to new business. So, whether you want to grow the business to commodate the entry of new family members, develop new and unrelated offshoots to the original product or service, or expand to meet your customers needs, a good bank looking to make loans will be open to financing your venture based on credit quality and some common sense plans.

For example, banks look for experience and confidence from the borrower, and a willingness to share in the risk of the expansion or new venture. "Are you expanding the business to give family members something to do? If so, are they qualified ? " asks Weir. " The fact that they are family is irrelevant to a bank, if , in fact, they can bunt or throw a man out at first base 8 out of 10 times."

Write a business plan that describes the capabilities and experience of the key people who will be running the show. Clearly define your goals and how you plan on achieving them, including specific action steps. Describe what your company has been doing for the last 5 years, and your anticipated growth over the next 3-5 years.

The plan should define your market and your ability to expand into it. The fact that a market might exceed $100 million dollars a year in sales does not mean that you can break into it, especially if there are many players in the market or there is a critical mass before profits begin. Relevant market data will demonstrate your likelihood of success and support your plan.

To ensure that your numbers tell an accurate story, include as much detail about the income statement, balance sheet, cash flow, and other factors such as environmental risk, union issues, and commitments.

There is an old adage that banks only want to lend money when a business doesn't need it. Whether it is true or not, establishing your creditworthiness during good times goes a long way tobuilding a relationship for difficult times. Anticipate your credit needs, don't respond to them. As Weir puts it, "A bank wants to see that you are on top of your business rather than your business on top of you."

Many a family business can take a look at itself and find its main strengths: enthusiasm, stability, pride of ownership, and hands-on management, are the very factors that are keeping you on top.

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