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No, we're not talking about earthquakes. We're talking gigantic financial crises, on the scale of '08 or what's happening in a few of the European markets (you know who you are). Recently, we asked Cairncross & Hempelmann's John Rizzardi and Bush, Stout & Kornfeld's Jay Kornfeld to talk disasters. Here are their five basic survival tips.
John Rizzardi and Jay Kornfeld in the offices of Cairncross & Hempelmann.
1) Just because you have a past relationship with a bank does not necessarily mean you have an ongoing one. (You marry people, not banks.) Priorities have shifted, and your company may not be as important to the banker. "It used to be customer first, then the bank, then the regulators," John says. "Now, it's the banker's job or the regulators first, then the customer." Best advice: If you want a loan, you'd better have a convincing argument supported by strong documentation. "They're looking for any reason to tell you 'No, thank you,' in this climate," John says.
Signing document
2) A new normal: Personal guarantees. "Right now everybody's hyperprotective," Jay says. Banks generously lent on perceived value before '08, but not so anymore: "There are many eyes looking at every transaction," Jay says. The takeaway: Banks will be conservative on valuation and LTV and will look to the owner's personal guarantee as a backstop.
3) Streamline your expense structure
before applying for a loan. Bankers are still reeling from developers who had extravagant corporate and personal expense structures. Granted, the excesses on Wall Street had everything to do with the crisis, but today's banker will be looking for reductions and simplification. They want to be comfortable that you can weather the next storm.
No eggs in one basket
4) Think carefully about compartmentalization of assets into separate LLC structures. ?From the last crisis, this approach of 'one asset in one entity? made it impossible to seek relief by way of Chapter 11,? John tells us. Jay's advice: ?Take your current structure or business plan and have it reviewed by someone who does commercial bankruptcy work so you get a read on whether you are positioned well in the event of another downturn.?
Include the downside in your planning and due diligence. No one really knows when economic pressures are going to ease up. True,some sectors of our local economy are improving, but others are still pretty shaky. John reminds us that sound and conservative planning—"aiming for lots of singles and not grand slams and re-cultivating a trusting relationship with your bank"—are today's fundamentals.