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KSA Foodservice Distribution Update

October 2008

The Financial Check Up – and What It Means to Foodservice Distributors Today

By Bill Beattie

Recent media coverage of the economy has gotten the collective attention of the foodservice industry at all levels. Many restaurants and hotels are reporting negative sales growth as consumers tighten discretionary spending. On the institutional side, schools, hospitals and nursing homes are fearful of reduced government support. In turn, foodservice distributors and manufacturers are experiencing only modest growth, or in many cases, declining volume.

Exacerbating the situation, we are hearing that lenders are reducing credit lines, redrafting loan terms or covenants, and vendors are tightening their credit and payment policies.

Prudent distributor owners, in addition to monitoring and managing their personal financial positions, must now also carefully examine the financial status of their businesses. It’s time to go beyond personal wealth preservation and look for the business indicators of impending trouble – it’s time for a Financial Check Up.

Negative events can happen quickly – and seemingly without warning. Be on the lookout for the early warning signals of an impending capital crunch in your business. Watch out for signs like these:

One or more significant customers close without warning
Vendors tighten credit controls, lower credit availability, or more rigidly enforce payment terms
Accounts receivable begins to climb (especially in your over 30 days group)
Aging inventory is on the rise (particularly your over 60 days value)
Key customers, including chains, begin to push for significant price concessions or for longer payment terms
Inventory inflation and slow collections push your line of credit close to the limit
You are fast approaching being out of compliance with the covenants or terms of your loan agreements
You write checks to your vendors and hold them for mailing until collections are in hand, and
You pass on the same buy-in deals you acted on last year because cash is tight, or not available

On the flip side, this type of economic environment could be an unprecedented time for strong businesses to avail themselves of opportunities:

Vendor buy ins – particularly at quarter-end (or other times when vendors need to make their numbers) when truckload pricing can mean a significant cost savings
When distressed businesses (including competitors) need to put themselves up for sale – it can happen very quickly, and
A major piece of new business comes on the market because the incumbent distributor is handling the downturn poorly.

To take advantage of these types of opportunities, you need to know with certainty, in advance, what your financial resources/buying power/borrowing capabilities are.

A Financial Check Up helps distributor owners and senior management better track and improve the financial health of their business.

Industry experts agree.

“Foodservice distributors need an outsider to look at their business to give an honest critique – your bank or accountant will treat you as a customer in order to stay noncontroversial. What you really need is someone with expertise in both foodservice and finance who will be frank with you and ask “why are you doing it this way?” said John Martin, CEO of Martin Bros. and Chairman of IFDA.

What’s involved in a Financial Check Up? Basically, it’s sharing key financial and operational information with a qualified and trusted advisor who is well-versed, like John Martin says above, in both foodservice and finance. For some closely held and/or family distributorships (“private” in every sense!) that have never shown their numbers to anyone on “the outside”, this can be a leap of faith. However, just like a significant medical event, sometimes you need to share sensitive information with a specialist to position your business for a healthy and secure future.

The first step in the Financial Check Up process is to discuss and confirm what your goals are for the review process. Here are some goals we often hear:

We need to prepare for a meeting with our banker about our line of credit
We are considering the sale of our family business in the next five years and we want to understand how to maximize its value
We need capital to fund growth (through business acquisition, new equipment, or more space.)
We want to identify strategies to increase the cash flow of the existing business to either pay down debt or to increase compensation to our family, or
We need help in deciding whether to purchase the customer accounts of a financially distressed distributor, or simply compete for the business.

Once you and your financial advisor fully understand the goals for the review, you will want to ensure confidentiality by signing a non-disclosure agreement (which your attorney may want to review as the agreements can differ from company to company, and from state to state).

Experienced, professional advisors will be very sensitive to the trust placed in them. It’s their responsibility to help clients feel secure about the process of providing them with specific financial and business information – so that clients provide enough information to make the review process useful.

Your advisor will likely examine historical financials, accounts receivable aging, miles driven, and earned income. In addition, they will want to review customer, employee, delivery, and invoice counts in the analysis.

To go back to my medical analogy, we all go to the doctor for one of two reasons. We go for the annual physical to have a professional assessment of our health, and we go when we are feeling poorly. The same two reasons inspire owners of foodservice distributors to work with a foodservice financial advisor. Some call the advisor when things are not going well. Others owners get a regular Financial Check Up to prevent small problems from becoming life-threatening – bearing in mind the old saying: “an ounce of prevention is worth a pound of cure.”

Please call me at at 804-565-6018 or email me at bbeattie@ksadvisorsllc.com if you have questions or would like to discuss this further.

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