As organizations across all industries continue to increase their investment in Information Technology (IT), they’re relying more and more on IT to perform day to day operations. IT is vastly integrated into the backbone of almost every organization by assisting with, or even performing critical processes in an automated fashion. Due to the inherent dependence on information assets, funding related to IT Disaster Recovery and Business Continuity Planning has also increased.
An IT Disaster Recovery Plan (DRP) documents the procedures and processes that an organization will follow in the event that critical technologies experience an outage. The DRP enables the organization to continue performing regular operations without the technology, while getting the technology up and running as quickly as possible. By conducting a Business Impact Analysis (BIA), an organization can improve their current IT Disaster Recovery Plan or efficiently create a new one from scratch.
The 3 Steps of a Business Impact Analysis
A Business Impact Analysis is a fundamental piece of an effective and comprehensive Disaster Recovery Plan. My recommended approach for developing a BIA is built upon the following three steps:
Develop a Comprehensive Understanding of the IT Environment
In order for an organization to implement a holistic IT Disaster Recovery Plan, it is essential that the organization have a comprehensive understanding of the various information assets utilized to achieve the organization’s mission.
As part of the BIA, an organization is required to obtain a thorough understanding of the IT environment. This is accomplished by meeting with each individual business unit and determining which technologies are essential for them to perform their day to day responsibilities. By cataloging the entire IT environment, organizations are then able to ensure that their IT Disaster Recovery Plan properly includes every system necessary to maintain operations and achieve its goals.
As an ancillary benefit, during this portion of the exercise, an organization may discover potential cost savings by identifying unnecessary or duplicate technologies.
Identify the Critical Technologies and Processes
Once the organization has cataloged the technologies that make up the IT environment, they must then rank the technologies based upon criticality for achieving the organization’s mission and performing day to day operations. There are various ways to assess criticality, but it is important to ensure that the assessment is completed in manner that allows the users of the analysis to consistently compare technologies across the organization.
An organization can achieve this goal by establishing uniform criteria by which a technology is assessed. For example, an organization should determine how technologies affect day to day operations (i.e. operationally, financially, legally, etc.) and then use a qualitative means for measuring how critical the technology is to that part of operations. An example of this would be a simple scale of 1 to 5, with 1 being no effect at all, and 5 being absolutely necessary.
After all of the data from this portion of this exercise has been aggregated, the organization can qualitatively determine which technologies are the most and least critical for sustaining operations and achieving its mission. This allows them to confidently assign which technologies have a recovery priority in the event of a system outage.
Establish Clear Recovery Time Objectives and Recovery Point Objectives
With critical technologies identified, in conjunction with business unit leads, users of the BIA will be able to easily identify appropriate Recovery Time Objectives (RTOs) and Recovery Point Objectives (RPOs):
- Recovery Time Objective (RTO) – The targeted duration of time a system can be unavailable and must be restored before unacceptable impact to operations occurs.
- Recovery Point Objective (RPO) – The maximum targeted period in which data might be lost or unrecoverable due to system unavailability.
This can be easily done using the qualitative results of the BIA. The information assets that have a higher criticality score will inherently have smaller RTOs and RPOs and will need to be recovered as soon as possible. Technologies that score low and have larger RTOs and RPOs will not have to be recovered as quickly. Once these have been established, the plan can be updated to clearly establish the order for system recovery and identify how long they have for recovery before a system has negative, drastic impact on operations.
The BIA should also identify technologies and processes that have robust downtime procedures. Downtime procedures are established procedures an organization develops and executes when a technology or system experiences an outage. This allows the underlying process the technology was supporting to continue operating while the organization works to get the system back online (i.e. a fall back paper-based model). Even if a technology is identified as critical, if the organization has already implemented strong downtime procedures, it will allow the system to have a larger RTO and RPO than a similarly ranked system that does not.Talk to Freed Maxick About Disaster Recovery Plans and Business Impact Analysis
Organizations of all sizes and from all industries, can benefit greatly from conducting a Business Impact Analysis. The analysis will ultimately allow the organization to identify all of the critical technologies in use, and determine the priority in which they are recovered. Having these two invaluable pieces of information could ultimately save an organization from going under in the event of an IT disaster.
For a complementary review of your situation and an assessment of how to bring a Business Impact Analysis into your IT Disaster Recovery Plan, contact me at Peter.Schnorr@freedmaxick.com or connect with me on LinkedIn.
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Be Wary: Not All Startups are Worth the Risk
Author: Eric Adornetto, Supervising Field Examiner
While entrepreneurship is the pinnacle of free enterprise in the United States, almost all banks tend to shy away from startups. Truth is, companies in this segment are much more likely to fail than not, at least according to the Small Business Administration. But there are some bright spots that offer lucrative lending opportunities for diligent, adventurous lenders.
Defining a “startup”
Startups are mostly small businesses that have a limited operating history. They often start as an idea that’s fleshed out via research and development. The business model is then formulated and the owner or owners start selling. At this point, the startups are funded by the owner’s personal resources, including savings, retirement accounts, credit cards and home equity loans.
Most lenders classify a business as a startup when it has operated for at least five years. But somewhere around the two-year mark, lenders might consider underwriting a loan. Community banks have long been a go-to source for entrepreneurs. But some big banks — including Wells Fargo and Bank of America — are starting to loosen up their purse strings to startups.
Evaluating the business
So, what do underwriters want the most from startups? For starters, the business plan should show that management has thought about potential risks and threats, such as hidden costs and seasonal cash flow shortages. But the real proof is in the startup’s actual results. If they can offer two or three years of CPA-prepared financial statements, the underwriters will have significantly greater peace of mind than with just a business plan.
Lenders also need to evaluate the startup’s concept. Ask yourself this question … would you buy it? How is this product/service different from that of the rest of the competition? It’s true … many entrepreneurs are blinded by love for their concept. So, it’s up to the lender to stay grounded and play the devil’s advocate. A startup’s growth projections should jibe with industry trends and historic results.
Franchised startups tend to bear a lower risk than nonfranchised ventures. For example, large publicly traded franchisors (such as Toyota or McDonald’s) typically provide a proven business model and marketing support for its franchisees, particularly during the startup phase.
Management quality is key
What’s even more important than the startup’s concept is the quality of its management. In the wrong hands, even the best idea can be doomed to failure. So, when you start evaluating the people behind the idea, make sure you look at their areas of expertise, employment history, credit scores and personal balance sheets. Key person insurance policies, personal guarantees, personal asset pledges, and co-signing are commonplace when lending to startup companies.
Take, for instance, a single-owner business that’s run by a technical expert (such as a former operations or R&D manager). Who will handle the administrative tasks (such as financial reporting and HR) as the business grows? Look for owners who can admit to their shortcomings and hire employees to help supplement tasks outside their areas of expertise.
Beating the odds
In the long run, lenders want assurance that a startup will be able to repay its debt, either from personal resources or operating cash flows. If your underwriters are sitting on the fence regarding a startup prospect, offer a little extra handholding in order to get the loan approved.
You’ll first need to educate the startup’s management team about what your bank is seeking. Typically, that will require a solid business plan, some two to three years of audited financial statements, and last, operating results that are above specific profitability, turnover, leverage and liquidity levels. As you can imagine, specific financial benchmarks will vary from industry to industry.
If at all possible, arrange for the entrepreneur(s) to pitch the business’s request directly to the underwriting committee and then field any questions. Transparency on both ends of the lending decision can, indeed, help push the deal through.
In addition, recommend Small Business Administration (SBA) loans to any “fence-sitters.” Companies that have less than $7 million in tangible net worth and $2.5 million in net income should investigate SBA 7(a) operating loans and 504 equipment loans, as they provide partial guarantees from the federal government in case of default. If your bank participates in such programs, an SBA-backed loan might be the final push that turns a “maybe” into a “yes.”
Worth the legwork
While lending to startups won’t be easy, it’s often worth the extra legwork. Why? Because, in addition to reaping higher interest rates for their incremental risk, most startup loans will reward diligent lenders with the satisfaction of helping struggling business owners make their dreams a reality. The bonus is that your bank might gain new long-term customers. With solid business planning and transparent communications, startup loans can be a win-win for both borrower and lender.
If you have any questions about lending to startups or any other asset based lending issue, give us a call at 716.847.2651, or you may contact us here.
What to Do When One Employee Holds the Key to Business Value
Author: Ron Soluri Jr.
A company’s earnings and cash flows can suffer significantly when an executive or other critical employee leaves. Small and service-oriented businesses and professional practices are particularly vulnerable to such financial losses.
To account for this risk, professional valuators may apply a key-person discount. These discounts don’t apply to all business appraisals and they’re rarely one-size-fits-all. Thus, a valuator must ask several questions specific to the subject company and its key employees.
Which appraisals are affected?
Choosing when a key-person discount is appropriate can be tricky. Smaller closely held businesses are likely to depend on one or more critical employees, but such risk is often accounted for in a separate “size premium.” Larger closely held companies or public companies usually are able to replace key management personnel and thus minimize potential losses.
In general, businesses that sell products are better able to withstand the loss of a key person than service businesses, which depend to a greater extent on key employees’ knowledge, reputation and relationships. However, a product-based company that relies heavily on technology or intellectual property may be at risk if a key person possesses specialized technical knowledge.
Who are the key people?
Key people provide value in different ways, depending on the roles they play in their companies. For example, a key person might:
- Drive the company’s strategic vision,
- Handle day-to-day management responsibilities,
- Offer technical expertise,
- Lend his or her excellent reputation, or
- Provide access to an extensive network of contacts.
Personal relationships are a critical factor in identifying key employees. If clients, customers and vendors deal primarily with one person, they may decide to do business with another company if that person is gone. On the other hand, it’s easier for a company to retain customer relationships when they’re spread among several people within the company.
A key person may also have a financial impact on the business. It’s not unusual for the CEO or another executive in a closely held business to personally guarantee the company’s debts. Lenders may call in such debts if the key person is no longer with the company.
How deep is the bench?
When determining key-person discounts, valuators must assess the ability of others to fill key employees’ shoes. To survive without a key person, existing management must have the knowledge, skills and business acumen to continue normal operations without interruption.
Another key factor is whether there exists a comprehensive succession plan that formally outlines which individuals assume control after key people leave. In the absence of a plan, the departure of one key person could trigger power struggles or require the company to bring in a replacement who isn’t familiar with the organization.
What’s the impact?
Identifying risks associated with key persons is one thing; estimating the impact of those risks on business value is quite another. Valuators generally use one of three methods to incorporate key-person discounts into their calculations: 1) Adjust future earnings to reflect the risk of losing a key person (typically used when a key person’s departure is imminent), 2) adjust the discount or capitalization rate, or 3) discount calculated value by a certain percentage (similar to a marketability or minority interest discount).
Quantifying the discount can be challenging because little empirical support for across-the-board key-person discounts exists. However, research has shown that, in cases where a discount was appropriate and a departure was reasonably certain, the applicable decrease in value associated with a key person’s loss ranged between 4% and 6%.
Among the many legal contexts in which key-person discounts can arise are marital dissolutions, shareholder disputes, mergers and acquisitions, and tax court challenges. To ensure the best outcome for your client, work with a valuator who has experience estimating such discounts and is capable of defending his or her appraisal methodology in court.
If you have any questions about valuations or any other issue, give us a call at 716.847.2651, or you may contact us here.
Budgets are a Tool for Evaluating and Communicating Performance
There may be no better – or more important a time – to do formal annual budgeting than when your high tech company is looking to make the leap from early stage to growth company.
Budgets are like an action plan for your high tech firm that allow you to plan and control expenses and match them to sales revenue. While they cannot always stay static, budgets create guidelines and prescribe limits. Last but not least, budgets are a tool for evaluating the performance of a company at the end of the time period that the budget covers – on both the expense and revenue side.
Of particular importance for the early to growth stage company, budgets show how money from funding sources has and will be used to make the leap.
What Should the Budgeting Process Accomplish?
- Sharpening the understanding of the company’s goals
- Delivering a “real picture” that shows what the company is actually able to do in a given year and where the gaps in funding are
- Encouraging critical and creative thinking on effective ways of dealing with financing, revenue generation and expenditure issues
- Fulfill the need for required information requested by funding sources , vendors and employees and other stakeholders
- Facilitate an open and honest dialogue about the financial realities of the company
- Avoiding surprises and maintaining fiscal control
Freed Maxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our CPAs or business advisors on creating an annual budget for your high tech company. Call us at 716.847.2651, or contact us here.
Making the Leap from Early Stage to Growth Requires Planning and Documentation
High tech companies that are looking to make the leap from start up to growth stage must have a business plan. Business plans are not only important for raising funding, they’re a way to describe and promote your business, critical for getting shareholders and employees on the same page, and represent a reality check against both market and competitive situations.
There is an abundance of information about how to write a business plan and our CPAs and consultants have helped hundreds of companies though the strategic and business planning process. Based upon our experiences, we offer the following checklist that can help you assess your business plan efforts:
A 10 Point Checklist for Your Business Plan.
A short, concise, and clear executive summary
A business rationale based upon your vision of the unsolved problems or needs that the business will address – i.e. – a convincing business case or “reason for being.”
A concise description of your differentiating product or service
A clearly defined target market
A competitive analysis and a SWOT analysis
A statement of goals and objectives for the business over time
A comprehensive marketing plan, including both traditional and digital marketing strategies
Bios of key team members, with particular attention to their responsibilities and key skills and capabilities they bring to the business
A roadmap or implementation plan for reaching goals or objectives
A credible financial plan, including projections
What Else Do You Need?
In addition to a full written business plan, we recommend that you also have available:
- An elevator pitch that delivers your value proposition in 2-3 sentences;
- A handout/executive summary of 1-2 pages that clearly outlines key aspects of your business;
- A PowerPoint presentation of 8-20 sides.
Writing a business plan is a fundamental and necessary step for making the leap – your current and potential investors will require one. But its value goes far beyond financial projections – it’s a roadmap to the future.
Freed Maxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our business advisors on structuring a business plan that will help you with strategic, financing and operational strategies and tactics. Call us at 716.847.2651, or contact us here.
SWOT Analysis Looks at Borrowers’ Strengths and Weaknesses
Author: Paul R. P. Valera, CPA, MBA, Senior Field Examiner
The best lenders understand the strengths, weaknesses, opportunities and threats (also known as “SWOT”) of their clients and prospects. The analysis can also play a critical role in due diligence, in addition to assisting borrowers identify opportunities to make improvements or better respond to external threats.
Here’s how a client’s SWOT analysis can asset based lenders make better lending decisions.
Unearthing the source of each strength
A SWOT analysis begins with identifying strengths and weaknesses from your customers’ perspective. Strengths typically represent potential areas for building value and boosting revenues. These may be competitive advantages or core competencies. Examples might include a loyal customer base, a strong brand image, or an established customer list.
It’s critical to unearth the source of each strength. Some are tied to the company’s owners or key employees, such as an older partner with influential standing in the business community and an impressive client list. This is especially common among professional practices, such as accounting, advertising or law firms. But retailers and manufacturers may rely on key people, too.
When strengths are tied to people, rather than the business itself, you need to consider what might happen if a key person were to suddenly leave the business. Ask whether the borrower has non-complete contracts, key person life insurance, a buy-sell agreement, or a formal succession plan to transition management to the next generation.
Weaknesses represent potential risks and should be eliminated or minimized. Often they are evaluated in relation to the company’s competitors. Weaknesses might include weak internal controls, high employee turnover, unreliable quality or a location with poor accessibility.
Of course, all businesses have an Achilles’ heel. But when a borrower reports the same weaknesses every year, it’s cause for concern. It’s not enough to simply recognize a weakness — the borrower needs to take corrective action.
For example, one borrower decided to boost its weak sales force with a headhunter to acquire new talent, Dale Carnegie sales training classes to inspire the staff, and a new-and-improved commission structure. Within just a few months, the business’s year-to-date sales were up 35%. And the borrower now lists its salesforce as a strength, not a weakness.
The second part of a SWOT analysis looks externally not only at what’s happening in the industry, but also with the economy and regulatory environment. An opportunity could be favorable external conditions that might increase revenues and value if the company acts on them quickly.
For example, a pharmaceutical company responded to emerging health care legislation and the aging baby boomer demographics by purchasing smaller medical device and generic drug manufacturers. Both the acquirer and its targets have acted on favorable external opportunities with a roll-up to improve their financial positions.
As you can imagine, threats are unfavorable conditions that can prevent an unwary borrower from achieving certain goals. Threats arise from the economy, competition, technological changes and increased regulation. It’s critical to watch for and minimize any existing and potential threats.
Hospitals and doctors, for example, are keeping a close eye on health care reform legislation, because it threatens to lower their billing and collection rates from private and public sources. Many physicians are banding together to improve bargaining power and achieve economies of scale.
How about your customers?
If your customers haven’t completed an in-house SWOT analysis, it’s time to do it. SWOT is a proven management tool that’s been taught at business schools around the world. Strong borrowers will say “yes!” immediately and discuss the results. But you may need to encourage your weaker, less experienced borrowers to tackle the analysis. The end result, however, will enlighten them.
A SWOT analysis is typically presented as a matrix (see the chart), and provides a logical framework for understanding how a business operates. It can not only tell what a borrower is doing right (and wrong), but it can predict how outside forces can impact cash flow in a positive (or negative) manner.
Business owners love their work and typically don’t want to hear that their businesses aren’t operating at peak performance. So, if you have concerns about a risky borrower, suggest they do a SWOT analysis. It can be an objective forum for discussing sensitive or negative issues.
Don’t put it off
As you know, due diligence can be a daunting task. And no single approach works for every customer. But a well-executed SWOT analysis can provide a method to the madness.
If you have any questions about SWOT analysis or any other asset based lending issue, give us a call at 716.847.2651, or you may contact us here.