I recently met with a Client of mine and his Lender. In spite of all the positive changes being made at this operation in terms of his reproductive program, efficiency measures, and higher than ever milk production, we were quickly informed that “The Sky is Falling!” I thought to myself – Why, after the last four years & all the difficulties we have faced and overcome during that same time, would anyone suddenly conclude that the sky is falling?
I believe, after the last four years, every dairy’s financial ratios could probably look more attractive, as they have previously. However, I had also done my homework for this meeting. Thus, I felt I had to change the course of this session quickly. Wait, the sky is not falling! The Lender simply hadn’t updated their Balance Sheet inputs for several years. This Client had completed some very positive developments on this land, part of which the bank had financed. Its value was considerably higher.
I also found that numerous assets were left off the bank’s Balance Sheet, which totally skewed the Client’s financial ratios, including Working Capital (Current Assets – Current Liabilities) and their Debt to Equity ratio. Whoa! Good thing we hadn’t headed for shelter. The sky wasn’t falling after all… In fact, the Debt to Equity ratio was below their desired level if you put the current values of the land, instead of the values in 1999.
As a matter of fact, the projected Debt Service Coverage for 2019 looks quite good at 1.36X, and this is being supported by some very favorable milk contracts and secondary sources of revenue that will continue long term. I’ve invited them to review all the numbers and show me where I might be mistaken. I’m still awaiting their call…
Is there a lesson here? Yes, I believe there is. Do your homework. We can’t always accept everything that people state at face value, even when they are adamant about it. In this case, their state of preparation was an embarrassment, for them. As the saying goes, “this wasn’t my first rodeo.” Had they been better prepared, their loan renewal process could have gone more smoothly, and they wouldn’t have looked like the warehouse worker who, when asked how long he’d worked there, replied, “Ever since they threatened to fire me!”
The lesson here for all of us? Always, always, always be prepared.