Business 101

Communicating with your banker is never easy. But there is a smart way to do it

Talk to Holly Hitzemann, the president and owner of Great American Stock, a $1.2-million provider of stock photographs, about the importance of building good relationships with your financial backers, and the conversation very quickly winds its way around to "Ron." He's the executive at the local bank that has financed Hitzemann's Rio Rancho, N. Mex., company throughout much of its growth. Although the bank itself has changed, thanks to consolidation, Ron has remained a constant fixture in the development of Hitzemann's business.

Last year the strength of that relationship bailed out Hitzemann in a big way, when a major new contract stalled during the final negotiations and she began to worry about her company's ability to meet its financing obligations. "I was embarrassed. I felt like a dog with my tail between my legs," she says. "But I knew that I needed to just go in there and tell my banker, face-to-face, that I was worried about this balloon payment we were due to make in three or four months." Hitzemann could have delayed that conversation, saved herself some embarrassment, and just kept hoping for the best. But that course of action might have resulted in her springing bad news on Ron at the last minute--something she has never done during the almost seven years in which he has helped finance her company.

Her gutsy strategy paid off. Thanks to Hitzemann's frank and early disclosure of her company's problems, her banker was, as she puts it, "incredibly supportive." She recalls, "He was prepared and understood the situation. And he worked out a much better refinancing arrangement for us than I would have even asked for." She pauses, then adds, "Thanks to that, we were able to work our way through this cash-flow crunch and to redirect funds that would have gone to the balloon payment to a new marketing campaign instead. We're now in a stronger position than we ever were."

There may never have been a time when it's been more essential for entrepreneurs to maintain strong ties with their bankers and outside investors. For most companies, the best sources of future capital will probably turn out to be their past sources--so long as their owners have worked hard to maintain good relations with backers.

The key to accomplishing that all-important goal is knowing how, and when, to communicate what's going on within the company. It goes without saying that the first step is living up to whatever basic obligations lenders or investors have insisted upon, in terms of which types of financial reports they want to see and how often they want to see them. But for business owners who recognize the value of going beyond the basics, here are some important steps to follow:

1. Don't overpromise; overdeliver.
Ken Thuerbach developed this strategy after owning Alpine Log Homes Inc., based in Victor, Mont., for more than 25 years while also making angel investments in a wide range of other businesses and serving on the boards of two venture-capital funds. "People don't realize that the more sophisticated an investor is, the less mileage a business owner will get out of making unrealistic promises," Thuerbach says. "It's much better to err on the side of caution. Then, you can communicate good news--your company has achieved better-than-expected results--and that leads to more confidence in you and your business." He adds, "What many entrepreneurs don't understand is that investors and lenders always care more about the jockey than about the horse. That's not to say they don't care about the company. But what they'll really care about, if they decide to back your company, is you--what you say, what you deliver, how you deal with them."

2. Don't take the money and run.
"Money comes with a price, and in many cases, that price will include an investor's insistence on getting a board seat," notes William A. Levine, a partner at the Boston-based law firm Sullivan & Worcester, who is frequently involved in closing financing arrangements. "Some entrepreneurs may not like this idea, but the truth is, it can be a tremendous advantage for a growing company," he explains, because among other things, "sophisticated investors will want to guide owners into being more open with backers and in that way building financing relationships based upon trust."

His advice: "When unexpected developments or problems occur, as they inevitably will, approach one or two of these board members first, at early signs of the difficulty, and discuss with them your initial strategy for responding to the development. That allows you to benefit from their experience and maintain your relationship of trust with them. You'll want to contact your banker and other investors as well-- sooner rather than later--but it's useful to make those calls at the point when you're ready to communicate your strategy for response rather than simply bad news."

3. Strive for personal contact.
If there's one thing that drives Robin Wold crazy, it's the way that people hide behind E-mail and voice-mail messages. "They don't talk anymore, which can be very destructive in cases where you're trying to maintain an important business relationship," says the president of $12-million Robin's Food Distribution Inc.

Wold has no outside investors in her company, but she believes that it's important to communicate with her key vendors the same way that she does with her bankers, since both, after all, can provide valuable financing assistance. "As you're building these business relationships, do everything that you say you're going to do," she says. "If an unexpected and temporary problem occurs, get on the phone and speak to people directly. Work out a temporary solution if that's necessary. And then, after you've handled the issue person to person, it's all right to follow up with a letter or E-mail."

4. Exercise self-control.
This is especially important when the information you're conveying is negative, Hitzemann believes. "I think it's a good idea to try to think about the impression you're going to make on your banker or investor, before you even go to see them," she says. "If you seem to him or her as though you're panic-stricken or like you're some kind of an idiot who doesn't really understand what's happening or why, then it's only going to be natural for your backer to lose confidence in you. Why would they want to support someone who's not in control of herself or her company?"

Here's where prep time can really pay off. Rehearse your conversation in advance, perhaps even by asking an outside adviser or key executive to lob tough questions at you so that you can prepare your responses. Your ultimate goal should be to convey a sense of realism (not pie-in-the-sky optimism), openness (not self-defensiveness), and calm self-confidence (rather than arrogance).

5. Use documentation to your advantage.
If you go to your banker or an investor with bad news, "the first thing he or she is going to ask you is what you've been doing all this time. What have you done to try to prevent the problem from happening or to try to solve it so far?" explains Brett W. Kaplowitz, a vice-president at Potomac Valley Bank of Gaithersburg, Md.

You'll be better able to support your case if you begin documenting your actions at an early stage. Prepare for questions like these: When did you first become aware of the problem? How did you assess it at that time and initially respond? What caused it, and why did it happen? What other steps did you take to try to counteract difficulties (for example, improving collections, slowing down accounts payable, renegotiating arrangements with vendors, and so on)? "It's important to remember that your banker will want to be your advocate, so long as he or she maintains confidence in you and your company," says Kaplowitz.

6. Seek assistance, if need be, from outside advisers.
Although entrepreneurs need to build personal ties to their bankers and investors, they don't need to handle all the communication themselves. "I have one client who just cannot bring himself to break bad news to his financial backers, so we've worked out an arrangement where I'm the bringer of bad news and he handles all the good reports," notes Richard Rampell, a certified public accountant based in Palm Beach, Fla.

That relationship works quite well. "My involvement actually gives this company's banker a strong level of comfort," says Rampell, "because he knows that any information I provide will be credible and timely." In more serious cases, the business owner attends banking meetings along with Rampell, since it's important to convey the owner's commitment to the strategies being discussed; but the accountant's presence ensures a professional, rather than an emotional, exchange.

One last point: sometimes a company's outside advisers can help break a pattern of bad communication with backers. "One of my clients had developed a real problem. He had a history of looking at the world through rose-colored glasses, and he tended to always report bad news too late. He began really feeling the heat from one of his investors, who was clearly losing confidence," recalls Rampell. Rampell's advice: "I told him to call this particular investor every single Friday and tell him everything of significance that had happened during the week. It was remarkable how much that helped.

"Investors and lenders want peace of mind," he concludes. "Even bad news, if conveyed in a timely and realistic fashion, is better than no news, or wrong information."

Jill Andresky Fraser is Inc.'s finance editor.

Communication questions

Uncertain about how to communicate an unexpected development to your backers? Ask yourself these questions to help fine-tune your approach.

Is it good news?
Things that might fall into this category are an important new client, a significant improvement in your collections, or an upgrade of your technological systems. Don't miss the opportunity to bolster a financier's belief in your business with information beyond what he or she will see in your quarterly reports. You can drop your financier a note or, if it's been a while since you've made personal contact, use your news as a good excuse for a telephone call.

Have you received kudos your backers should know about?
Although it may not be worth a call, you should certainly send along copies of any articles written about your company, news of community awards, rave reviews from customers, or other out-of-the-ordinary feedback.

Do you have a real problem or just a quick blip on your company's radar screen?
You need to answer this question, without being excessively optimistic, before deciding on the proper course of action. Although you'll always benefit from being open with your bankers and investors, you may not want to worry them unnecessarily if a cash-flow glitch can be cleared up so quickly that it will not affect either quarterly results or your ability to meet monthly financing commitments. What if you can't tell the difference? That's why you have an accountant, a board of directors, and a corporate lawyer to consult.

Is your news both negative and significant?
There's no doubt that the longer you wait or the more you try to inaccurately minimize your bad news, the more you'll hurt your relationship with backers. Remind yourself that your credibility is everything with them. Then, break the news promptly and, preferably, in person.

But don't end on a bad note. It's a good idea to look for ways to follow up with communications about positive developments as soon as they start unfolding.