Companies Seeking Money Miss Mark on Business Plan, Experts Say
By Josh Long
With investors remaining ever vigilant as the bankruptcy line grows longer, telecommunications companies must present a comprehensive financial model in order to garner funding, experts said at the ASCENT 2001 Spring Conference and Exposition in Dallas.
That premise would seem simple enough. However, many companies seeking funding are not giving investors primary research on market demand and worst-case scenarios, among other key factors integral to determining the viability of a business plan, according to Ed Czarnecki, managing director of BIA Financial Network (www.bia.com) for strategic advisory services. Those companies include entrepreneurs and large companies forming a subsidiary or implementing a new business line, he said.
Czarnecki said five business plans were sitting on his desk with no sales or marketing strategy, adding that far too many companies seeking funding tout their technology without articulating the merits of the financial models.
“That is not a business plan,” he said. “That is a white paper.”
The follies are not limited to startups, he said. Even major operators sometimes present a business strategy that is not consistent with the financial model.
In an interview following the conference, Czarnecki said many companies submit good business plans each week, but there are a number of plans omitting substantive details, masking what otherwise might be a decent business idea. “It surprises me sometimes that entrepreneurs and expanding businesses don’t take the business planning process more serious especially as they are in market for additional capital,” he said.
John Patton, managing director of MCG Credit Corp. (www.mcgcapital.com), detailed a number of factors integral to a business plan. They included acquisition costs, churn, monthly operating performances, segmentation of revenues and the value of sales channels.
For companies in the midst of significant financial difficulties, liquidation of assets often is the last thing bondholders want, according to James R. Wrathall, a partner at international law firm, Wilmer, Cutler & Pickering (www.wilmer.com). Financial restructuring, such as the exchange of debt for new debt terms or equity, is a viable option, he said.
Bondholders have a strong incentive to support a financial restructuring in order to avoid receiving a weak return if assets are scooped up. He mentioned AT&T’s (www.att.com) $135 million purchase of the assets belonging to San Francisco-based NorthPoint Communications. The business assets were reportedly purchased for 20 or 30 cents on the dollar of their value, he said.
In contrast, Wrathall said one of his clients, a wireless paging company, worked through a merger in bankruptcy court and emerged with a better business plan. Citing a public example, he mentioned Denver-based competitive local exchange carrier (CLEC) ICG Communications (www.icgcomm.com), which filed for Chapter 11 bankruptcy with “staggering” debt. According to The Wall Street Journal, the company has $3 billion in securities and is expected to emerge from bankruptcy early next year with a clean balance sheet and many of its same customers.
Other large service providers recently participated in restructuring deals. In May, WorldCom (www.worldcom.com) issued approximately $12 billion in new bonds for debt refinancing and general corporate purposes, a WorldCom spokeswoman said. Wrathall said there was not a question as to whether bondholders would agree to the issuance of new bonds, owing to the carrier’s strong position.
Meanwhile, finance experts predict a significant number of bankruptcies over the next few years, although Wrathall does not think huge carriers are in jeopardy.
“At this point, I don’t see that, and I haven’t [heard] talk of that around here either,” he said. “Bondholders of that debt are going to have a strong incentive to help carriers restructure if necessary.”
Wrathall said it is a good time for large carriers to scoop up the assets and customer bases of smaller businesses in order to expand.