Thin capitalisation: practical guidance: knowledge and negotiation: getting to know the business
As emphasised in the suggested questions in INTM513050, it is essential to understand how the business works, and this is information best obtained from the people who run it. Detailed knowledge of the business is important in coming to a decision as to what constitutes an arm’s length borrowing position. This will depend on wide range of factors: profitability, cashflow, credit history, investment requirements, assets available as security, the present and future condition of the market in which the company does business, the state of the economy and the financial markets at the time of borrowing, and the amount of debt which would reasonably be sustained at arm’s length by such a business. No comparables will yield as much information and guidance as looking closely at the business under review. This will also help with understanding historic results and the extent to which those may be relied on when forecasting future performance. Building up knowledge of how individual businesses operate will also enhance broader commercial awareness, which will feed into other cases.
This does not mean endless ferreting for knowledge for its own sake, but finding out sufficient to allow a well-informed decision to be reached within a reasonable timescale.
This process would be time-consuming and virtually impossible to do by letter, and is best carried out face-to-face, even where facts have been set out in the ATCA brief. Facts on paper can explain how a transaction took place, but tend not to bring to life the reasons why. Wherever possible, one or more representatives of the business should be present at meetings. These should be people can provide detailed information on the way the business is run, how priorities are set and how decision-making processes work.