Questions: Global Cash Flow
Q: When determining global cash flow, when do you determine which entities to be analyzed? When the owner has more than "x" percentage in an entity? When it’s directly related to the industry of the borrowing entity? Or only account for entities that will be a guarantor on the loan?
A: A very good question.
The key is one of control. Certainly 50% ownership or more suggest control of an entity. Majority ownership may also serve as a control indicator. In addition, an owner may exercise control with very little ownership, depending on how a partnership or management agreement is written and structured. And if an owner has a controlling interest we would expect him or her to be a guarantor – another good indicator of control regardless of the ownership share.
If it is determined that the owner happens to personally guaranty any other company (one that he may not have a controlling interest, for example), it may be prudent to determine the extent of that guaranty and require business financial statements if appropriate.
The related industry issue may not be relevant. In fact, it may be useful if the controlling owner also owns or controls companies that do not move in tandem with the company in question.