Staying Clear of Round Two: Insights Gained From Turnarounds
Originally Published: September 15, 2015 by ABL Advisor
In the restructuring world, one goal is to give our clients a second chance and hopefully they are wise enough to take advantage of this opportunity and learn from their experiences. Once they have seen the abyss, they should never want to be there again.
As the summer winds down, we are all focused on the remaining four months of the year. If we’re under budget the focus is trying to get to the Promised Land. If we are tracking better than budget, then the question is how to maintain the momentum. Here are some ideas for you and your clients to maintain the focus on success.
Tools and Resources
Cash is king and if you borrow and don’t pay it back, people are really going to be annoyed. One of the most used tools we develop for clients is the rolling cash flow forecast. We develop it on a line-by-line, vendor-by-vendor and customer-by-customer basis. The initial cash flow forecast should be done in excruciating detail.
The insights gleaned from the analysis will show business owners where money is being spent, where it is generated and where the priorities should be for a business. Some clients complain about the time required to prepare the forecast and liken it to a root canal. However, one likely reason clients’ need our services is that they have not used proper cash management tools in the past. Once the forecast is complete, it provides relief and is a great tool for the future. Every week or two, depending on how tight their cash position is, clients should prepare a variance analysis against the forecast to track their performance. Most people and companies that develop and use the forecast come away with the two following positive takeaways:
- First, where the money goes amazes them. Then from the receipts side, it amazes them how pertinent the 80/20 rule is – that 80% of the cash flow comes from 20% of their customers.
- Once management starts to use the tool they don’t want to be without it. We instituted a forecast for a client during a Chapter 11 bankruptcy in 2009 and he has rolled it forward every week for the past six years. It is no coincidence that his company, revenues and cash flow have grown exponentially.
Self-Assess, Retool and Stay Grounded
Self-assessment is one of the toughest things to do; however, being able to do it well can be one of the biggest differentiators. When I was a sophomore in college, a teacher offered our class one of the greatest lessons. He said that everybody needs a personal board of directors consisting of no more than four people. Your personal board should be comprised of people who have known you for a long time and who you are comfortable with. Two should be from your personal world and two from your career, but not someone who you directly and currently work with. Each quarter take them out for a nice dinner as their fee and discuss how you are progressing and ask them for honest feedback.
This lesson resonates whether you are the CEO of a Fortune 500 company, a local pizza shop or running a household.
The most critical part component of selecting your personal board of directors is that they have known you for a long time and their opinions do not need to be filtered. If you have an idea or concept and they think it is way out there, they can challenge you without offending you. And, being challenged is something all good leaders relish even if it is uncomfortable.
It is important that we celebrate success but we always need to assess if we could be doing better. We need to be able to answer the question: did I really have a good year? For example, a $100 million manufacturer drops two percent, or $2 million, to the bottom line after allowing for salaries and other expenses for the owners and family members. Most clients would think that is a good year. However, a closer look may reveal that with additional focus, improved throughput and reduced overtime, margins could have improved more. For example, an additional two percent in cost reductions could have translated to double the performance.
Human Capital and Working Capital
In one of my previous articles I wrote “if you don’t have the right human capital, you’ll never have enough working capital.” As an organization grows, there are few more important ingredients than having the right people to execute the vision of the CEO or entrepreneur. Knowing where to find talent and being able to develop it are critical to avoid returning to a restructuring situation. Surrounding yourself with exceptional talent with a broad breadth of experience will ultimately be a difference maker.
Consider some of the following:
- Do you have people to turn to in a time of need for both business and personal issues? As somebody once said to me regarding excuses and justifications – your friends don’t need them and your enemies won’t believe them, so why bother. Do you have that person on your bench who if you called at 2:00 a.m. and said I need a favor, they would be on their way immediately?
- Do you have a financial reserve? I am going through a financing opportunity for a client who is looking at some excellent growth opportunities and has a positive trajectory. The best time to ask for money is when you do not need it. Look at a client’s cash flow history. Is your client always operating and pushing against the top of their line of credit or investors’ cap or do they operate with an adequate capital structure?
- How is your client’s vision? Is the owner planning out a year or more in advance? Does he or she know their anticipated sales volume in 2016 and 2017? Understanding the answers to these questions will provide significant insights. When I talk with clients, it is clear which ones have a handle on the market, their position, the opportunities and threats that lay ahead, and what their customers expect to purchase in the near term. After a short meeting with your client, do you know whether he or she has the pulse of the market?
Some Sudden Thoughts and Second Thoughts
First and foremost, be a difference maker!
One of the most overused clichés in lending is that everybody’s money is green. However, great companies figure out early on how to differentiate themselves and make an impact. Two examples come to mind.
- Back in 2008 and 2009 when the financial world was falling apart, the leader of a relatively new private equity fund, Ted Koenig of Monroe Capital, was on a panel at an industry event. All the panelists except Ted indicated that they saw tightening markets and more problems on the horizon, appearing very cautious about their futures. Ted’s view was very different: they had money, their people could manage risk and they were looking to lend. When everyone is running to the hills, it may be the best time to run toward town. When fewer people are in the market there are more opportunities to seize.
- Many years ago I was talking to a seasoned credit executive who had left a large established lending institution and was going to join a new fund called LBC Credit Partners led by John Brignola, Chris Calabrese and Nate Cohen. They had a vision and plan and at the time saw an underserved place in the capital structure. Their early entry, customer service and the networks they developed provided the foundation for their continued success and growth.
More importantly, everyone who comes into contact with them and their team quickly realizes they are the bluest of blue chip companies.
Always look ahead.
It is so easy to criticize and blame others and circumstances for failure but remember the saying that when one finger points out, four fingers point inward. Take time daily to not only recognize and celebrate success but also to be self- aware of improvements that can be made to achieve even greater success. Take time to strategize for the future and find ways differentiate your company. The impact will be long lasting and make a world of difference. Change is coming and happens to all of us whether we are ready or not. Being as prepared and proactive as we can be is the difference between success and failure.
TURNAROUND AND RESTRUCTURING RESOURCES