Month: June 2011

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Never Complain, Never Explain

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

Never Complain, Never Explain

Henry Ford II, the founder’s grandson and Ford Motor’s president or chairman for 34 years, is credited with this saying, though he may have been preceded by Benjamin Disraeli, the 19th century British prime minister. While few of us have Mr. Ford’s money or attitude or Mr. Disraeli’s political philosophy, this advice is nonetheless well worth heeding.

Explanations = Back Pedaling

I have found that when I have to explain anything to my banker, my wife or my vendors, I seem to be backing up.

If I have to explain something, it is generally because something isn’t clear on its face, which means I have failed to make some issue so crystal clear that even a caveman can understand it.  Not to confuse my banker, my creditors or my dear wife with cavemen, but if I have to resort to an explanation, I am in a bad place.

Avoid Explanations

If the notes to my financial statements are not so clear then my creditors have to ask questions and I have to explain, which means I am wasting time that could be used to get better pricing, longer terms, market intelligence or just running my business.

If I have to explain to my banker why the existing financial covenants need adjusting, I am backing up. Explaining non-compliance with anything my banker wants makes more work for him. It also makes him start to ask what else is wrong. It distracts him from getting me more money on my credit line. He’ll have to write some report instead of playing golf with me.

If I have to explain to my wife why I’m late for dinner (again) or why my American Express bill has some peculiar charge from QAT Consulting Group (ask Elliot Spitzer), I am going downhill fast.

Definitely Don’t Complain

Complaining is even worse. Your wife and banker may be sympathetic to your plight, but they are only human, and they have a limited amount of patience for people who don’t measure up or can’t deliver.

I always tell folks I have a limited amount of sympathy and patience, and it’s reserved for my children. Try to save whatever sympathy and patience your wife and banker have for really big problems.

In short, try to measure up to their expectations, deliver what you promise and avoid situations that you have to explain.

When has explaining in your life been indicative of larger problems?

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The Regrets of “Too Late,” Managing a Company in Crisis, Part III

Similar to last time, I’ll happily wait while you read and enjoy parts One and Two of this series.

Consider All Your Options Before Making a Decision

I find that in a crisis, some leaders often accept bad advice without thinking through their options (I’ll address the issue of mistakes leaders make in crisis more thoroughly in my upcoming White Paper).

In the case of our bankrupt restaurant, the Board of Directors got bad advice to file for Chapter 11 Bankruptcy. It’s not that they shouldn’t have filed at some point, but their timing was terrible.

To survive a Chapter 11 you have to prepare properly, and by filing without making the appropriate preparations, the company created more problems than they already had. With more time, we could have found a better DIP lender and/or located a purchaser for the entire company.

But what can you learn from this?

Don’t Wait Too Long to Ask for Help

It can be difficult to know when you need professional, outside help. For 5 signs on when it’s time to call a turnaround professional, read Vic’s guest post.

Generally, when you’re either panicking or deferring to unqualified people for advice, it’s wise to consult an outside professional. Don’t worry too much about whether or not you think you don’t need help, as turnaround managers with integrity will tell you honestly if you don’t need their help. Better safe than sorry.

I have many meetings with business leaders who, being proactive, invite me in to discuss how GGG can help them and their businesses, but at which I tell people that they can solve their problems on their own. Knowing that I’ll tell it to them straight establishes trust, a key to success in this business, and ensures that I’ll hear from them (or their friends) when there really is a matter that requires my involvement.

Whether or not GGG is hired, CEOs who speak with me early are confident in their abilities to face their companies’ challenges. It is always better to know that you are okay than to ask for help too late.

If Only

In the case of this malfunctioning restaurant, we were needed – but sooner than when we were called.

If we had . . . 

. . .  arrived when emergency mode kicked in, we would have advised against filing for bankruptcy when they did and salvaged more of the business as a result.

. . . been involved before the large judgement against this company, I could have negotiated their crippling settlement down and mitigated its demoralizing impact on the team.

. . . been brought in at the beginning of the crisis we could have saved the whole company. In fact, the bankruptcy could have been avoided altogether, but it was done before we were consulted.

Let this echo the lesson that you ought to bring in the professionals before it’s too late.

Our Expertise is Fixing Problems

There are a lot of talented people in the midst of a crisis like this, but they’re not looking at the big picture the way a turnaround professional worth his salt is. Lawyers are looking one way. Accountants are looking another. But we have an overall grasp of all the legal, accounting and business angles, and we’re the perfect catalysts to see a turnaround through. After all, that’s why they call us turnaround professionals.

One of our key objectives in crisis situations is to empower the company leader by acting as his sounding board and instilling a sense of confidence while recommending creative and unique solutions based on our experience saving companies. This works no matter the company’s widget and ensures future potential crises are managed with greater success and poise.

Lesson Learned

The probability of successfully reorganizing in a Chapter 11 is statistically less than 25%. Without proper planning, reasonable terms for a DIP loan, and a focused Board and management, the probability of a successful reorganization is NIL.

Have you ever waited until it was too late to take action? What happened and how will you behave differently next time?

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Liquidity versus Solvency: A Lesson in Lacking Money, a guest post by Vic Taglia

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

Lehman: From Illiquidity to Insolvency to Bankruptcy to Liquidation

You’re likely familiar with the Lehman failure of 2008. The business model of Lehman and other investment banks relied on leverage of up to 50 to 1 (a 2% capital ratio) and its creditors’ belief that the collateral pledged for these borrowings would maintain its value.

The investment bank business model relies on the market to provide liquidity to allow the investment bank to carry billions of dollars of securities. When Lehman’s creditors began to doubt the value of the securities already pledged, they demanded more collateral.

This led to a liquidity problem; Lehman couldn’t get the cash it needed to operate. When Lehman ran out of collateral to pledge, it had a solvency problem. Bankruptcy and liquidation followed.

Game over.

Understanding the Path to Illiquidity or Insolvency

An industrial business frequently relies on its bankers and other creditors to provide liquidity to operate through open accounts payable and lines of credit. That’s normal.

So long as the business cycle from purchases of raw material through production, distribution and collection remains on schedule, a business can continue to operate. If the schedule is disrupted however, a liquidity problem emerges. Now the business needs to find cash.

Working capital fixes include lengthening payment terms to vendors, offering prompt payment discounts to customers and finding external financing from a friend, a bank or a partner.

This will work until someone loses faith in the business and decides to stop participating in the extended payment terms, the prompt payment discount or the rolling over of bank debt. At this juncture, a new plan becomes critical.

What asset can the business convert to cash? What can it sell for cash now? Equipment, vehicles and real estate are all illiquid assets, but they all have value today—probably much less today than if you had six months to sell, but if you need cash now, you become a very motivated seller.

The end game starts when you discover that these illiquid assets are really illiquid.

Surviving Illiquidity or Insolvency

You can’t sell them fast enough or for enough money to save your business, for instance. If you collect all your receivables, sell all your equipment, all your real estate, all your inventory and still can’t cover your debts, you are now insolvent.

A liquidity problem can lead you to a reorganization filing in the bankruptcy court. Your business can survive a reorganization, perhaps with different owners, employees, and strategies, but insolvency will lead to liquidation.

Illiquidity can be temporary and fixed with relatively simple steps – but you must act quickly. First, identify what can be sold now, for cash.

Insolvency is more difficult; you need more capital, debt relief (forgiveness, payment holiday, etc.) or other more drastic help, and you don’t have a compelling story to attract this help.

Obviously you want to avoid both of these situations. Remember, though, you can survive illiquidity, but rarely insolvency.

What are your experiences with illiquidity and insolvency? Please ask any questions about these differences or what to do if they arise in the comments section below.

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Making Your Own Puzzle Pieces: Saving a Company in Crisis, Part II

If you want to check out Part 1 of this series in order to get up to date on the situation and lessons thus far, I’ll be happy to wait for you. Just come back when you’re ready.

Cooperation is Key

In order to effectively implement proactive growth strategies, your company needs a management team that cooperates and openly communicates internally and externally. As CEO, think broadly about your team, which may include management, the Board of Directors, your bank or vendors and your team of turnaround professionals.

In the case of our bankrupt restaurant, the Board of Directors and the CEO were not pulling together effectively to expedite what should have been their common goal: helping the company survive. There needed to be buy-in earlier from these key stakeholders, but instead they were tearing each other and their company apart.

This proved challenging for our GGG team, whose first job is always to get everyone aligned. No matter how good we are at workouts, it’s tough to succeed when your C-Level executives and your board disagree and refuse to set a common goal. In crisis situations, more so than any other time, people need to focus on the higher level goal of the company.

As a result of this discord, we had to assist the company in a ‘363’ auction sale of pieces of the business rather than do a traditional restructuring.

Solve Puzzles Creatively

This was a complex and interesting case to work on due to the variety of challenges we faced, one of which was the frequency with which we were required to come up with creative solutions on the spot.

The puzzle pieces of our restaurant were all scattered, some of them on the table before us and others on the floor (and the dog probably ate a couple). As a workout guy my task is to put these pieces together, but recognizing that the pieces don’t always fit properly and that there isn’t time to put everything in its proper place is important to prioritizing problems – and their solutions.

When solving problems in this fashion, you have to cut the pieces to make them fit and make game-time calls. This approach allowed us to keep up with the pace of a rapidly changing crisis.

One example that comes to mind is the memorabilia. They have memorabilia all over these places, and I found myself sitting in the corporate offices admiring what was on the walls and wondering how I could sell off these valuables in order to create cash to fund the business. As I looked around, I noticed that the “t” in a lot of the signatures looked weirdly similar. I’m no handwriting expert, but I couldn’t shake this weird feeling.

Acting on my feet, I made a phone call and got someone to assess the value of the memorabilia, all of which was purchased from one of the board members for a quarter million dollars. Turns out it was all fake. Though we didn’t have the money to sue this board member we took certain actions to coerce him into refunding our money.

We also had to act on our feet when we noticed the board self-dealing. The board had to be reminded of the change in its fiduciary responsibility once the company had become insolvent. Their interests were legally required to change from themselves to their creditors. We had to protect the board members legally by making sure they kept their fiduciary responsibility in mind and quickly curbing actions that went against this premise.

Taking Smart Risks

At GGG we always think long-term. We don’t want our clients just to survive; we strive to implement strategies that will make them successful in the long-run. And we don’t make compromises on this point.

Part of long-term success involves risk taking. But never bet the ranch – take smart risks. On this project, we were challenged by the disparate goals of the Board of Directors, yet we consistently managed to get their approval in order to take smart risks and solve major problems.

Our risk was evaluating and cutting unprofitable locations fast enough to allow the rest of the company to survive with a core group of profitable bars. The subsequent auction of the company resulted in several competing bids and the completion of the ‘363’ auction sale. Today, a few years after the bankruptcy and in a much tougher economic climate, the client continues to operate several locations profitably.

Join me next time for Part 3 to discuss why it’s important not to make rash decisions about the fate of your company and the tools you can use to make better decisions.

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My Greatest Magic Trick: Creating a Million Dollars in Cash Flow Overnight

So I’ve decided to share my coolest business magic trick with you. I can create a million dollars in cash flow out of thin air – and valuable as a million dollars is, there’s nothing like magically creating extra time.

Now, now, I know that a magician isn’t supposed to go revealing the way his tricks are done. It’s bad for business, and where’s the money in that!?

But what’s good for you is good for business, so I’ve decided to share.

Now You Owe 4 Million . . . 

First, let’s suppose that you have 30 day terms with your vendors and a million dollars in payables every month. Imagine that we’re just looking at the first four months of the year, January through April.

Over the course of those four months, then, the total payments are 4 million dollars.

Check out this picture:

So how do I create a million dollars?

And Now You Owe 3

All I have to do is extend normal trade terms from 30 to 60 days and suddenly you owe nothing in January!

That means that the million dollars walking out the door in January is still in your pocket. A million dollars has just been added to the positive side of your cash flow.

That’s right: in the four month period of January through April you’re now paying only 3 million dollars! You still owe that million, but by changing the timing of your payments, it’s been pushed back every month going forward.

Don’t Try This at Home

So why have I told you one of my greatest magic tricks and one of the best strategies of my turnaround success? Because the secret’s in the sauce!

My real talent is playing, “Let’s Make a Deal.” They don’t call me Monty Hall for nothing. The key – and hard part – to this magic trick is doing the right financial assessment and then successfully renegotiating with vendors to obtain extended terms and create that improved cash flow.

When businesses try to get vendors to give them an extra 30 days to pay a million dollars, vendors get agitated and concerned. My job is knowing what vendors need to hear, what makes them comfortable, providing them with the proper assurances and then making sure that those 30 days are used in the best possible way to ensure things get back on track by the second month.

Remember, you have to keep to your negotiated deals. You don’t want this to blow up on you, and it takes a professional to see this process through because generally this trick is one piece of a larger successful turnaround and restructuring strategy.

Conclusion

In business there’s hardly anything so valuable as creating time, and if you can make money come out of that time to boot, you’re in great shape. My skills lie in putting people into great shape.

My golden formula is time + energy = value. I create the time and bring the energy, and with those two pieces in place I can provide value.

Have you ever tried to renegotiate your terms? If so, what happened? Have you ever tried this trick yourself?

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My Most Interesting Case of Fraud to Date – a Guest Post by Vic Taglia

Lee has some amazing fraud stories that never cease to crack me up. To emphasize his consistent advice to watch the back door and other openings for theft, I want to share that store of the most interesting fraud I’ve ever uncovered.

A General Feeling of Unease

I was working at a company at which we needed to replace the retiring finance director of our English subsidiary. It was a small company with about a dozen employees.

Our auditing firm recommended an experienced finance executive from one of their other clients. He was well-regarded, active in his church, married with two children and had a stable work history and good references. The interview went well, and he spent a few days with our retiring finance director to get acclimated to our business.

Over the next few months, the managing director (MD) mentioned some specific minor problems to me regarding the parent company’s CFO, as well as a general feeling of unease. I investigated the specific problems on my next quarterly trip and confirmed that there was something just a little bit off. I reiterated our policies and requirements with the new hire, and the MD and I agreed to watch our new finance director closely over the next few months.

Champagne’s On Us!

Our new guy took a long weekend the next week, and his phone calls were covered by our receptionist. When she got a call from a liquor store asking about payment for a case of champagne, she went to the MD and asked what was going on.  (The company was running on the ragged edge of profitability and had reduced spending significantly in the past year. Thus, cash was at the top of every conversation I had with the MD, and we were not buying champagne.)

On his return, the finance director told the MD that he had bought the champagne through the company so he could avoid VAT. The MD told him to reimburse the company the full amount, including VAT, and to go home pending further notice. The MD called me and we scoped out an investigation plan for him to start while I flew to England.

Sophisticated Theft for Sophisticated Parts

In addition to trying to get the company to pay for a case of champagne, we found that he had paid personal bills with company funds (charging inactive vendor balances) and even directed a customer to pay the balance they owed to his personal American Express bill.

Our criminal finance director picked his targets very carefully: inactive accounts, unsophisticated customers, etc. In total, he stole about ₤20,000 in less than three months.

We had him arrested and pursued through the courts for theft and other charges. Upon his conviction, the judge was about to send him to jail for several years when suddenly his lawyer provided doctors’ notes specifying that his client had stolen from us in order to pay his out-of-pocket costs for a sex change operation.

While National Health Service paid most of the costs of the operation, our finance executive needed money to set up a household separate from his wife and children.

Mercifully, the judge ordered merely restitution (which would take about 50 years, without interest) – and no jail.

We didn’t even get the champagne.

Ever seen any strange cases of theft or fraud? Care to share in the comments below?

Want to read about preventing fraud in your business? Click HERE.

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Quick Lessons from Unfortunate Signs

 

Today’s quick lesson comes to you from the sign you see above, which I spotted on a recent weekend get-away. I’m sure it didn’t take you long to spot the mistake, did it?

That’s right. It’s not a “collard shirt” like collard greens, the delicious veggie dish enjoyed in many a southern restaurant. It’s collared shirt, as in, my shirt has a collar so I look more professional.

This sign, on the other hand, does not look professional.

Everybody makes typos (myself included), but my hunch is that this isn’t a meer typo. If it were a typo, my presumption is that it would have been fixed by now since this sign was just printed on a piece of regular paper and hasn’t been laminated or anything.

So there are a few lessons to be derived from this sign, the most basic among them being, edit your work and get someone else to edit your work, too.

On a larger business scale, don’t do things poorly or half way. You don’t look professional and people don’t want to do business with you. Perhaps you recall my white board story about the company that wanted to move across the country and be operational again in a weekend. When someone isn’t “editing” your work, you end up with sloppy results, like error-filled signs and factories that don’t run properly. Neither gives other people the confidence to do business with you.

A shoddy sign implies shoddy workmanship for your products which implies shoddy management. That may not be the reality – you might be a great manager – but that doesn’t keep the public from feeling that way about you when you put things into the public sphere that are riddled with errors.

Don’t do half-baked work. It undermines your credibility and public perception.

Have you ever gone half-in and looked unprofessional? What would you have done differently?

 

 

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De Nile – A River in Egypt or a CEO’s Final Resting Place?

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

In my post a few weeks ago about how to treat your bankers, creditors and vendors, I advocated telling the truth. As important as it is to tell all of these people the truth, it is even more important to tell yourself the truth.

I recently came across a company whose bankers have expressed some discomfort in their situation (no names here obviously). The loan balance has declined, and the bank wants to continue to reduce its exposure. In recent memory, the company has not satisfied its debt service coverage covenants, but the loan document has been extended on a short term basis. Since the principal owner describes his industry as “declining” the only growth will be through consolidation. Moreover, the company has exhausted its balance sheet reserves, even to the extent of taking some tax positions that will improve its book equity, but cost it millions of dollars in CASH over the next several years.

See the warning signs?

  1. Declining industry
  2. Nervous bank
  3. Bad operating performance
  4. No focus on Cash, which we all know is king

The principal owner/CEO stated that he had made some significant spending cuts, and that this year will be better than last. His projections show a slight decline in revenue with increasing EBITDA, but still not enough to cover its interest expense.

When I looked through the financial statements I noticed that payroll in some operating areas had indeed fallen by about the amount revenues had fallen, but payroll in the sales and executive departments had increased. I also noticed a monthly payment for a luxury sports car’s financing company that matched the make in the CEO’s reserved parking spot. The CEO said he had a new, more expensive model on order for summer delivery. The CEO said everything was fine; he had his business under control, and he had a wonderful, long-term relationship with his lender, even though his new loan officer needed some more time to understand his business.

I contend that the CEO is in denial about the true state of his business. As my favorite coffee mug is fond of saying, “De Nile is Not Just a River in Egypt.”

Without significant changes in his mindset and the business’s operations, the bank will continue to ratchet down its exposure. There will be fewer operating accommodations, more reporting requirements, more onerous covenants and certainly no financing for acquisitions. He will be the acquiree, not the acquirer. It’s quite likely that he will find himself out of the business and out of a job within 18 months.

While it is important to maintain a positive attitude for your family, employees, vendors and creditors – after all, hope is extremely important – it is also important to face your reality, especially when the chips are down.

You can talk to your trusted advisors — lawyer, accountant, even a banker — to share your concerns and fears and more importantly to chart a course of action to rehabilitate your business. But when your advisors can’t help, call us, and face the harsh reality rather than board De Nial River Boat Cruise to self-destruction.

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Lessons from a Burning House: Saving a Company in Crisis, Part I

When there’s a fire, call the fireman.

The Crisis

A few years ago, a popular chain of restaurants found itself at a defining point in its history.

The company filed for protection under Chapter 11 of the Bankruptcy Code following a detrimental legal judgment and the termination of its President. These, in addition to a feuding board, were the final pushes that landed the company in a crisis, but fortunately there were still members of senior management who were committed to seeing all or part of the company survive.

Thus, GGG was brought in to see the chain through the crisis and evaluate alternative restructuring solutions.

First Put Out the Fire, No Matter the Cost

If, God forbid, there’s a fire in your house, you don’t finish the laundry and the dishes before grabbing the dog, the baby and the family jewels and getting the heck out. You either put out the fire or call the fireman and get the heck out!

As the firemen at this conflagration, it was our job to stop the fire and save whatever we could. By working with the company to secure a Debtor-in-Possession loan, which is a line of credit in bankruptcy, we were able to make some tough moves to put out the fire and allow some of the company to survive.

We advised the chain regarding the closing of unprofitable locations that were burning cash. We needed to squash those fires in order to get the best bang for the few bucks the company had left. In a town fire, this is like letting part of the town get eaten by flames in order to effectively protect the main square from the inferno. Although this was difficult for everyone, letting go of parts of the company allowed the core to survive.

Assume the Worst to Protect Yourself

In any restaurant or bar business, you need to focus on the costs of your food and alcohol. This not only applies to sourcing from your supplier at the lowest fair price but also locking the back door to your establishment.

No matter your business, always watch the back door.

It seemed that this restaurant’s managers thought the best about their teams, but too many employees proved them wrong. When we investigated, we found food and liquor in dumpsters behind numerous locations. Employees were putting things outside during their shifts and coming back later to pick them up.

“Glad that doesn’t apply to me,” you might be saying if you’re not in the restaurant business. But it does!

No matter your business, always watch the back door.

People in all professions find creative ways of draining the company’s resources for personal gain. Be proactive in protecting yourself before harm comes to your business.

It’s never fun but you have to assume the worst. No one wants to imagine that his house could burn down, and theft was hardly the only reason why (though the theft at the corporate level was even more grandiose!) – but that doesn’t stop you from having a fire extinguisher, knowing where the valuables are, and, if you’re wise, running a family fire drill bi-annually.

Think about how people may take advantage of you and put policies and practices in place that minimize the possibility of abuse to your organization.

The second and third parts of this series, available in upcoming weeks, will explore the creative process of solving major problems and how to do so in a crisis situation.

Have you ever caught theft happening at your establishment or somewhere you worked? What was happening and what did you do?

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5 Warning Signs That It’s Time to Call the Turnaround Expert

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.
In business, it can be hard to see the forest through the trees, especially when it’s night time and you have no flashlight, the only supplies you have left are bubble-gum and a rubberband but your wife always tells you you’re no MacGyver, and the forest creatures are attacking you with cries of “blood!”
If you just said, “That sounds about right,” or “What the heck is this guy talking about” then you may want to read these 5 warning signs and see if it’s time to bring in some professional help.
  1. Fatigue – yours and your creditors. One late Friday afternoon, you’re beat, and you realize that you’ve spent the entire week talking to your vendors. You’re not placing orders or negotiating terms. You’re not swapping stories; you’re begging for extended credit terms. You’re pleading for deliveries without knowing how you’ll pay the over-90-day balances. You’re talking to the credit manager, not the sales manager.  And you have a new bank officer visiting Monday morning from some new department called “special assets.” This is creditor fatigue.
  2. You’re out of new ideas, and the old ones don’t work. You used to be able to cajole deliveries from vendors based on a promise, and you could make your promise reality. Not so anymore. Your product collateral looks old and tired. Your website’s most recent news refers to a 2008 press release about a new salesman (who you fired in 2009). And worst of all, you haven’t anything new to add that you want to share.
  3. A different look in your employees’ eyes. The old-timers wonder where your magic went. The newbies wonder how you ever got anywhere.
  4. Longer hours, less progress. You haven’t had a vacation in three years.  The lake/mountain/beach house is just a pile of cancelled checks and fond, but fading, memories. You’re missing ballgames and ballet recitals with your children. You haven’t had a nice dinner with your spouse since your anniversary; but maybe it was the anniversary two years ago. And the inventory in the warehouse seems to be growing in size and dust.
  5. Less cash, more debt, fewer receivables, more payables. You’re calling customers and finding they aren’t paying because your shipments are late/wrong/incomplete. Bankers’ reference letters refer to your account as “low five figure” as opposed to “high six figure.” You ask your CPA /attorney/friends for some advice on a new banker “who understands this terrible economy/insane competition/horrible cost pressures” better than the banker you’ve been with for ten years.

If any of these describe what you’re seeing, it’s time to call your friendly neighborhood turnaround professional.