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No More Fixed Rate Loans for You, My Friend

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.

Have you tried to get a fixed rate business loan lately from a “too big to fail” bank?  Has the bank said it only offers variable, floating rate loans?  Has it then offered to introduce you to its affiliated company that can help?

No More, My Friends

If you answered yes to these three questions, you are not alone. Many smaller borrowers find that the traditional 15-year fixed rate mortgage on their factories, warehouses, offices, etc. can’t be had from their long-time lender.

With interest rates at all-time lows, you can understand why a banker doesn’t want to fix his return for 15 years, just as much as you do want the fixed rate option. Bankers really need to limit their interest rate risk in these days of aggressive regulation, and avoiding long-term fixed-rate assets is one sure way to do so.

Their Friend Isn’t Your Friend, My Friend

But I don’t write to pity the TBTF banks.  I write to alert you to one of the pitfalls of this “affiliated company that can help” offer.

Most banks are part of bank holding companies, and big bank holding companies have investment banking subsidiaries. These investment bank subsidiaries can sell the borrower an interest rate swap contract that effectively swaps the borrower’s obligation to make payments based on variable rates for an obligation to make fixed payments for the life of the contract.

For example, a borrower may get a 15-year floating rate loan at prime plus 2% for his factory. At today’s rate that is 5.25% and will change the day the bank announces a change in its prime rate. For a million dollar, 15-year amortizing loan, the monthly payment at 5.25% is $8,039. If the prime increases to 8.25%, the loan rate rises to 10.25% and the payment increases to $10,900, an increase of 36%.

(For those of you with short memories, the prime rate was 8.25% from June 29, 2006 to September 18, 2007. Yes, four years ago, the prime rate was 8.25%.)

The Pitfalls for My Friends

We can see why no one wants to take the risk of interest rates increasing if he can avoid it. And the banks have a special incentive not to do so — avoidance of regulatory criticism. So their investment banks developed interest rate swaps. Great idea, but beware of a few potential pitfalls.

First the accounting for these derivative contracts is complicated and changes every month.  As interest rates increase and decrease and the present values of the cash streams change (as they will as time passes), the differences must go through your income statement and be recorded in your company’s equity. Some borrowers ignore this during the year and have their CPAs figure it out later.

I realize this is just paperwork and has little impact on your business (remember Cash is King), but it will impact your financial ratios, possibly hurt your covenant compliance and give you one more thing to explain in your financial statements.

More potentially troubling is that your obligation to make these fixed payments is for the life of the swap contract, not the life of the loan. So what happens if someone offers you a bunch of money for your business and you want to retire? Great, right?

Not so fast. You must pay off the mortgage note, but you still have the obligation to pay the fixed mortgage payment, every month, for the remainder of the swap contract or buy your way out of the obligation.

So read the fine print, negotiate an early maturity for the interest rate swap or even buyout prices in the swap contract. And ask yourself just how much you are willing to pay to trade one type of risk for another.

Have you gotten involved in one of these situations? What has your experience been?

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Living the Lessons of Turnaround Success

Cash is King – Living the Lesson

In 2007, a large Southeast-based contractor called us at GGG for the usual reason: they were having a crisis. This call marked the beginning of an 18-month turnaround, during which the company regained its financial health to continue operating profitably.

For decades prior to 2007, business was booming. After many years of profitability, and coinciding with the broader economic decline in the USA, unprofitable long-term contracts with major customers resulted in severe declines in cash flow and ultimately the business overall. Its unsustainable position also put the operations of the utility company’s customers in jeopardy.

Business Facts, Not Beliefs – To the Bank, It’s All About the Money

Anxious about these alarming trends, the bank cut back on the company’s availability (they decreased the amount the company could borrow against their receivables), shrinking the cash available to operate. When we arrived, we were asked to act as advisors to find new financing opportunities, to streamline operations and to act as interim CFO.

Besides the unprofitable contracts and unfavorable cost structure, the company was operating in a saturated and highly competitive market. It therefore had limited ability to raise prices despite improved operations.

Banks, naturally, like to rely on numbers rather than hopes and promises. Thus, in order for any troubled company to get financing, the company needed to be fixed first. When it was clear to the bank through facts and data that the company has regained its stability and had long-term growth potential, the bank was more likely to provide additional funding.

What We Did

First thing was first – and I recommend this for you and your business – we renegotiated contracts that were generating losses and reengineered the cost structure to accommodate prevailing economic conditions. We worked with the company leadership to eliminate unprofitable product lines, renegotiated vendor debt, and executed on a forbearance agreement with the senior lender. We also solidified a long-term contract with a key customer.

You should always have controls to monitor your product lines, so as to avoid losing money (or too much money) in the first place. Don’t assume because something worked once it will continue to work.

One of our largest vendors (Big Gorilla) was paying every 90 days which was creating huge cash-flow problems. Implementing tighter credit criteria was a must. Consider your credit risk based on who you offer terms to and consider overhauling your system and reducing your risk. We introduced the requirement of collaterals or guarantees when necessary and shortened payment terms for the company’s customers across the board. Though most of our efforts with the company were geared towards creating cash flow, each of the above actions was necessary to ensure the company’s survival.

The Hard Part and the Happily Ever After

Despite the turnaround success and the awards and accolades GGG received for it, there were some expected difficulties. We had to lay off some people, remembering that despite being a tough thing to do, letting some workers go saved the jobs of many others.

As a result of our efforts, the company shifted from a significant loss to positive cash flow after 16 months. The bank debt was significantly reduced, and a new two-year bank loan was executed.

Due to the speed of the turnaround, the bank elected to extend the company’s credit. An important factor in the bank’s continued partnership was that we educated our banker about our turnaround efforts and successes. The bank was happy to maintain a client when it could see the signs of a positive transformation and have open lines of communication. Always make sure you communicate with your bank by following The CEO’s 10 C’s of Borrowing.

Currently the company has an excellent relationship with the bank that includes ongoing and honest communication. In fact, the company completed an acquisition in 2011 and its employees received raises across the board.

Lessons Transcending Industries

This case reinforced for me that 95% of any turnaround is not about specific knowledge regarding any particular widget or industry.

GGG had a lot of construction experience by this time, but only about 5% of the turnaround had to do with construction company issues. The rest had to do with basic blocking and tackling issues: watch your contracts, watch your cost, watch your headcount, negotiate with the bank.

You can hardly learn these important business lessons from a textbook – you learn them from getting the bloody noses that my partners and I got throughout our decades of experience.

How can we learn from this case?

When your numbers start getting soft or you start losing money, be proactive. If the company is highly leveraged, has a decreasing cash cushion and is maxed out on its credit, these are among the signs that it’s time to take more serious action.

None of us has a crystal ball to know exactly how long this current economic downturn will last. If you are seeing problems and intend to survive, restructure sooner.

Be proactive. Be decisive.

If you must let people go, do it in one confident move. If you have multiple layoff weeks or even months apart, you will demoralize your employees who will feel insecure in their positions. As CEO or leader, you need to be aware of the economic reality and act decisively based on them.

Whatever your business, face your harsh reality and be proactive.

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5 Foolish Faux Pas of CEOs in Crisis

While preparing for my speech on “How Not to Hire a Guy Like Me: Lessons from Past CEOs’ Mistakes,” I realized that it was worth sharing a few of the biggest faux pas CEOs make along with a few of my more colorful anecdotes.

What follows are the 5 things CEOs in crisis do that you want to avoid as the leader of your company or organization.

1. They Act Like Deer in the Headlights

In crisis situations, it’s amazing how many CEOs and company leaders act like deer in the headlights. They just freeze up and wait for the impending SMACK!

I was working with a guy whose company had entered a crisis. In the midst of this crisis, his very time-sensitive catalog that directly generates 80% of his 65 million dollar annual revenue within 90 days had to go out. It was hours before the catalogs had to be postmarked and mailed, but in order for this to happen we had to have $10,000 – immediately. In a cash crisis, this guy, worth a few million, wouldn’t take $10,000 out of his own pocket to pay the postage. If anything went wrong, he was personally guaranteed on 40 million dollars. He would have been totally wiped out had he defaulted, and all he had to do was personally put up $10,000.

I was brought in within hours of the deadline and convinced him to put up the cash. This was the first of many critical decisions amongst endemic problems, but thankfully, this incident established trust and a working relationship that led to a successful restructuring plan.

2. They’re Only as Smart as the Last person They Talked to

Many CEOs (and people for that matter) are only as smart as the last person they talked to – especially in a crisis. They cease being able to think for themselves, whether out of the hope of being able to pass the buck or because anything and everything sounds better than what they’re doing.

At a non-profit educational institution, the president was kicked out of office for various well-deserved reasons, resulting in a crisis of leadership, and the interim president kept changing the restructuring plan with every person to whom he spoke. He’d announce firings and closings almost daily, and then backtrack when someone objected, subsequently calling those he’d fired to tell them to disregard the two week notice they’d received. Back and forth he’d go like this, only spouting the last thing someone else said to him.

The only smart thing he did without changing his mind was hire me – and I fired him six weeks later. In restructuring, you generally get one plan to move forward with – it’s a house of cards and you don’t want it to fall from a lot of movement. Keep your plan conservative and reasonable, and don’t be as smart as the last guy you talked to.

3. They Can’t Check Their Egos at the Door to Admit Mistakes

The president at an electronics parts manufacturer found some cost accounting discrepancies that meant he was selling products under cost. Though he didn’t tell the bank, perhaps thinking that his Ivy League Ph.D.s would save him, the truth emerged a year later when his cash flow continued to deteriorate until the bank noticed. If he’d set his ego aside, spoken to the bank and brought in a professional early, he’d still be president, but the bank gave him the boot and brought me in. He lost everything because his ego got in the way.

Queue the Dragon Lady of El Paso: his wife and executive VP. Upon arrival, my first goal was to build loyalty and get buy in, and an opportunity dropped into my lap. The assistant immediately asked for twenty bucks to buy coffee and toilet paper. “Huh?” I asked. Apparently, in the interest of the budget, the company was rationing coffee and toilet paper. The Dragon Lady was losing millions on her left side while hoping to limit enough toilet paper and coffee for 60 people on her right side to balance out the equation. I gave the assistant $100 and told her to buy the biggest can of coffee and pack of toilet paper she could find, telling the other employees, “compliments of Lee.” From then on, they loved me. I had full buy-in, no one lost his job and we sold the company in full six months later.

4. They Don’t Depend on Their Key Subordinates

I hire people who are smarter than I am. I have no problem with people making more money than I do or being smarter. I view myself as a catalyst for positive change. However, I was brought into a company at which the CEO did not share this sentiment.

The CEO had created a generous sales commission structure, and the Sales Manager did a great job  for the company, meeting and exceeding goals. Resultantly, he made twice as much as the CEO in his first year on the job. When the board refused to give the CEO a raise to exceed the Sales Manager’s salary, the CEO attempted to lower the sales team’s commission structure, thereby dis-incentivizing them, even though they had been very successful on behalf of the company.

After the CEO forced a changed pay structure, the Sales Manager quit and went to work for a competitor. The board of directors found out and fired the CEO. While this echoes the sentiment of the ego problem, it also highlights the issue that CEOs fail to utilize good talent and rely on key subordinates.

5. They Don’t Get Buy-In

Buy-in is so important, and the CEO who isn’t getting it is looking for trouble because nothing goes forward for long without buy-in. At WYNCOM the CEO didn’t want any bad news, and he never wanted to hear what anybody had to say. He therefore didn’t have 100% of his team’s focus to make his wishes a reality. Subsequently, he lost 8 million dollars in 2 years.

As a CEO it’s important to know which way you want to go, and though a business is no voting democracy, you shouldn’t be handing down dictates from on high either. Have a conversation with your people, and let them tell you what they think. Even if they disagree and you still go the way you want to go, you can incorporate their feedback and by doing so, get their buy-in and support.

All I did when I became CEO of WYNCOM was act as a catalyst and seek others’ input, Thus, we went from an EBITDA of negative four million to positive four million in 12 months. In fact, we saved a half million dollars in postage just because I listened to someone.

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The Real Estate Market Will Recover in October – Just Don’t Ask Me Which October, 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.

A realtor called me today about selling my house in Florida. My neighbor sold his in a short sale for less than half of what he paid four years ago. The realtor told me that new owners of the development will be starting construction at much lower prices, so now may be the time to sell, before the supply increases. The new owners of my development bought the property (with the big name designer golf course, club house, fitness center, tennis courts, pool—you get the picture) out of bankruptcy about 18 months ago.

I spoke with the Property Appraisers of two Florida counties in the past few weeks and they see continuing declines in property values across the board—commercial, residential, industrial, raw land, etc. They have advised their Boards of County Commissioners to prepare for continuing declines in real estate taxes.

Last year we sold an office and warehouse building to an end user. I asked the banker who financed the deal if his big bank was now making real estate loans (I was looking for some good news). He laughed and said this particular deal got done only with SBA guarantees and the personal wealth and guarantee of the buyer’s owner.

I talked with an accountant who tells me his wife is now working for a big auctioneer. “They had their best year ever last year—over 250 auctions,” he said.  They have so many properties to auction, many are held on line.

I have also talked with real estate brokers and appraisers who report the same thing: Real estate in Florida continues to decline in value and they don’t see any recovery on the horizon.

I spoke with a client last week who told me he is selling his 65 foot two story motor yacht (with an elevator, no less).

“I thought you loved that boat,” I said.

He responded, “I do, but I want to buy some 100 acres of land nearby to play with on the weekend.  This land will appreciate in value, my boat won’t. And, besides, I want the cash.”

This is from an entrepreneur whose business generates over a million dollars of cash every year and who has bankers making appointments to try to lend him money.

Another accountant friend sold his house three months ago and moved to a rental house on the water. He reduced the rent 20% by paying a year in advance. He is using the capital from his home to purchase and flip foreclosures.

Wednesday is real estate day in the The Wall Street Journal. It used to be fun to see all the fancy resorts, big condo buildings, ranches, etc. with full page ads. Now the ads are one sixteenth of a page with headlines such as Bankruptcy Court Ordered, Absolute Auction, FDIC Owned Property, etc. Sometimes these are the same properties I saw six years ago.

Land is close to free in my part of Florida and elsewhere, and construction costs are the lowest in decades. I am not shilling for Florida real estate (I can, however, offer you a great deal in a wonderful golf course community outside Tampa), but I want to draw your attention to some hard facts.

1.  Land in many places has reached values unseen in decades.

2.  There is no recovery in sight.

3.  There are bargains to be had for long-term cash buyers.

4.  Owners are reaching their limits of endurance; they are becoming motivated sellers.

5.  And Cash is King, now and forever.

What does your real estate situation look like? Does it confirm or counter this picture?

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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.