War Stories

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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 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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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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The Wonderful Ways of the White Board in Business, part 2

Last week we discussed the advantages of using a whiteboard in business timelines, and after the positive feedback I got, I wanted to share another anecdote.

The Set-up

Company A is in Orlando. Company B is in Minnesota.

Company A buys Company B.

The Plan

Company A decides to close down the factory of Company B and move its operations to Orlando – you know, to consolidate things.

Their plan was to shut down a factory in Minnesota, drive its equipment and operations to Orlando, set it back up in an inadequate space, train all the personnel in the new manufacturing process and be fully operational – without disrupting their supply line, output, customer service or other operations – over the course of a three day holiday weekend. I repeat: a three day holiday weekend.

As you can imagine, I told them they were crazy. Loony. Bonkers. No way. Oh, goodness.

The Problems

1. The most glaring problem (among many) that I saw was that Company A had no inventory built up to handle orders if the production line didn’t come up Monday morning. And as far as I was concerned there was no way that the production line was going to be up on Monday morning.

2. There was also no mind being paid to the fact that the assembly line personnel in Orlando couldn’t assemble what was being done in Minnesota. It wasn’t so far from their core competency, but it certainly required training and oversight. Their plan was to send one guy from MN to FL to teach people how to put the widget together in three hours. What if something happened to this guy? What if the entire crew didn’t pick this up in 3 hours?

3. The capacity in the Florida location was full! Where were they going to put all of their new equipment? There was no time to find a new location

The Solutions

My solution to this insanity was mapping out the process of moving and consolidating this business on the whiteboard as a 2 month timeline. By doing this, I could not only identify all of the steps necessary and include everyone’s responsibilities to make this happen efficiently and effectively but also I could show them why and how their initial 3-day plan was asinine.

1. I built them a 45-60 day plan during which time their primary goal was to build up inventory, running overtime at the Minnesota plant, so that when they closed the production line they had a full 30 days to get operational in Florida.

2. The Orlando crew needed to be properly trained. I suggested that they send the factory workers in Orlando to Minnesota to watch the process there for a few days. Company A complained about not having the $5000 to do this, but if their plan didn’t work they would lose millions! Penny wise and pound foolish, if there were ever an example.

3. With two months for this process to take place, there was now adequate time to find a suitable location at a reasonable price for the Minnesota factory to be relocated in Florida. Three days, I fear, would not have sufficed.

I’m pleased to say that ultimately Company A listened to me, and they were successful. Without the whiteboard, though, I would never have been able to make my case. I literally saw the aha-ing happen all over the faces of Company A’s execs when I drew up their plan and my plan on a whiteboard.

One thing I always do with my whiteboard is take a high resolution picture; I blow that up, print and study it so that I can re-explore my logic and see what I may have gotten wrong. I would love one of those white boards that digitizes your notes, but I guess that’s the next step!

What kinds of tools do you find most effective in allowing you to successfully manage your business responsibilities?

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Testimonial Magic: Know All the What You Want, But Don’t Neglect the Who

When being retained as an expert witness, generally the other side tries to undermine your credentials or experience in order to either discredit your answers or, in extremes, not allow your testimony at all. The opposing side also tries to undermine one’s credibility by investigating whether you’re always a plaintiff or defendant side witness – or if you only represent creditors and not debtors. It’s a game that we’ve all seen on Law and Order or Perry Mason.

The Pledge

For my first case as an expert witness, I was hired to testify to the feasibility of a cash collateral order in a bankruptcy case. As I took the stand my lawyer introduced me and gave my background.

Now, I knew what I was talking about, but we were all still confident that the other side was going to absolutely skewer me. It’s not that I had a shady past, but because 25 years ago I’d only done a few turnarounds. The question was, Was I really an expert at this point?

Now I’m The Turnaround Authority and I have the experience to prove it, but back then, well, there just wasn’t enough gray hair on my head yet.

The Turn

The opposing counsel introduced herself to me as she prepared to elaborate on my experience, or supposed lack thereof. However, as soon as she called me “Mr. Katz,” the federal judge took notice, looked down at me from the bench over the rim of his glasses and said, “Katz? Are you related to Israel Katz?”

I replied, “Yes, your honor. He’s my father.”

At which point the old judge bellowed jovially, “How’s old Israel doing? Did you know that in 1967 your father was head of the Democratic Party in Dekalb County, and in the late 40s he filed the first Chapter 11 case in this district? I know him well but haven’t seen him in a long time. Please give ol’ Israel my regards.” Then turning to the opposing counsel, who had reared back on her haunches, ready to pounce, said, “Oh, sorry, counsel. It’s your witness – please proceed.”

The Prestige

Having been totally flustered but regaining her composure and straightening up, she answered, “No questions, your honor. Mr. Katz is an acceptable witness.”

And that’s how I got through my first case as an expert witness without any trouble. Sometimes it’s not just what you know but who you know that counts.

Now, with my history of workouts I don’t ever worry what the opposing counsel will say – indeed, in a recent case the lawyer already knew me and asked why my side would “bring out the big guns when a pea-shooter would do” – but back then this was a lucky break.

I’m even proud to say that after this case I became friendly with the opposing counsel who has since retained me for a number of client cases over the past twenty or so years.

Have you ever been to court over business issues? What were your experiences?

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Life’s Lessons and Surprises: 18 Months at Life University

Life is full of surprises, and as a business leader, you can’t let those surprises turn your business upside down. If you learn to manage them as part of your business, expecting that they will be there and creating contingencies for them like emergency cash, a fully stocked resume and interview line should you need some fast hires, good networking, a solid relationship with your banker and so on, then you will likely survive when they surprise.

In 2003/4, I did a turnaround for Life University, the award-winning chiropractic institution in Atlanta, GA. Life had a lot of lessons about the power of surprises.

Life’s Problem

After achieving an all-time high enrollment rate and setting the standard of excellence in contemporary health for its chiropractic undergraduate and masters degree programs, Life University was challenged with a loss of accreditation and defaulted on $35 million in secured bond debt.

Our Solution

Upon becoming the Director of Refinancing and CFO, we redid the budget based on declining attendance and negotiated a forbearance agreement with the Trustee and Bondholders. We also sold assets and refinanced others while the board searched for a new president.

The Outcome?

Within 18 months Life University’s cash flow was stabilized, accreditation was granted and the bond debt was refinanced. As part of the long-term plan, the school retained a President and Chief Financial Officer from a competing school. Victory was ours, and we won the Non-profit Turnaround of the Year Award in 2004 from the Atlanta Chapter of the Turnaround Management Association (TMA).

What I Learned from Life?

Professionals need to hire consultants and advisors who have different skill sets than their own. When professionals go outside their sweet spots they often make mistakes or don’t consider all the issues. Business is not the forte of all professionals – and it doesn’t have to be. Bring in business people to do business.

Life Always Has Surprises!

There are always surprises and things you didn’t account for. At Life, the CFO had a heart attack and bypass surgery, and without him we couldn’t find all of the documentation or understand the cash flow budget.

This created issues with the bondholders because a key member of the management team had been changed. Then, six months in, the president was gone, too.

A new president and a new CFO do not breed confidence to lenders.

What You Can Learn from Life

Be prepared for unfortunate events: heart attacks, death, personal tragedy, community strife. These things are part of life, and as a business leader, you have to have contingency plans in place to know how you would operate should the unthinkable occur.

Ultimately, in this case – and many others – communication solved these problems. Through extensive meetings, we got support in a forbearance agreement, which gave us time to hire a new president and to show results from fund-raising efforts.

Always have open communication.

The spirit of the chiropractic staff was great. They were committed to their university and seeing it survive. Anything I needed from them I got. Being part of a team that believes in the cause is a great thing, and in a crisis it’s very important to return to core values and purpose and to be able to lean on them.

Parting Words of Wisdom

This was a wonderful, award-winning turnaround. In turnaround management – as in business – there are always surprises. It’s your job not to let those surprises undermine your goals, but to deal with them as part of a business day.

What surprises have you encountered in business? How did you deal with them?

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What Napoleon Can Teach Business Leaders

A leader is a dealer in hope.
– Napoleon Bonaparte

This is a lesson I learned on one of my earliest turnarounds, and though I’ve talked about it before, it’s worth reiterating to emphasize the point.

A very large cheerleading supply company was having huge problems and needed to be brought through a Chapter 11 restructuring. So, they brought me in.

I realized more than anything during this project that nothing pulls a team or company together like having hope, and I hardly think that any company could have taught me this lesson quite like a cheerleading supply company.

When you think about cheerleaders, you realize that they’re cheering hardest when their team is down and needs a big score (or three) to win the game. It’s the cheerleaders job to keep the crowd on its feet and not to let the fans’ silence and dejected feelings infect the team. The worse the situation is, the louder cheerleaders cheer.

So when it was a cheerleading company restructuring through a Chapter 11 bankruptcy, you could imagine that they knew how to cheer for themselves and keep the hope alive.

After 18 months we came out the other side of this restructuring, and at the hearing, I gave everyone pompoms, including the judge.

To this day I still have my pompoms in my office to remind me that no matter how bad things get in a turnaround, as the appointed leader, it’s my job to be a dealer in hope. It’s my job to tell everyone that we will get through it and that we have to work harder than ever to pull us out the other side.

If I don’t do that, I’ve done nothing.

As a business leader, no matter what level of management you’re at, it’s your job to deal out the hope, whether the chips are down or up. No one can fight or work or play if they don’t have hope that what they’re trying to accomplish is possible.

Be a leader who deals in hope.

How do you bring hope to your team or business?

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What Cheerleaders Can Teach Us about Big Business

 

Last night I did a radio interview (that I’ll post when the podcast becomes available), and I was asked a question that I thought I’d share my answer to with you here.

I was asked about my guiding principle – one that helps me lead my firm and other companies that hire me as their CEO.

My Guiding Principle: Be Proactive, Not Reactive.

I live by this motto, give speeches about it, and I’ve mentioned it here before.

All businesses have problems. Nothing goes as you expect it to. But if you’re proactive in your leadership, decision making and planning then you’ll have the tools, people, and ideas in place to handle much of what comes at you.

On the contrary, if you’re constantly reacting to everything, you’ll never get your feet underneath you long enough to resolve your problems.

I’ve also found that honest communication goes a long way. People try to lead secretly, and that doesn’t work. Yes, leaders run businesses, not committees, but if leaders are honest with those involved, especially key stakeholders like boards, banks and creditors, there is a much greater chance for success.

Ra Ra Ra!!!

My initial turnaround success was a Chapter 11 restructuring at a company called Cheerleader Supply, a $50+ Million revenue business with over 1000 employees. As their name suggests, they made cheerleading uniforms, pompoms, etc., and they sent kids to summer camp to learn how to become cheerleaders.

It was the spirit of Cheerleader Supply that helped get it through Chapter 11 restructuring, and I learned a serious lesson about attitude from them.

Think about football games. When your team is down, the cheerleaders cheer harder – they don’t get dejected. Seeing that attitude – embodied by everyone at Cheerleading Supply – inspired me and allowed me to be the best catalyst for big change that I could be and ultimately brought that company through Chapter 11.

I’ve applied that attitude to everything going forward. To this day I still have a pompom in my office reminding me of this original successful turnaround and the importance of cheering harder and having the right attitude even when things seem their darkest.

What You Can Do

I encourage you to go forward with this attitude, which goes hand and hand with being proactive instead of reactive.

The proactive leader is cheering constantly for his company by saying that nothing is going to stop it from being successful – especially not his own complacency when it seems like he’s up by four touchdowns and can just coast (are we good with the football metaphors?).

Learn from the cheerleaders and be a proactive leader.

What’s your guiding principle? How do you think these notions can help you in your life and business?

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Prepare for Change: The Tale of K-Mart the Big Gorilla

Everything changes but change itself.

– John F. Kennedy

Little rings truer to me than this statement by President Kennedy.

I was speaking to a CEO group just last week and I was telling them: change is coming, change is here, change is staying. What does that mean? It means that everything changes but change itself.

Conditions will never remain the same, and as a business person you have to prepared for that. Be ready for the future and be ready for change.

Let me give you an example, that I like to call the Big Gorilla example.

A while back I was CEO of a manufacturing company that made t-shirts and sweatshirts. We did good, steady work, and one day K-Mart came to us and started placing huge regular orders. A big change!

They asked us to change our manufacturing capabilities to suit their needs. We did. Another big change that seemed worth it because they ordered so much so regularly.

Then one day, after we produced a million dollars worth of merchandise branded explicitly for K-Mart, they told us not to ship their order, that they were having some financial issues. That was $1 million of merchandise!

This was unwelcome change, and this is the power of the Big Gorilla. The Big Gorilla changes your customer mix; it changes your business; then it changes its relationship with you.

When K-Mart told me to destroy the merchandise and that I couldn’t sell it anywhere – I just had to eat it – I was pretty perturbed. I, of course, didn’t listen, and sold the merchandise overseas at enough to break even. When K-Mart eventually found out (an executive was vacationing in the area and noticed the locals wearing the merchandise), the company terminated its relationship with us, changing the nature of our business again. We had lost our Big Gorilla.

Two lessons come out of this story. The first is: Be Wary of the Big Gorilla. It’s nice to get a big buyer but when someone controls that much of your customer pie, change is always on the horizon.

And that brings us to the second lesson: Change is the Only Constant. Believe it and prepare for it by staying aware, recognizing that all projections have holes and flawed assumptions, being proactive rather than reactive and having controls in place.

What change has caught you by surprise? How do you prepare for change? Have you ever had a Big Gorilla – what happened?