The Lessons I Learned from Bull Sperm

Did you know that top notch bull sperm is worth in excess of $75,000 a gallon?

This is something I know personally thanks to Fred, the CEO of a refrigerator warehouse company in Texas, who, instead of grabbing the bull by the horns, kept his eye on the ball a little too much.

Fred’s hobby was breeding the perfect bull. He wanted the black spots on one side and the white spots on the other side, but he got it backwards and had to keep working. Thinking that breeding the perfect bull would be the next step in his career, Fred put all of his time and energy into this hobby and none into the “no-ball” endeavor of actually saving his family’s struggling refrigeration business.

Fred bet the ranch.

If Fred had been more concerned about getting busy with his business rather than his bull, he may have saved the company. Unfortunately, though, the core competency of his company was not bull sperm. It was refrigeration.

Thus, Fred’s hobby got in the way, and he stopped paying attention to refrigeration. When the bank realized that Fred was distracted, they defaulted him on his loans and brought me in.

I had a mismanaged and neglected refrigeration company to deal with that was over $500,000 behind in debt to the bank, had maintenance issues that created spoiled product for its clients, and that had a CEO who was focusing on bull balls rather than the family jewels.

Since the company was already being forced into bankruptcy and on the path to being sold, it was my job to recover as many assets for the bank as I could. I fired his 85 year old mother who was on the payroll, and even though the bank thought the bull seed was worthless, I held a little auction at which I sold off bull sperm by the gallon at anywhere from $75,000 – $100,000.

When your company is having difficulties, put your hobbies aside and keep your eye on the prize – not your eye on the ball.

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?

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.

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.

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?

The Wonderful Ways of the Whiteboard in Business, Part 1

I love my white board, and quite frankly, I don’t think I could do business as successfully without it. A white board lends clarity to complex situations and helps viewers logically analyze the many issues surrounding a case or problem.

The white board also allows you to see the holes in your logic – and therefore solidify your case by dealing with those holes.

Other white board fleshings reveal that you had the wrong fact in place. Many times I find that people are operating under the pretense of erroneous information, but by sharing their thoughts on a white board, they allow others to see their wrong facts and correct them.

In short, white boards get everyone on the same page.

Whiteboard Timelines

I find that timelines are one of the most useful ways to employ a white board. With one client we strategized a Chapter 11 case and created a timeline that included everything from the details of the date of filing to the date of exiting, thinking the whole process would take 9 months (ambitious, I know).

As we made the timeline we assigned specific tasks and responsibilities to people, and we also added our goals. By placing our goals at appropriate time intervals and getting buy-in from everyone involved, we could see how missed deadlines would affect our actual timing throughout the process.

And timelines aren’t just for bankruptcies. They work with any task: moving production lines, BK plans, relocating your offices, planning a wedding or whatever else.

With a timeline visualized on a white board you can get buy in, understand milestones and see how adjustments need to be made. This also reinforces people doing their jobs on time because their screw ups or lapses are tied into everyone else’s success and the overall feasibility of the timeline and the plan. This creates a great deal of personal responsibility and the consequences become very palpable.

This can all be especially effective if you add a budget to your whiteboard timeline.

An Example – With Horses!

Rotama Park, which I’ll discuss more thoroughly another time, was a race track that took 100 million dollars to build over 18 months – and 30 days to run out of cash.

I wanted to get them out of bankruptcy in 12 months. With my initial filing I also needed marketing plans, PR and other “why we’ll survive” materials. There was an opening period to fine-tune operations for profitability and positive cash flow, restructure debt equity and maintain a line of credit – and by day 300 we needed the disclosure statement hearing and approval so that by day 360 we were out of bankruptcy.

People said it couldn’t be done, but after putting the timeline on the whiteboard so that they could visualize the process, we were able to get buy in by asking each person involved what he needed to complete his responsibilities on time.

Without a whiteboard workout this turnaround never would have happened. Only by mapping everything out for all involved was I able to get buy-in and approval.

Use the whiteboard to your advantage and see where it can take you.

Do you use white boards? How do they help you?

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?

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?