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.

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.

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.

If You Want Glory, Join the Marines – Turnaround is Not About the Accolades

The greater the obstacle, the more glory in overcoming it.

  • Moliere

If overcoming obstacles of enormous size yielded glory in such volume, there would be more awards in the turnaround business.

I appreciate the sentiment, Moliere, I really do, but I have to say that I’m not with you 100%.

Turnaround Accolades

General MacArthur was certainly acknowledged  for his work in the Pacific Front during World War II, speaking of enormous obstacles and the glory that goes with them, but for us turnaround professionals, the glory is less, shall we say, pronounced.

Is that maybe because the obstacles aren’t so great?

Far be it for me to crack up the complexity of the problems that face turnaround professionals, but I think most of us can agree that restructuring billions of dollars in debt, successfully renegotiating terms with dozens of creditors, saving tens of thousands of jobs, and preventing hits to the US economy – and sometimes in the business blink of an eye – is no cake walk. And even though much of the work is on a smaller scale, jobs are still saved, money is still recovered and businesses keep going. And all of that is good for the economy.

My reflections on Moliere’s remarks have brought me to the conclusion that the turnaround profession is incredibly satisfying in its own right for the very reasons listed above – accolades be forgotten.

Be Your Own Turnaround Manager

When done right, turnaround work is not the kind of consulting that borrows your watch to tell you what time it is. Turnaround management is about rolling up your sleeves, getting into the trenches and getting your hands dirty. It’s about apologizing for mistakes you probably didn’t make and accepting burdens that weren’t otherwise yours to bear.

This isn’t meant to elevate turnaround management to unwarranted heights or make myself feel better about my work.

I want you to derive a lesson from this when it comes to your business, whether or not you’re the leader of that business.

Why wait to hire a turnaround professional? Sure, experience breeds insight and knowledge into many potential solutions, but if you could take on a lot of what I’ve already said, then you’re halfway to resolving your problems:

– Take responsibility for what’s gone wrong

– Accept the burdens for resolution on your shoulders

– Get dirty by rolling up your sleeves and getting down in the trenches; don’t just sit behind your desk and hide – get out there and make tough decisions

No, these things alone do not turn around companies, but when those around you perceive that you’ve taken responsibility, accepted the burden of making things right, and gotten your hands dirty, they will pull behind you and get on your team. They will listen when you ask them to act; they will share with you and be honest about their ideas and yours.

Conclusion

This is what much of turnaround management is about. As I said, the experience and insight allow us to have a better idea of what will work and what won’t – and how best to do it – but for successful turnarounds, all of this ground work has to get laid down first.

You won’t wind up with a ton of glory when it’s all said and done, but I assure you that it’s rewarding in and of itself. When done right, your job will still be there when you’re done, as will those of your colleagues.

Glory be what it will – I’ll take turnaround any day.

Have you ever accepted responsibility for something that you didn’t have to? What was the outcome?