Tales from the Trenches

M·A&A was recently referred to an automation equipment manufacturer in the Midwest by a major middle-market lender.  The Company had a small $2 million Line and we were the second turnaround firm who had been retained to help.  The first firm was a big name who had charged $75,000 for a very nice “accounting type” report on the situation.  Unfortunately, a small over-advance had mushroomed to nearly $1 million, 50% over-line, during their one-month study.  No one was happy!

My new Client and his management team were skeptical that M·A&A could help any more than the previous consultants.  However, he had to do something as the Bank was understandably becoming quite aggressive.  Of course, the owner had personal guarantees on the Line and several leases.  As most of his wealth was tied to the Company, he was looking at both a business and a personal bankruptcy straight in the eyes.

I went to the Company the first day with my financial modeling associate in tow and explained my “4C” approach to turnarounds.

1. Cash – Immediately, we must understand, forecast, manage and control sources and uses of cash.  We use a 13 week detailed forecast.
2. Costs – Secondarily, we must understand and agree on the monthly revenue size of the business.  Then we can calculate the monthly costs and/or uses of cash which we must cut from the business to get back to cash breakeven.  Obviously, we must push to do this exercise quickly.
3. Control – Next, we want to have cash disbursements tightly controlled, preferably by M·A&A, weekly metrics created to measure performance and action items with management accountability assigned and tracked.
4. Communications – Finally, we want to make sure that our Client and senior management agrees with our findings of fact and recommended actions, so we meet regularly to share information.  We asked to have direct communications with both the Lender and middle-management employees, so we can bring them into the process as well.  Obviously, we typically will meet with vendors to discuss credit and payments as well.

After one week, the owner and his senior managers asked to have a dinner meeting to review M·A&A’s progress.  In reality, this was a “test by fire” to see if I was just another blood-sucking fee monger.  I summarized my findings into four buckets that night and spoke from my handwritten notes on the problem areas.

Cash – Unreconciled bank accounts, held checks in drawers, unnecessary delayed billings, poor collections follow-up.  Recommendation – centralize all cash responsibilities with M·A&A.

Costs and Control – No budgets, poor pre-approval of expenditures, unexplained use of outside contractors, heavy overtime, and unneeded open personnel requisitions.  Recommendation – hiring freeze, elimination of unauthorized overtime, and tight control over new spending all under M·A&A control.  Also immediate need to cut approximately $100,000 of monthly costs to get to breakeven.  Recommendation – M·A&A to convene team to develop action plan and implement plan within two weeks.

Management – Current management structure was ineffective and nothing was being done to address current problems.  Recommendation – put M·A&A in Crisis Manager role to be a “Catalyst for Change.”

Manufacturing – Vice President of Manufacturing was incompetent and Plant Manager was worse.  Recommendation – terminate both immediately and recruit a strong Vice President of Manufacturing.  Additionally, work-in-process inventory was ridiculously high and scrap, rework and quality were huge problems.  Recommendation – work down WIP as a source of cash and focus on root causes of scrap, rework and quality problems.

They were stunned by this comprehensive analysis of their situation and how to fix it.  They agreed to terminate the manufacturing leaders and I personally recruited the new Vice President of Manufacturing from my network.  They gave M·A&A control of the checkbook and all processes affecting cash.  They gave M·A&A control over new expenditure approval.  We re-sized the business two weeks later and laid off 20% of our work force.  My financial modeling assistant developed a great project model to forecast billing and collection trigger points which were key to managing cash in this type of project.

Within one month, the nearly 50% or $1 million over-advance had been totally eliminated.  I met personally with every major vendor and asked to be put on COD for 60 days to give us time to develop a recovery plan which would include how we would pay down their old debt.  They all agreed and continued to work with us.

M·A&A worked with management to put a plan together to guide the turnaround.  Approximately six weeks into the assignment, we presented the plan to the Bank who was very happy with their much improved risk exposure.  However, they had become credit weary and asked our Client to find another lender.  Of course, M·A&A was most happy to assist the Client in this regard and we moved the loan three months later to an Asset-Based Lender in our network.

I spent six months on this project and my associate modeler spent two months.  The results are noted below.

Client – facing the real possibility of melt down of Company and personal bankruptcy, sold his company two years later at a fair multiple on approximately $1 million of EBITDA.

Secured Lender – facing real possibility of $1 million loss due to over-advance was 100% paid out.

Asset-Based Lender – new customer with $2.5 million line.

Suppliers – 100% paid out.

M·A&A – received fair project fees and developed more positive referral sources.