May 12, 2010
Making the Whole Greater than the Sum of its Parts
By Keith S. Balla
Recently, Marcum LLP helped a printing business resolve defaults under their loan and credit line with the bank. The company was a second-generation manufacturing business based in New Jersey for 100 years. It had expanded its operations as well as its service to large businesses in the state. Due to the economic downturn, the company’s sales declined while expenses remained the same. The owners were reluctant to terminate employees who had been loyal to them for many years. Furthermore, since they had recently purchased a new facility with much more space, the owner’s preference was to find new customers and expand the business to be able to pay for the move and the building costs. Downsizing could jeopardize the entire business.
As trusted advisors, we met with the owners and key company management to understand and evaluate its customer base and the viability of increasing sales to existing customers. We also reviewed the operations, work flow and employee productivity to identify areas to operate more efficiently. We evaluated all expenses and costs to determine where additional saving opportunities existed to assist in the recovery. The overall objective was to cure the bank defaults and replace the bank financing, since the existing bank was unwilling to work with the company and its crisis issues.
Unfortunately, the bank did not want to deal with this customer and it lacked confidence in the owner’s ability to recover from the recession. It is not uncommon that business owners neglect to meet with their bankers regularly. Often, the business owner fears if the lender knows too much about the business, the lender will want to pull or not renew the loan. In our experience, if the lender is kept abreast of the situation and understands the plan for turning the business around, the banker and lender frequently will work with the business owner constructively to implement the plan. Here, we knew that we needed to replace the lender with a new bank. Convincing a new bank to lend money to a troubled business is not always easy. However, once the bank buys into the turnaround plan, the owner can concentrate on putting the plan in place.
We recommended that the owners dramatically lower their compensation structure. In addition, they would need to motivate their employees to garner greater productivity and efficiency for less money – a challenge indeed! We also aggressively negotiated new insurance policies and other expenses for our clients to reduce costs.
Since the only liquid assets that the owners had were within their retirement accounts, we advised them to take distributions from their retirement plans to have funds available to pay down the bank debt and allow for new bank financing. One of the obvious downsides of this is the income taxes due on the retirement distributions. We also advised the owners that they would need to relocate and sell their palatial homes and move to more modest housing to lower their overall living expenses, since their compensation reduction would not allow them to continue to live the same lifestyle in large, highly leveraged homes. Sales of the homes also yielded added funds to pay down and reduce the debt obligations of the business under our turnaround plan. This was one of the most difficult decisions because it affected the entire family. Having to move within the same town to a lower priced residence was a difficult pill to swallow for the spouses and children. When financial survival is at issue, people need to be willing to make the appropriate sacrifices to provide an opportunity for future recovery. Parents’ conversations with their kids about financial management are also very delicate. Children have tremendous pressures put on their lives as it is, and added pressure or confusion could create real panic for them. Therefore, it is essential that the communication with children in these situations be handled with the utmost care.
In the plan to increase sales and revenues, we advised the owners to meet with their best customers in an effort to cultivate additional business. It is much easier and usually more fruitful to increase business with existing customers than to solicit new, unknown customers. These efforts produced increased sales and dramatically improved the cash flow, since the added sales came from the best customers that the business had dealt with for years. The customers embraced the added services and the consideration shown their business relationships.
Over the next 18 months, the strategic plan returned the company to profitability and allowed for the continued growth and building of the business. The owners became energized and refocused, and they, along with their employees, have now garnered the turnaround’s benefits.
Many businesses react too late to corrective changes. It is much better to evaluate the operations and make an honest assessment of where the business is and where it is going so that a detailed plan can be established. The plan then needs to be effectively communicated to those on the team for implementation. Key employees are a great resource for helping a business retool in difficult times. When key employees understand that they are important and have a real stake in the survival and development of the business, the owners can get exceptional efforts from them.
Professional financial advisors and vested service providers are also key team members who can shed a different light on the evaluation and propose honest recommendations to turn the business around in a positive direction. The long-term objective in many businesses is to be able to sell the company for the best price. The owners choose if and when they want to sell. But without the buy-in from both internal and external stakeholders, this becomes a much more difficult, and risky, proposition.