Mid-States recently encountered a situation that unfortunately ended unnecessarily poorly for our client. We were working with an Owner and his Controller that had built a very nice business from a small start-up acquisition to leveraging their considerable industry experience to significantly grow revenues. The company, however, was in a CapEx-heavy industry and was undercapitalized from the start. While management did an excellent job growing the top line, the bottom line suffered due to accepting low-margin work and incurring operating costs that were unnecessary.
Many of the operating issues centered on insufficient equipment and unfavorable and expensive financing. We were engaged to locate funding for the business replacing high-cost funding and to aid in the growth of the company. As part of our assignment we were retained for a small turnaround engagement in order to remedy the root causes of the modest profitability. We began work immediately and within a short period of time assisted management in putting together a turnaround plan that showed a drastic and very achievable increase in profitability.
We began monitoring the turnaround actions and their impact on the resultant financial projections which were distributed to several prospective lenders. We were told repeatedly by the management team that the current lender was being very cooperative and there was no need for our involvement with them. We persisted on, taking the plan and the new projections to appropriate lenders, and located several potential new refinancing sources, potentially completing the restructuring of the balance sheet. Our discussions and the turnaround plan were bearing fruit!
Despite the probability of a successful refinancing, it appeared that management was suffering from a lack of liquidity for so long that they couldn’t see the bigger picture and the light at the end of the tunnel. Instead of taking the necessary steps, and working closely with our team, communicating where they were with their current lenders and creditors, they turtle-shelled and eventually informed us they were filing for Chapter 11 bankruptcy protection, with the likelihood of a Chapter 7 liquidation imminent. We were disappointed because we had lenders at the table. The projections and the action plans clearly showed how the business would be successful. But we were never allowed to talk to their legal team.
This a long route to say that their inability to communicate, properly inform one of their advisors, and to have all their advisors working with the same information and toward the same goal likely made the future road to success far more expensive and difficult.
So how can others avoid these mistakes?
First, we always advise our clients to use their advisors. These professionals understand complex situations, have likely seen similar situations before, and likely have short- and long-term solutions that will potentially offer some immediate relief. It’s what they do. This expertise, when applied to most situations, allows the business owner to catch their breath and focus on day-to-day operations. At the very least we suggest business owners should be keeping their (1) CPAs, (2) attorneys, and (3) financial advisors up to date. In most situations, it is also appropriate to keep their lender up to date with a well-written and well-thought-through plan of action, even though it is contrary to most management teams' intuition. Lenders who are well aware of the situation and the action steps being taken can be proactive and work with customers to get through short-term issues.
What should the company be updating advisors on? In a distressed situation advisors typically need to know the current status of the business, potential future issues, and what is causing them the most distress at that time. In a stable situation or growth situation, they should be discussing the current status of the business, where they want to take the business, how they want/plan to achieve their goals, and what they think they need from their advisors to get there.
Second, management needs to ensure all advisors are working off the same set of facts. Advisors, in conjunction with management, should come to a consensus on the best course of action. Looking to acquire an add-on to the business but haven’t talked to your CPA and attorney about the best legal structure? That may have significant implications down the road. Operating in a tight cash position but haven’t discussed it with your CPA and financial advisor? That may lead to a worsening position rather than a short-term solution. If the owner does not trust the advisors enough to disclose their current position to them then they should find someone with whom they are comfortable candidly discussing the issues. Withholding information very rarely leads to effective solutions. Advisors are typically compensated well for their advice and services, but they have proved their worth time and again.
So, how do we suggest business owners work with their advisors? We suggest touching base with all of your advisors at least on a quarterly basis. Make a list of what needs to be discussed beforehand and make sure it is a true list of the issues or topics of importance. Don’t skip one or two items because they are uncomfortable to discuss or feel ashamed to be in the position. Advisors are not there to judge, they’re there to help. There are very few times we have actually heard a trusted advisor complain about a common client, and when they do it is usually to complain that they did not disclose an issue sooner if at all.
Lastly, if a business owner does not have one of the advisors we mentioned above, reach out to one of the advisors they do trust and ask him or her for a recommendation. The trusted advisor likely has someone they’d recommend because they’ve seen them be successful for other clients.
The trusted advisor role reminds us of the time Chauncey Billups, Detroit Piston, “Mr. Big Shot”, was interviewed after making two game-winning foul shots with fractions of a second on the clock and Detroit behind by a point. He was asked if he was nervous. He simply laughed and said, “I wasn’t nervous at all, it’s what I do!” Such is the role of the trusted advisor.
If you or a client are in need of an advisor for an M&A transaction or need assistance structuring and locating debt for future success, please contact one of Mid-States’ Directors as listed below. We are also happy to make referrals to CPAs, attorneys, and other professionals that we have used and trust to bring results.
We welcome discussion and comment on this or any of our Newsletter articles. If you would like to discuss our services in more detail or to discuss the content in today's newsletter, please contact us to learn more about how we can assist your company or client. Below are the direct phone numbers and emails for a Mid-States team member who can answer your questions (yes, we answer our own phones):
Joseph P. Alam III
Managing Director
(313) 670-5713
Joe Alam Sr.
Senior Advisor
(313) 215-1700
Jim Connor
Managing Director
(248) 935-4037