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Turnaround Consultants Provide Many Benefits for Borrowers and Lenders

Date: Oct 21, 2011 @ 11:00 PM
Filed Under: Turnaround Management

The strains of running a business today have never been greater, whether you’re an executive at Proctor & Gamble or the owner of your community’s local pizza shop. As a lender, similar business strains exist, regardless of whether you’re lending money to John Deer & Company or John Doe and Sons. In today’s environment, pressures on a company’s ability to service debt is at a premium, whether the company is adequately or thinly capitalized. And again, regardless of the size or type of loan, lease or other obligation, one thing has remained consistent through all economic cycles -- when money is borrowed, it is expected to be repaid and, if it is not, people are going to be unhappy and  most likely somebody will pay a price. 

So in times of record uncertainty, where the Dow has recently recorded swings of 10-12%:

• How do lenders ensure they give themselves the greatest opportunity to have their loan repaid and how do borrowers fulfill their obligation(s)?

• How do borrowers and lenders find hidden opportunities to maximize cash flow and operating performance in the most cost-effective manner possible?

• How can confidence and credibility be restored in relationships between customers and companies, vendors and companies, and borrowers and lenders where such qualities seem lost?

These are areas where a turnaround consultant may be able to help. At Executive Sounding Board Associates Inc. (ESBA), we have been working with companies for over 30 years facing similar and even more dire or strained circumstances.

What organizations like ours do, and pardon the potential cliché, is provide business owners and executives guidance, assist them in dealing with the issues and  extensive pressures similar to those referenced above, and restore some of the performance and excellence that may have been lost or diminished due to toughening times. Resources like these can be an exceptional opportunity to add substantial expertise on a variable cost and timely basis.

This article highlights how, when managed well, there is very little downside and great upside in utilizing the resources of a turnaround professional.

Immediate Value Creation at No Cost

The first meeting with a profit improvement/turnaround consultant costs nothing. These professionals come to your facility, meet with you and your management team, tour the operations and detail how they can be of assistance. And in most cases, if you ask for a follow-up visit, the next visit will even be conducted on the turnaround professional’s nickel.

If business owners/executives have employed best practices related to efficiently operating their businesses yet still find themselves mired in business practices that result in inefficiencies as well as market share and margin erosion, then what is the downside of meeting with a consultant who will initially cost nothing while simultaneously identifying cash flow opportunities and profit improvements well in excess of the costs?

To maximize the effectiveness of the first meeting with a turnaround professional, it is critical for the company leadership team to properly prepare. After a meeting and tour of the facility and operations, turnaround professionals get right to the point and discuss the most pressing and prominent issues and concerns facing the company and its executives, as well as the relationship between the company and its lender. The right consultant should be able to articulate how he or she will be able to add value to the situation. Furthermore, he or she should be able to outline how to improve the valuation in multiples of the engagement’s cost.

And before engaging any turnaround consultant, always request references! While nobody provides references that don’t speak highly of them, request references from clients that have experienced similar issues you are facing. Ask what the outcome was and how the turnaround consultant assisted the company in managing the situation. While past experience is not necessarily a guarantee of future results, it is a darn good indicator.

Formula to Succeed and Confidence to Deliver

As part of the proposal, consultants should outline and do their best to quantify deliverables. That is, if you follow and execute their recommendations, how much in savings can be expected and in what time frame? And, will they guarantee their results? In certain circumstances and under some parameters, such arrangements can be negotiated. 

For a particular client in the candy and confectionary business, after the initial visit which included a tour of its manufacturing facility and meetings with some key managers, ESBA was so confident that it could deliver a substantial and immediate impact that we guaranteed cost saving in excess of 10x the fee.  That is, if the company followed our recommendations, as outlined, and if certain levels of savings were not achieved, we would refund the cost of engagement. Following that formula, if the client and the consultant agree on the parameters, how much downside is there? Almost none.

From the Company’s Perspective -- Working Through the Minefields and Stresses

A focused and coordinated approach gives the company and its lender a better opportunity to succeed and achieve their objectives, even when those objectives may be different.

• From the company’s view, you should let your lender know you are considering hiring a turnaround consultant. While most entities feel it may be considered a sign of weakness, in fact most lenders will see it as a proactive step. The decision to engage a turnaround consultant demonstrates you understand there are certain issues that must be addressed in order to succeed, and you are focused on developing a course and plan of action to achieve your goals.  And while others may disagree, I believe it’s prudent to let your lender know who you are hiring.  It will help relations with your lender if your lender knows and has worked with the consultant in the past. 

• Outline expectations and deliverables at the very beginning. This is a critical consideration.  Almost nothing is worse than if the project is completed and the client and consultant have different expectations. Furthermore, the company may want to consider discussing the project scope with its lender. For example, if you need a loan extension, there may be certain things that the lender or loan officer wants additional information about, such as potential new customers, manufacturing efficiency opportunities, relationships with your suppliers and short-term cash flow forecasts. Proper coordination can ensure those questions are answered as well. Lenders and outside stakeholders like to hear from independent third parties and in fact it may be a condition of a renewal or extension.

Earlier communication is usually better. By addressing and coordinating these issues at the beginning, it could save substantial time and costs on the back end, so as not to go through a project/process only to find out at the end that something must be reworked or redone.

From the Lender’s Perspective – A Focus Leading to Cash Flow

As the lender, why does your customer hiring a consultant add value? Why should you, the lender, invest in it?

• One of the prime benefits a turnaround consultant brings is an unbiased perspective -- being able to focus and zero in on cash flow opportunities immediately while not losing sight of the broader picture. Focus is always maintained on where the company is trying to go and what it is trying to, and more importantly, will be able to achieve in both the long and short term.

• A turnaround consultant assists in helping the company establish reasonable objectives. In many cases the company may have over-promised and under-delivered even with the best intentions, undoubtedly causing credibility problems through the lender’s organization. The turnaround consultant streamlines the process for the company and its management team so that the business plan is developed, vetted, synthesized and sensitivity ranges have been established prior to presenting the plan to the board and lender.  And, the turnaround consultant’s goal is to under-promise and over-deliver. Rarely is anybody criticized for that.

• Since most clients and their particular situations have significant degrees of stress, the turnaround consultant has a laser beam focus on increasing cash flow, enhancing margins and delivering results. We understand there is no time for a learning curve and results are expected almost instantaneously! Also it is understood that multiple constituencies are relying on our findings -- most of the time with similar goals and objectives but occasionally differing.

An important part of the consultant’s job is also to manage expectations, which has led me to explain to companies and lenders that, although it may have taken you many years to generate the issues and problems you are facing, it may take me longer than a week or two (although not much longer) to find and implement a solution.

So … Where to Go From Here?

Often when ESBA’s consultants first meet a prospective client’s executives, they have been operating their business successfully for two or three generations, not just two or three decades. They’ll often say “nobody knows my business better than me.”  And, often that is true.

However, after 33 years and over 1,000 successful turnarounds for our firm, companies have learned from the successes experienced by business owners that have implemented strategy shifts (the breaking of old paradigms). And in many cases, business managers have turned to the outside expertise of a turnaround professional to effect such changes acting as a sounding board to be change agents.

The turnaround professional is a highly-skilled individual who can often uncover inefficiencies across a broad spectrum of industries and assist senior managers and leaders in the creation and implementation of successful new business strategies that generate cash flows, preserve value, and repair strained relations with the company’s stakeholders. The turnaround professional assists the executive in handling significant stress, implementing expeditious changes, generating cash to cover payroll when no cash seems available, and bridging the gap between a company and lender when the gap appears too wide to close. This experience can prove to be highly beneficial to business owners in this changing economy.

Additionally, it is our sense that equipment finance companies, and banks focused on equipment finance, are often unaware of the benefits of suggesting the employment of a turnaround professional’s expertise to their “problematic borrowers/lessees.” The employment of a turnaround professional can in many cases “turn around” a portfolio problem.

So, having read all this, consider engaging a turnaround professional whether you are a borrower or a lender. There is very little to lose, cash flow to gain, borrowing capacity to grow, and collateral to preserve and strengthen!

Author’s note... I have known and worked with the editor-in-chief of this new and dynamic publication for the last decade and am honored to be a contributor to the launch edition and have taken a few paragraphs of his input as contribution to this article.

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Robert D. Katz
Robert D. Katz, CTP, CPA, MBA, is a Managing Director at Executive Sounding Board Associate Inc. He has led numerous operational and financial turnarounds for both publicly traded and private companies, generating substantial cash flow and operating improvements. He has acted as an interim restructuring officer for companies both in and out of bankruptcy. He sits on the CFA’s Education Foundation, is a former TMA Executive Committee member, and an Adjunct Professor at Temple University. He can be reached at 215.568.5788 or rdkatz@esba.com.



Robert Katz
Managing Director | Executive Sounding Board Associates
Robert D. Katz, CTP, CPA, MBA is part of the succession plan at Executive Sounding Board Associates LLC. Katz has led numerous operational and financial turnarounds for both publicly traded and private companies, generating substantial cash flow and operating improvements. He has acted as an interim restructuring officer for companies both in and out of bankruptcy.

He sits on the CFA’s Education Foundation; is a former TMA Executive Committee member and a current Board Member. He is also an Adjunct Professor of Finance and Strategic Management at Temple University. Katz can be reached at (215) 568-5788 or rdkatz@esba.com.
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