- Finding and Utilizing Hidden Untapped Assets for a Retailer in a Cash Crisis
Company Description—Retail Chain:
A retailer with 130 locations in two states and $300 million in revenue was purchased from a larger retail chain and began to operate independently under new management.
Background and Initial Issues—“Taking Their Eye Off the Ball”:
The new owners had operated a much smaller retail operation in the past but were unprepared for the multitude of problems they would have to deal with very quickly after their acquisition. They were so happy that they had successfully acquired the new entity that they celebrated by buying themselves expensive new cars, traveling, and by shortening their work days. They immediately had a cash flow crisis and then began to realize they had:
- Inexperienced new leadership
- A lack of depth in management
- A highly leveraged balance sheet
- Many stores that were in poor locations and in poor condition
- Many stores that were too large
- Far too much inventory tying up much needed cash
- Presence in too many markets, requiring localized advertising that was too expensive
- Vendors who were getting very nervous and were beginning to cut off credit
- High-value employees beginning to leave the organization; poor morale
- No overall strategy for success
Solutions—Finding Untapped Assets and Managing Efficiently:
We gathered data and completed analyses that identified a tremendous hidden opportunity. There was a large amount of value in the company’s below-market real estate leases. These leases were often long term, with few restrictions and at rental rates far below market value. In many cases, however, these assets were generating little or no return because the company’s stores were occupying the property and were performing poorly.
As a result, we developed a new strategic plan to pare down the number of stores to those that could operate successfully and to generate cash from the other locations through various types of divestitures. Part of the new plan was to bring in new senior managers; Fred Leeb became VP of Real Estate and Planning, to help take the company into Chapter 11 bankruptcy. This step was imperative to gain the necessary time to carry out these strategies and to be able to protect the company from creditors.
We developed a simple computer model to evaluate and determine the best option for each store: 1) whether it should continue in operation as is, 2) whether it should be subdivided and subleased, 3) whether the lease should be assigned or 4) whether the fee interest should be sold. Fred first guided the successful divestiture of a 30-store chain in another state and then acted as the entire real estate department (having no assistants) overseeing all of the real estate issues of the other 100 operating stores. At the same time, Fred identified potential real estate buyers for the locations to be sold or subleased and negotiated the sale, assignment or sublease transactions. He then coordinated the asset sale approval processes within the bankruptcy court system.
Results—Resizing to Become Profitable:
The new management team successfully re-sized the operation to generate positive cash flows and developed a high degree of credibility with its employees, customers and vendors. At the same time, we successfully identified many new subtenants and other real estate acquirers. Fred’s negotiating skills and his guidance through the asset sale process in bankruptcy court succeeded in bringing in $14 million in cash to the company. As a result of his work and the other new managers, the company was sold and successfully exited Chapter 11 in less than one year as a healthy operating entity.
Company Description—Two Unrelated Divisions with One Sucking Cash from the Other:
A company with two completely different business units had consistently unprofitable performance for over five years. The company was comprised of two different business units, A and B. Business Unit A (“BU-A”) had encountered extremely difficult operating conditions. It faced very intense competition and declining prices due to the consolidation of its competitors into much larger operators and from relatively inadequate purchasing power. BU-A also was faced with cash flow problems due to the need to have large amounts of slow-moving inventory. Customers were becoming more and more demanding while margins were becoming much lower, making the business unviable. Business Unit B (“BU-B”) required little management attention, was very profitable, required no inventory and had few employees and competitors. Even though BU-B generated substantial positive cash flow, this amount was more than offset by the negative cash flow of BU-A.
Background and Initial Issues—Sentimental Values:
The current owner had bought the company from the founder years earlier in order to grow the business using more sophisticated financial management techniques. Instead of operations gradually improving, however, they began to worsen.
Management invested more and more time and capital into fixing BU-A because that represented the bulk of the employees, the primary use of the buildings, and the historically more significant entity. The company’s bank became increasingly concerned because it began to break covenants and went into default. After many months, there was still no progress and no solution in sight.
Solutions—Objective In-depth Analyses:
Fred Leeb began to work as a team member with the company’s attorney, president, CEO and investment banker to carefully evaluate the business viability of BU-A. We looked at past results, the competitive situation, major industry trends, contractual issues, key assumptions, and operating constraints. As a team, we created detailed week-by-week cash flow projections designed to be as realistic as possible. After evaluating numerous scenarios and strategies in a thorough and objective manner, management eventually agreed that the current situation was untenable and would continue to reduce the value of the company. Most importantly, the CEO finally agreed that he must enact fundamental change in order to save the company.
Results—Stopping the Bleeding and Using Cash for High Return Projects Again:
The management of the company, along with its investment banker, tried to sell BU-A as an operating entity. When this proved to be impossible, the president finally decided to liquidate BU-A. This resulted in cash proceeds from the sale of inventory that could pay down secured and unsecured creditors and enable growth in BU-B. BU-B was no longer starved for cash because of the need to provide repeated transfusions to BU-A; the bleeding was finally stopped and the president was able to move on to managing his successful business unit properly.
- Unemotional Decision-making–Diversification and Friendship Almost Lead to Disaster
Company Description—Long Established Company Tries to Diversify:
A well-established equipment service company diversifies and expands into selling high-tech large equipment.
Background and Initial Issues—Too Small and Too Slow for Success:
The president of an established business decided that it was time to diversify in order to increase profit quickly and take full advantage of the company’s expertise and knowledge of certain types of high-tech equipment. The idea to buy and resell certain types of this equipment was broached by a long-term friend of the president. The adult children of the president (who also were company employees) were against the idea from the beginning.
The company invested a substantial amount of its assets to enlarge its space to accommodate a showroom for large pieces of equipment and then to buy the equipment to establish the necessary amount of inventory. The marketing effort to sell the equipment did not work well because too little equipment was on hand, competition was too intense and the technology changed so fast that the pricing on the inventory of used equipment, even after substantial discounts, was still more than the price of new equipment.
As a result, cash flow worsened significantly. But the president and his friend continued to believe that success would come soon. They repeatedly put in more money and gave it more time (even though the situation had only worsened over a two-year period). The children of the president were growing more and more frustrated and upset with their father for continuing to feed this diversification effort with additional cash.
Fred Leeb was called upon to prepare an unbiased, thorough analysis of the situation. Since he was a neutral unemotional party, was not part of the original decision and had credibility with all sides (the father and the children), he was the appropriate candidate to recommend a carefully considered solution. He recommended that the company no longer attempt to sell equipment and should go back to its original focus of only repairing the equipment.
Results—President Acknowledges and Decides Time to Move On:
Because the analysis of the issue was handled in a professional manner by an experienced person, all sides were finally able to agree. Though the original decision to diversify was prudent, it was now time to reverse course based on actual and predicted results. The president and the other family members agreed to cut off further investment and sell off the equipment before even greater losses were incurred. The president was able to make this decision calmly because he remained in control of the entire non-threatening decision-making process. He had hired Fred Leeb, he had provided critical information and insight and he made the final decision after he reviewed all the facts.
Company Description—Costs Out of Control, Company Disorganized:
A technical service company was managed by the majority owner (the president) and the minority owners (the vice presidents). The company encountered financial difficulties due to the failure of the president’s management efforts. The president embezzled a substantial amount of money and then the president suddenly disappeared. The minority owners (the vice presidents) were left in charge by default. The bank required the company to interview and select one of three turnaround consultants to help in this difficult situation. The company chose Fred Leeb.
Background and Initial Issues—Management Frustrated and Angry:
The minority owners of the business were faced with a number of very difficult problems. For example, the company and its related entities owned certain assets including the office building that housed the firm. Unfortunately, these assets could not be sold to raise cash without the approval of the majority owner (the president) who had disappeared. In addition, the bank was pressuring them to improve operations even though the company had just been a victim of theft and employee morale was low.
When Fred Leeb arrived, the new managers said, “We already are working as hard as we can, everybody is extremely busy, and we already have cut our expenses to the bone. Just get done whatever you have to do as quickly as possible and leave. We have no money to pay your fees and you won’t be able to add any value anyway. You aren’t going to be able to tell us anything that we don’t know already.”
Solutions— Manage Effectively by Getting Much More Value from Existing Data and Reports:
We asked them for typical reports to be able to analyze their profits for each of their major product lines. They did not have these types of reports. They also did not have any reports that tracked the profitability of each of their technicians to be able to pinpoint who was contributing to the bottom line and who was not. After some discussion, they conceded, however, that they already had this information in their billing system (just in a different format) because they had to be able to justify billings to their customers.
With some guidance, management then prepared new reports that detailed billed and unbilled hours for each technician, the profitability for each type of work under each customer contract, the amount of unproductive time required for their technicians to travel to their customers’ locations as compared to their billed hours, the amount expensed for replacement parts, the types of parts needed and the locations of these parts, the training provided to each technician and the training required for each type of contractual service, etc. These relatively simple analyses of readily available data lead, for the first time, to:
- The identification of the most and least productive technicians
- The most and least productive contracts
- The need to renegotiate certain key aspects of major contracts
- The need for additional training
- The appropriate amounts and types of inventory to be stored at optimal locations around the country
- The strategic areas on which to focus for the future.
Results—Success from Working Both Hard and Smart:
Through these analyses of existing data the company learned much more about its business and regained profitability. They were no longer satisfied to be busy or working hard. They were now working “smart” and were using their own knowledge of their business to adjust their strategies to stay ahead of their customers and their competitors in the future. Unfortunately, a new risk developed. The president learned that the company had begun to do well and threatened to return.
Company Description—Automotive Parts Manufacturer Diversifies Into Aerospace:
A well-established automotive supplier began to diversify to another industry but was impacted by losses from past automotive contracts, slow paying customers, high marketing costs, excess overhead and capacity, and intense competition.
Background and Initial Issues—Company Strained to the Breaking Point in Two Tough Industries:
The company had bid with very low pricing on a number of large automotive contracts, had overrun certain cost estimates and incurred substantial losses. At the same time overall sales volumes were decreasing as the domestic automotive industry cut back on spending due to an uncertain economy and its declining market share. The company tried to hold on as long as possible to as many of its employees, managers and engineers in the hopes that the economy and the company’s own business volumes would rebound. This did not occur and a cash flow crisis developed causing broken bank covenants and an out-of-formula condition to develop. In addition, the company added sales personnel and marketing offices to be able to diversify into a non-automotive industry in another part of the country. This put further strain on cash flow.
Solutions—New Tools to Manage the Basics More Effectively:
Fred Leeb worked initially to rebuild the company’s credibility with its bank and its vendors. One of the means to do this was by helping the company to implement a detailed week by week cash flow to scrutinize actual results and to develop accurate financial projections. These simple new processes resulted in major improvements to the business in the following ways:
- Leadership almost immediately took a proactive role in managing cash inflows to a much greater extent than ever before. The week-by-week cash flow format clearly showed when cash inflows were needed to meet payroll, raw material and other needs. The company recognized that it was not in a position to be a lender to its customers (by having high levels of receivables). The company also recognized that, even though it was selling to large, bureaucratic companies with their own cash problems, the collection period could be shortened dramatically. The company developed much stronger relationships with the purchasing and accounts payable personnel of their customers, began to know the status of their invoices at all times in their customer’s payables system, understood the specific information that had to be provided to the customer to enable prompt processing, resolved disputes quickly and opened new communication links so that the customer understood that the company must be paid on time to enable it to continue to manufacture and ship product on a timely basis.
- All costs became subject to much greater scrutiny. All back office personnel were re-evaluated and the least productive were taken off the payroll. The company also cut back to a much smaller physical footprint, drastically reducing the utility costs required to continue operations. Most importantly, the president admitted that it was highly unlikely in the near term that sales volumes would regain the previous higher levels. It made sense to cut overhead that was unlikely to be required in the future, even though it would be very difficult to replace.
- The president recognized that he no longer needed an expensive plant manager. He took on the role of plant manager himself, making him intimately familiar again with each aspect of the manufacturing operation. He was able to guide the company to become much more efficient. He was much more effective than his previous plant managers.
Results—Stakeholders See Positive Results, Pull Together, Regain Positive Trends:
The bank, the company’s customers, the vendors and the employees all saw that the company’s management was becoming much more aware and alert to business opportunities and delivering on commitments. This caused the management of the company to increase its credibility with all parties, improve its cash flow significantly, regain profitability and successfully complete its diversification effort to become 80% non-automotive. This dramatically lowered the company’s risk profile and increased the value of the company accordingly.