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Sunday, 03 March 2013 22:00

Distressed companies find more flexible environment post-recession

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Even with the dark days of the recession in the rearview mirror, turnaround and restructuring professionals say they’re keeping plenty busy in West Michigan.

While companies are still finding their way into trouble and need help to get out of it, the ranks of distressed companies are shrinking as the business environment evolves. That’s meant the nature of the work turnaround managers are doing now has changed from just three or four years ago.

Firms are seeing more business owners coming forward for assistance in repositioning their company for the future or preparing it for an eventually sale. Overall, today’s operating environment is a far cry from what they were doing at the depths of the recession, according to professionals in the field.

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“You were dealing with workouts at an all-time high” in 2009 and 2010, said Bob Wolford, an attorney at Miller Johnson in Grand Rapids who specializes in business turnarounds and restructurings.

When a distressed client does come forward, either on their own or through a referral from a bank, they are likely to find more flexibility than a few years ago. The bank today is typically clear about what it wants, or they’re acting more proactively to keep a borrower out of trouble, rather than reacting to a crisis.

Companies today that are in trouble have a better chance of getting through it than they did a few years back, experts say. That’s because turnaround experts say they now have greater flexibility in the options they can explore for a company.

“Just because a company is distressed doesn’t mean it doesn’t have good prospects,” Wolford said.

During the recession, when many banks were essentially in survival mode and working to quickly get bad loans off their books and cut their losses, there “were no real marching orders” that accompanied a distressed business referral, said Chip Hoebeke, a senior manager at the Grand Rapids office of Rehmann who works with companies in receivership.

“It was, ‘Go in there and find out what we can do,’” Hoebeke said. “It was a fire drill. Everyone was just trying to figure things out with way too much going on.”

These days, the calls from the banks are coming earlier, Hoebeke said. The bank, for example, sees that a borrower may have cash flow problems in the months ahead and wants someone to work with the owners to avoid a problem, he said.

“We’re still getting the phone calls, but they’re more timely and there’s more direction to them,’” Hoebeke said. “It’s not a 911 call anymore. They’re not calling (with) ‘the roof’s on fire — get over here.’”

When a bank refers a client to a turnaround specialist, the company is typically still in distress. They’re often behind on their loan or having cash flow problems.

If the bank wants the borrower off of its books, the turnaround firm will work with the company to find another bank for the company and restructure its debt. If not, the firm will go in and identify the internal issue that got the company into trouble and recommend changes accordingly to improve operations.

Sometimes what’s needed is a management change or an internal restructuring of business systems. Or a firm can align the company with a strategic partner.

Hoebeke tells the story of a distressed Muskegon manufacturer he worked with that was turning away sales because it didn’t have the capacity to produce the orders. He was able to connect it with another company in Muskegon that had capacity but lacked orders. Both parties came away happy, Hoebeke said.

Sometimes, however, the best option is to find a buyer for part or all of the company or, in the worst-case scenario, to liquidate the assets.

The latter option is the last one that turnaround firms want to consider, although “once in awhile, that’s the right choice — let’s just wind this down,” Hoebeke said.

Professionals say in most cases, they are able to find solutions that maintain the company as an ongoing concern and satisfy the bank.

The causes that get companies into trouble vary, although experts say they invariably go back to bad management decisions such as taking on too much debt, not having the proper controls or lacking a good plan for the business.

In many instances, a business owner is tired after struggling for an extended period or has gone through a personal trauma, such as a divorce, that distracts their attention. The first priority is to get them re-engaged in the business and convince them that the problems with the business are not terminal, experts say.

“It’s giving them hope and having them talk to somebody who’s been in their shoes,” Hoebeke said. “Once you get their attention, you can sit down and look at what’s going on.”

As the economy improved in the last year, Dan Yeomans, the president of Amicus Management Inc. in Cascade, has seen changes in banks’ demeanors. After a few years of acquiring real estate through repossession or foreclosure that they are now just beginning to dispose of, banks are more amenable these days to working with a distressed client.

The relationship has become less adversarial, he said, and while every bank has its breaking point with a borrower, their approach now is “to figure something out and work with you.”

“The playbook has changed. Before, some of the banks wouldn’t look at where they wanted to go with the loan. They just wanted it gone. It was more of a ‘get them out of the portfolio’ attitude,” Yeomans said.

“In the past year, they’re looking at how do you approach this in a business way? Now they want to take more of a strategic approach,” he said. “They’re actually engaged and seeing if some of these assets can stay with the owner or (be) sold in a more orderly fashion.”

While owners or the management of distressed businesses may initially resist having an outsider come in, turnaround professionals say they are not there to cause more trouble. They can get a business some breathing room, help find solutions and often make it stronger.

“Our job is really to fix companies where they can be fixed and find the best solution possible for the most people possible,” said Doug Wilterdink, managing director of DWH Corp., a business and financial advisory firm in Grand Rapids.

In some cases, however, it takes a third party to get the owner to admit that changes are needed, even if the company is not necessarily in distress. A company’s legal counsel or accountant, for instance, may urge management to seek outside help to avoid a problem they see coming down the road, said Patrick O’Keefe, CEO of the Bloomfield Hills-based turnaround consultancy O’Keefe & Associates that has an office in Grand Rapids.

“A lot of times, management gets complacent thinking things are OK because they are making money and are not realizing that they’re not making as much as they could or should with changes in their organization,” O’Keefe said. “They just need a kick in the butt to change, and if the lender is not dealing with it, there’s no change agent or stimulus, so to speak.”

If a company can begin dealing with pending problems on its own without the bank forcing the issue, or perhaps even before the bank becomes aware of it, they’ll have a lot more credibility later on with their lender, O’Keefe said.

“It gives a lot more confidence to the stakeholders to want to play ball,” he said.

Not every company that turnaround firms work with comes to them through bank referrals. Some step forward on their own after management or directors see they are headed down the wrong path and need an outside view to get back on track.

Other times, owners are laying the groundwork to exit the business.

DWH Corp. has seen an increase in transition and succession work from owners who want to sell their business in the years ahead, Wilterdink said. They have decided to get an outside look at the company and its internal systems to better position the business to potential buyers in the future.

“They need to start looking at transitioning out and if they haven’t been doing their homework, they’re not in a position to do that,” Wilterdink said.

Demographics are driving that area of the business, as aging baby boomers approaching retirement age begin thinking about retirement and what they could do with the company. They want to make sure they can get their investment and proper liquidity out of the business, he said.

“They may be doing fine, but that doesn’t mean somebody is going to pay for it if it’s not sustainable,” Wilterdink said. “For example, it’s very common for smaller businesses to not plan for their (owners’) exit, so it’s very dependent on one person or a small group of people. Their financial system is not something a potential buyer or investor is going to have confidence in.”

Coming out of the recession, a lot of baby boomer entrepreneurs are saying, “‘We don’t want to go through that again. I have to figure out a way to get out of this,’” Wilterdink said.

“We know they’re not ready, so we’re doing a lot of preparing businesses for ownership transition,” he said. “The value is only there if the buyer sees that the cash flows are sustainable. If the business is doing fine but it is really dependent on the ownership that is leaving, then why would I pay for that? You have to make sure the business disciplines are such that somebody will see that it’s not a fluke.”

The work that goes into polishing a business is essentially the same as turning around a distressed company, he said. Turning around a company means “you live and die by 90-day increments of cash flow relative to collateral” and getting to positive cash flow as quickly as possible, then figuring out later how to sustain it, he said.

Preparing a business for sale still involves a cash flow analysis, examining a company’s financial systems and controls relative to best practices and then closing the gaps, Wilterdink said. “You just have a longer runway” to do it.

As the years go by, Wilterdink expects transition and succession planning to become a larger part of his business and to drive growth as baby boomers prepare for retirement.

DWH optimally advises business owners to go through that process as many as seven years prior to an anticipated transaction to give their companies at least two years of restructured operations using the new systems and processes, Wilterdink said. Buyers tend to want to see a minimum of two years of sustainable cash flow under the present management team, he said.

“The idea is you have to get it right. Sometimes you need to test it a little bit before you can demonstrate to a buyer or investor that it’s working,” Wilterdink said. “If you have to transition the existing management out so you can demonstrate that it’s not dependent on the people that are leaving, then you have to have some runway. You have to make sure they can prove they can run the business and an investor will buy the business and retain that management team. Sometimes that takes a while.”

Read 1794 times Last modified on Friday, 15 March 2013 14:51
Mark Sanchez

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msanchez@mibiz.com

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