best practices/techniques operational turnarounds and financial restructuring - association of...

Best Practices in

Turnaround Consulting

Jim Davidson CTP, CIRA, CPA/CFF, CFE, CM&AA

7 Questions to be Answered

• Complexities of turnarounds this recession?

• Who engages turnaround consultants?

• Immediate turnaround issues to focus?

• Consulting skills required for turnarounds?

• Best practices and techniques?

• How to ensure prompt payment?

• Takeaways/lessons learned for your practice?

Avant Advisory 2

Current Turnaround Environment

• More than other consulting services

• Less than previous recessions

• Why?

– Excess financial leverage coupled with decreased

collateral values

– High valuations/financing - enterprise value not

asset based

– Greater capital structure complexity

Avant Advisory 3

Current Environment (cont’d)

– Credit market collapse

– No liquidity, credit drought

– Fewer financing options

– Lenders “kicking can down alley”

– Amend, extend and pretend

– Out of court workouts

– Significant uncertainty and legal minefield

Avant Advisory 4


• Bankruptcy is questionable

– Under secured creditors

– Lack of DIP financing

– Complexity and lack of visibility (feasibilty)

– Few successfully reorganized

– Many unsuccessful – Several Chapter 22s

Avant Advisory

5


• Bankruptcy Law Changes

– New 20 –day supplier administrative claim,

e.g., Circuit City

– New utility deposit requirements

– Expanded inventory reclamation rights

– Tighter deadlines

– Filings shifted to states out of California

Avant Advisory

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• Result?

– Fewer traditional Chapter 11 reorganizations

– Increased:• Straight Chapter 7 liquidations

• Chapter 11 liquidations, i.e., 363 sales

• Chapter 7 conversions

• State alternatives

• Less turnaround consulting

Avant Advisory

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• Costs and timing are overriding

– Fast “pre-packs,” e.g. 32 hours

– More 363 sales

– More out of court sales/liquidations

• Consensual “friendly” foreclosures

• ABCs

• Receiverships

Avant Advisory

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Types of Insolvency Consulting

• “Stressed” e.g., Covenant violation– Best chance for course correction

– Business assessment/financial analysis

– Identification /correction of underlying problem

– Likely out of court “workout”

– Easiest on the restructuring/turnaround continuum

Avant Advisory

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• “Distressed,” i.e., Zone of Insolvency– Legal determination based on financial parameters

– Balance sheet and cash flow criteria

– Expanded D&O duty of care

– Tension and competing goals between creditors and corporation/shareholders

– Insufficient assets and/or cash flows may results in suits against “deep pockets”

Avant Advisory

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• Operational Stress– Loss of revenues (industry or macroeconomic)

– Increased expenses

– Fixed expenses (high operating leverage)

– One or all reflected in operating losses

– Result in negative cash flows

– Turnaround/operational restructuring candidate

Avant Advisory

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• Financial Stress– Poor financial structure

– Excess debt

– May be fundamentally strong/operationally solid

– “Good-Company-Bad Balance Sheet”

– Inability to refinance, extend, or restructure

– Maybe timing or short-term liquidity

– Financial restructuring candidate

– Balance sheet make-over

Avant Advisory

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• Both Operational and Financial Distress– “True” corporate turnaround situation

– Extensive, pervasive revamping of operations andfinancial structure

– Potentially performed out of court subject to:

• Industry

• Timing

• Complexity of capital structure

• Number and cooperation of constituents

Avant Advisory

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• Both Operational and Financial Distress– If factor(s) are overriding, then,

– Likely Chapter 11 reorganization

– Retailers and restaurant chains

• Reduced sales (consumer retrenchment)

• High operating expenses, e.g., leases and franchise agreements

• Low collateral values

• High debt levels

• Extensive legal obligations, i.e., executory contracts

– Alternative - Chapter 7 liquidation

Avant Advisory

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Turnarounds – Who?

• Restore lender confidence and credibility

– Experience and expertise

– Former CEOs, COOs, and CFOs

– Professional certifications (e.g., general practitioner versus specialization surgeon)

• Financial advisors (CIRA, CPA, CFE, etc.)

• Certified Turnaround Professional (CTP)

Avant Advisory 15

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• Out of court workout/financial restructuring

• Turnaround (strategic, operational, financial)

– All encompassing and pervasive

– May be out of court or in-court (bankruptcy)

• Reorganization - Chapter 11 bankruptcy rehabilitation via in-court legal process)

Avant Advisory

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Requirements of a Turnaround

• Financial expertise, e.g., financial statement

restatements (fraud)

– 13-week rolling cash flow forecast (Detailed cash

analysis

– Liquidity critical - preserving, maximizing

– Working capital - receivables, inventory, payables

– Balance sheet -Scour for any sources, e.g., tax refunds,

noncore asset sales, sale-leaseback

– P&L analysis – Revenues, logistics, outsourcing, lean

manufacturing, fixed costs reduction (e.g., facilities)

Avant Advisory 17

17


• Management replacement

• Viability analysis

• Liquidation analysis/valuation versus

• “Going-concern” valuation

• Identification of and return to core operations

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• Customer profitability analysis (large/small)

• Inventory analysis (turns, margins, non-core products by item)

• Vendor analysis-critical versus non-critical

• Four-wall analysis

• Dashboard metrics – KPIs and CSFs

• Cash flows - Incessant, detailed scrutiny

Avant Advisory

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Required Skills and Experience

• Financial expertise (e.g., CFO, Controller,

CPA, CVA)

• Distressed operational experience

• Turnaround expertise (CTP, CIRA)

• Industry experience (retail and restaurant,

healthcare, manufacturing, high technology/E-

commerce, energy, real estate, hospitality, etc.)

Avant Advisory 20

Consulting Specialties

• Functional experience

– Strategy

– Marketing/revenue enhancement

– Lean manufacturing/Supply chain/logistics

– International/import/export

– Product development

– Organizational/management

– Human resources/incentives

Avant Advisory

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Turnaround Case

Issues and Moving Parts

• Alternative Strategies impacted by:

– Industry

• Macroeconomic/ recession, i.e., cyclical trough

• Industry concerns may dominate

• Highly competitive

• Consumer retrenchment

• Financing dependent

Avant Advisory

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Turnaround Case

Issues and Moving Parts• Products and Markets

– Quality and differentiation critical

– R&D and intellectual property

– Co-dependency with dealership network

– Expanded into additional product lines

– Increased capital expenditures (e.g., molds, facilities, fixed costs)

– “Stuffed” sales channels

– Cannibalized other higher margin sales

Avant Advisory

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Turnaround Case


• Legal issues

– Product liability

– Environmental liability

– Employee litigation

– Successor liability

• Continuing management

• Continuing products

• Continuing name/brand

Avant Advisory 24

Turnaround Case


• Management and Corporate Governance

– Misdirected board involvement/arrogance

– Sales dominated versus oriented (unbalanced)

– $85MM purchase/investment now $12MM

– Management assessment

• Competence and industry experience

• Related party affiliations

• Loan guarantees

Avant Advisory 25

Turnaround Case


• Operations – Pluses and Minuses

– Lean manufacturing and efficient supply chain

– Strong supplier relationships

– Strong dealer relationships

– Industry leader

– Poor information technology utilization

– High facility fixed costs

Avant Advisory 26

Turnaround Case


• Significant asset write-downs and operating

losses

– Loss on discontinued operations

– Goodwill, intellectual property, and asset write-

downs - $65MM

– Lender repurchase requirements - $5 - $10MM

– Industry and company sales declines exceeding 70%

Avant Advisory 27

Turnaround Case


• Capital Structure, Financing, Liquidity

– Negative equity, significant debt

– Lenders withdrawing from market

– Primary floor lender curtailed lending

– Primary bank group swept $3MM cash

– Negative cascading effect

– “Melting ice cube”

Avant Advisory 28

Turnaround Case


• Turnaround Strategy

– Variable expense reductions

– Marketing and promotion/dealer refocus

– Retrenchment to core products and business

– Reemphasis on product development/innovation

– Working capital reductions

Avant Advisory 29

Turnaround Case


• Sales Process and Alternatives Evaluation

– “Naked” out-of-court asset sale

– “Loan to own” and/or “Own to Own”

– ABC (Hand over the keys”)

– Prepackaged bankruptcy

– 363 sale (clear title)

– “Friendly” UCC Article 9 Foreclosure

Avant Advisory 30

Fees –When and How

• Retainers or guarantees

– Risk of bankruptcy

– Unsecured creditor

• Carve-outs

• Fee applications

– Trustee reviewed

– Parties-in-interest objections

– Court approval

Avant Advisory 31

Takeaways – Turnaround Consulting

• Takeaways

– Challenging, demanding, and exciting

– Risks and opportunities in turnaround consulting

– Riches in the niches

– Be qualified, prepared, experienced, credentialed

– Align with other experts and specialist consultants

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Takeaways – Turnaround Consulting(cont’d)

• Lessons learned/ideas for your own practice

– Specialization, i.e., core competencies and

differentiation in services have value

– If diversify service offerings, do so cautiously

– Do not stray too far afield of your competency

– Track margin trends by service offering

– Focus on higher margin not commodity services

Avant Advisory

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Takeaways – Turnaround Consulting(cont’d)

• Lessons learned/ideas for your own practice

– Track and project your cash flows

– Monitor cost structure, especially, fixed costs

• Debt

• Office facilities

• Expanding too quickly

• Staffing

– Incessantly focus on core competencies

Avant Advisory

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QUESTIONS?

Avant Advisory

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Avant Advisory Group

Presentation by:

Jim Davidson, CTP, CIRA, CFE, CPA, CM&AA

Managing Director

714-928-7888

Los Angeles Newport Beach San Francisco Santa Barbara

• Operational Turnarounds, Financial Restructuring, Bankruptcy

• Mergers, Acquisitions, Capital Transactions

• Forensics, Fraud Investigations, and Dispute Consulting

• CFO and C-Suite Interim Management Services

Avant Advisory

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