Turnaround Tips-blog #1

Welcome, blogsters. Now that I’ve posted blogs dealing with M&A Tips and Trust and Integrity, I am starting a new series containing Turnaround Tips based on my experience with troubled companies in the toy, retail, entertainment software, food packaging, trading card and industrial computer products businesses. I hope these tips will be useful and I look forward to sharing more with you in the weeks ahead. Now, on to the first in the series illustrating two companies that were NOT turnaround candidates:

• The first and most important step in evaluating options for a troubled company is to determine if a turnaround is feasible. A partial list of considerations will include: Competence of company management; the company cost structure and potential for sustainable profitability; the rank of the company in the industry in which it competes; the vitality of the company’s product line and new product pipeline; the ability of the company to service and/or refinance its existing debt and the support of its existing creditors and other stakeholders.

• As an example, I took up an assignment as interim CEO for a troubled Chicago area toy company in the early 1990s. The company generated $30 million in revenue and was profitable, but had taken on $30 million in bank debt to finance a series of ill-advised acquisitions and had acquired a new facility-at a “bargain” price-located on an EPA Superfund site. It quickly became clear that an orderly liquidation under Chapter XI protection was the only possible strategy. When the case was converted to a Chapter VII at the conclusion of the asset sales, the bank debt had been reduced to to $12 million and the effort was viewed as successful.

• My partner and I were engaged by a Chicago bank to advise the bank as to whether it should continue to finance a retail costume jewelry chain with 24 national locations. After visiting 16 of the stores, we concluded that, since the bank had not financed the company ahead of the prime Christmas selling season, the debtor was beyond rescue. Taking our advice, the bank agreed to a Chapter VII filing and we liquidated the inventory assets above expectations for the Trustee.

Now that I’ve shared a few examples of when a turnaround and going concern continuation was not feasible, my next blog will deal with examples of companies that were viable turnaround candidates and the steps taken to implement the turnaround. Remember, even if a turnaround is not viable it is still possible to generate a “win” for stakeholders. I look forward to sharing some turnaround success stories with you and welcoming you back to my blog. Have a good week.