Q&A - Mid-Market Turnarounds

About

I've been fixing mid-market businesses for the last 18 years. First two turnarounds were my own business and since then I have fixed or advised on another maybe 50 across a dozen industries. Generally between $30M - $500M in revenues.

My specialty is taking on the hairiest business situations possible (CEO suicides, EPA raids, FBI warrants, IRS foreclosures, death threats, executive fist fights, stolen wages, diagnosed insanity, addictions) along with all the normal everyday turnaround issues like; no cash, unprofitable, broken balance sheet, fleeing customers, frozen supply chain, hostile banks, hostile unions, etc. The mechanics of a turnaround are largely the same in every situation, once you've established control and provided some stability.

Industrial factories have become my niche though I've worked in retail, services, CPG, distribution, medical, restaurants, etc. We're active buyers of these troubled businesses but will also take on select consulting projects.

I've recently published a book on the topic which is a whole lot more insightful than what I usually offer here.

CV19 makes turnarounds an important topic so I want to offer help where needed. Fire away

WSO Podcast

Comments (31)

 
May 4, 2020 - 2:34pm

Jeff,

Any advice for an incoming new grad starting at a larger Turnaround/ Corp. Finance group in the fall? Though you clearly took a very individualistic & entrepreneurial approach to the turnaround space after MBA, do you have any advice for someone in a more junior role?

Thanks for your time!

 
May 4, 2020 - 4:23pm

So you're already (or about to be) employed in the space? Congrats.

Turnarounds require a tremendous amount of knowledge between; management, finance and legal (both commercial and insolvency). I bought the TMA Body of Knowledge when I was trying to establish my baseline of knowledge. https://turnaround.org/certification/body-knowledge-courses-0. If you know that, you have a solid baseline. The Management section is largely a rewriting of Don Bibeault's foundational book Corporate Turnaround.

If starting out in turnarounds, realize that healthy and insolvent are two different worlds and what you can do in insolvency will mortify people in healthy environments.

My experience is that turnarounds require a tremendous amount of creativity, so keep that in mind.

Best of luck,
Jeff

 
May 4, 2020 - 2:52pm

I always thought it was crazy whenever I found weird things on the company's balance sheet like yachts, cars or summer houses, but this is a whole other level.

I just bought the book on Audible and will definitely give it a listen in the coming days!

As for the Q&A, do you have a turnaround that you are particularly proud of? What was the biggest challenge that you had to overcome in order to get the company back on track?

I don't know... Yeah. Almost definitely yes.

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May 5, 2020 - 1:49am

Just read through the memos - amazing story!

I don't know... Yeah. Almost definitely yes.

 
May 4, 2020 - 3:09pm

Thanks for doing this!

I have 2 questions.

  1. Where do you invest in the capital structure? Are you mostly buying equity from existing holders, buying bank loans and equitizing your debt, coming in with a preferred piece, or something else?

  2. How do you go about valuing these companies? Are you taking a DCF, looking at what it's going to cost to turn things around, seeing what the cash generation/cost is going to be from normalizing working capital, and basing projections off of a successful turnaround?

 
May 4, 2020 - 4:47pm

Warning, I'm going to be a bit cryptic on the investing side because I don't want to give away trade secrets. Usually taking out the senior secured and will rarely buy the stock and then do the cleanup.

Not the valuation rigor you would hope for;
1. A bit intuitive like an Architect who 'likes the bones of this building'. What can I do with these assets, this team and these customers? They are usually dogs on the surface so it's seeing the soft qualities underneath.
2. Backward looking; when did the business last make money, how strong was it then and why did it make money, how far away from that are they now, how did they get from there to here, can we navigate back to profits.
3. Cashflow forecasting is most important for us. That's our pressure-test for PL and BS forecasting.
4. Customers. Are they blue chip and willing to pull us back to health?
5. Uniqueness of products, competitor moats, etc.

Hope that helps.

 
May 5, 2020 - 3:52pm

JS Turnaround:

Warning, I'm going to be a bit cryptic on the investing side because I don't want to give away trade secrets. Usually taking out the senior secured and will rarely buy the stock and then do the cleanup.

Not to be a jackass (and totally being a jackass with this comment), but this answer rubs me the wrong way.

If my trade secrets are so digestible + actionable they can be doled out in a bit-sized format on an internet forum with me losing sleep over it, I would have to question the defensibility of my position & business.

Its a fairly straightforward question, you're not laying out the restructuring playbook. I struggle to think what is sensitive in regards to his question.

Of course, you're on here promoting your business, which is great. And if there is heightened sensitivity surrounding certain questions, that's fine as well b/c your name is attached, but I wouldn't characterize them as trade secrets.

I'm probably also just angry I'm getting a lot of non-answers from the management teams I'm working with, and taking it out on this forum.

Array
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May 4, 2020 - 6:04pm

1) Is it as interesting as it sounds? Or is it like forensics accounting which sounds more exciting than it is...

2) Do you ever see mid-career transitions into the restructuring world, or do you need to grow up in the space?

when you're accustomed to privilege, equality feels like oppression
 
May 4, 2020 - 9:58pm

I suspect your temperament will determine how interesting it is, or what's interesting. I enjoy mayhem outside the home and look for the hairier challenges. My hardcore accounting friends really enjoy the complexity of turnarounds but don't want to deal with the hostility from stakeholders and such. The commonality is that all the roles run at a fast and demanding pace, with great uncertainty so that needs to fit your temperament.

I transitioned into this mid-career, almost against my will, and I would say that's somewhat common given the amount and breadth of experience needed. In a crisis people will naturally gravitate to an elder for direction and leadership so having a little gray hair never hurts.

 
  • Analyst 1 in IB-M&A
May 4, 2020 - 10:05pm

What does your compensation look like in a typical year?

 
May 5, 2020 - 12:32am

Given a company with a large, say greater than 50%, coronavirus-induced drop in revenue, how would you think about:

(1) cash flow, (a) generation (how would you go about thinking about whether & if so, how much, revenue will come back, and timing), and (b) preservation right now? A rule of thumb I've picked up from mostly in-court restructurings is it's a lot easier to change the bottom line by cutting costs than increasing revenues... I'm struggling to see how we get to the end of the year without a wave of chapter 11 filings and possibly a higher incidence of chapter 7 liquidations/ABCs, etc. if there's anything longer than a quick "V"-shaped recovery... liquidity bridges from incremental term debt or revolver draws will only last for so long before things get ugly, and I can't see many people willing to come in and write a big new money check without some sense of when relative normalcy returns.

(2) supply chain relationships? In an industry or sector that's being hit hard, I can't imagine the playbook of "oh, we'll stretch our payables and speed up collections" working if everyone through a supply chain is hurting. How would you go about dealing with suppliers, etc. in a situation where there's probably (it would seem to me) going to need to be mutual concessions?

 
Most Helpful
May 5, 2020 - 8:00am

Great points. Traditional turnaround techniques work best when surrounded by healthy companies where you can leverage off their balance sheets to support yours. When everyone is suffering, it's much harder. in 2009 I fixed a Detroit manufacturer whose revenues had declined 90% in 9 months and very few in the supply chain were willing to be helpful.

Another way to look at costs vs revenues is that you can control costs, you can only influence revenues. Well, you can jam the prices up on customers and upset everyone, if you have that sort of leverage but it's a high risk move. I think you're right about the tough times still coming at us.

Some of survival is a choice, if there will be one survivor who will it be? Not necessarily the company with the biggest balance sheet, often it's rat-like-cunning that saves the day. Your customers may share a few extra crumbs, who will they share it with? Your suppliers cant help everyone but they can help you if they really see the value in doing that. As an outsider I get to walk in with a clean slate and credibility and ask for the absurd from our stakeholders. I refer to it as playing poker with the world's worst hand. A really good plan is your biggest weapon. If you can get everyone to support your plan, then (obviously) you have their support when others dont.

 
May 5, 2020 - 2:03am

Everyone should buy his book. It's easily the most applicable book I've read on turnarounds. I literally used the self selecting debt stack negotiating tool a day or two after reading about it and it worked. Also forced my team to buy it because it's very easy to understand, even for people that aren't in finance or executive roles.

Thanks again for writing the book!

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May 5, 2020 - 5:28pm

A brand stuck between Gap and Sacks. A brand between affordable and fashion. IMO they prioritized looks over functionality and neglected punching a hole into the ecommerce space until others did. The first to go and certainly not the last. Though it is important to mention Jcrew had issues going into CV19, but do most retailers not?

There can only be one Dirty Dan, the rest of you are Pin-head Larrys...

 
May 5, 2020 - 12:08pm

How would you describe your personality and how does it lend itself (or not lend itself) to enjoy working in turnaround situations? Is your personality in your personal life different than when you're at work?

I've always wondered what kind of people can thrive in the RX environment in a way that aligns with their own personalities. I've been in a couple turnaround situations before (the normal everyday turnarounds issues like you mentioned), and I personally hated it. The amount of daily stress, at times contentious relationships even with your own portcos, constant micromanaging the management and operations of the business (felt almost like punishing your own "teammates"), etc. I personally did not enjoy that at all, and certainly felt bad for the management team that was actually responsible for the day to day. This isn't meant to be a moral statement on someone or anything. Just genuinely curious since it's not something I can personally relate to.

 
May 5, 2020 - 6:40pm

Ha, I think your comments about daily stress and contentiousness are accurate. I have an unshakeable missionary zeal about saving businesses. In my heart I believe saving blue collar towns and jobs is the most noble work a person can do and with that zeal, all the obstacles seem so trivial. I also love to win and I think people love to win and if I can get down-trodden folks who have been neglected for years, If I can get them really excited about kicking a whole bunch of ass for a few months (and saving their jobs, satisfying lenders and customers and suppliers) then they will be happier and better off for it and so will I.

As a child I was an absolute menace, hyperactive, mischievous, always under-stimulated and in trouble. Turnaround work really satisfies me because of the pace and uncertainty.

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