Wayne Wilson on Companies in Transition

If only you believe…

Today’s posting by ACG-Boston’s Gail Long on TheDealMaker.org (We’re Off to See the Wizard) reminds us how important belief is to confidence and confidence is to success. The current crisis in the credit markets is largely a crisis of confidence. Market players have plenty of liquidity; they just do not know whom to trust and are therefore hesitant to take any actions which might be at all risky until two things happen:

• Risk exposures become more transparent – which actions and counterparties truly represent high risks and which do not, and

• Investment pricing includes appropriate premiums for the real underlying risks.

What are the implications for owner/CEOs of companies in transition?

• We are in the midst of an historic credit market reset - Credit availability and credit pricing will be unfavorable to borrowers for a long time to come.

• Bankers’ three Cs of lending (credit, character, and collateral) will re-assert their dominance of middle-market lending.

• Your personal and professional credibility with lenders has never been more important – promise only what you can deliver; always deliver what you promise; and always tell your lenders the whole truth – the good, the bad, and the ugly.

What to do when your banker slams the door

When your bank tells you to go somewhere else, they may give you time to find another bank. Or they may not – they may simply slam the door by calling your loan. Now what?

Don’t wait for the door to slam – start getting ready now. Bank loan officers are often not very good negotiators – they are sales people. When the word comes from bank senior management to pull in their horns, your loan officer may become a chameleon or they may turn your loan over to the work out group. Neither outcome is in you interest.

Get some help – negotiating with bankers under difficult circumstances requires specialized help. You need assistance from someone who knows what bankers do better than they do – hire a work-out specialist before you become a work out.

Here are some success stories:

• Heavy equipment dealer – the business was well run with a strong finance team. When the bank said “go somewhere else,” the CFO quickly approached another bank that liked the business and took over the loan.

• Retail distributor – the company had its first money losing quarter and almost panicked. A work out consultant helped management prepare a revised business plan with financial projections which bought management time to address the problem.

• Nursing home operator – the owner had over-leveraged the business with outside purchases of real estate. When the company’s loan wound up in the work out unit of a failed bank, a work-out consultant was able to negotiate a restructuring of the loan which enabled the owner to keep the business while shedding the outside real estate.

What to do when your banker says it’s time for you to leave

Banks are often fickle. During the last big recession / credit crunch in the early 1990’s, several large regional banks politely, or not so politely, told many long-time middle market companies to “go somewhere else.” Some of these companies were struggling but others simply happened to be in businesses which the banks no longer wished to lend to. Go figure.

Finding a new bank was very difficult for many of these companies. For some it was impossible. Bankers are generally risk averse – no banker wants to take on another bank’s problems. What to do?

• Trim the sails now – start with the operational actions suggested in yesterday’s post.

• Request additional credit from suppliers – they still need your business.

• Look for bankers who favor your industry – banks that specialize in your industry will be more likely to stay the course in turbulent times.

• Don’t wait for the call – continuously develop relationships with other prospective bankers.

• Consult with a work-out specialist before you need one – they are experts at negotiating with banks.

Above all, maintain a tight rein over your own operations to reduce your dependence on bank borrowings, as well as to strengthen your position should your banker call with unpleasant news.

Surviving the coming credit crunch

A full-fledged credit crunch appears to be on the way in 2008. Housing and mortgage securities related losses are causing a broad tightening of credit wariness among the large Wall Street and commercial banks. It’s just a matter of time before the crunch is felt on Main Street.

Now is the time for all owner/CEOs to get their houses in order:

• Tighten up receivables collections – if the money is in your customers’ pockets, it’s not in yours.

• Trim inventories – if it’s not moving, send it back or dump it.

• Squeeze out non-essential spending – conserve cash wherever possible.

• Review the terms of your borrowing agreements and your company’s performance against those terms – those companies not in compliance with their bank loans will likely be the first to feel the squeeze.

• Hug your bankers, frequently – by that, I mean communicate pro-actively. Keep your bankers abreast of all developments in your business including the good, the bad, and the ugly. Let them hear it from you first.

• Make the tough decisions about operations and personnel now - don’t wait; it will only be more difficult later.

Building companies is a good thing

Amidst the on-going grinding of this year’s credit crunch, an article in today’s Wall Street Journal about Jamie Dimon (CEO of J.P. Morgan Chase) quoted him on his management philosophy:

“Our job is to build a company, build it relentlessly, build it over time, [and] the stock will do fine and take care of itself.”

Dimon’s statement represents the essence of value creation for all owner/CEOs:

• Value creation results from building something that will last.

• Value creation comes from fierce dedication and lots of hard work.

• Value creation requires time and patience; it doesn’t happen overnight.

• Value creation will eventually be rewarded by the marketplace.

But that value can only be created if what you do creates value for your customers. The real question for owner/CEOs is whether you are focused on businesses which truly add value for your customers. If you are, keep rowing. If not, maybe you should look for another row boat.

Are your revenue targets realistic?

Many companies and their CEOs today are experiencing relentless pressure to grow their revenues. Public companies must meet quarter to quarter earnings guidance, and the owner/CEOs of private companies often worry about whether their businesses are growing fast enough to attract the selling-out valuations they desire.

Personally, I am a big believer in big goals, audacious goals, and even big hairy audacious goals. Big goals cause us to think bigger, to stretch ourselves, to constantly work to improve our performance. Regardless of whether we actually achieve a specific goal, people tend to achieve more than they would have had they not set big goals.

But those goals need to be realistic; they need to be achievable. Take revenue goals for example. A business’ revenue can only grow as fast as the market will allow it to grow. Pushing and shoving may extract a few more dollars or pull some sales forward from a later period, but that extra revenue will not be sustainable.

The challenge is to understand the market and develop the best possible marketing and product plans to maximize revenue opportunities without putting the organization under such stress that it becomes dysfunctional.

Does your business plan defy the laws of physics?

Over the years, I have seen many intelligent-sounding business plans which:

1. Were based on fantasy or otherwise not grounded in reality;
2. Were out of date before the ink was dry; or
3. Went into someone’s desk drawer never again to see the light of day.

In one way or another, most of these business plans defied the laws of physics. Here are some examples.

• The Law of Inertia – bodies at rest tend to stay at rest. This category includes plans based on wishful thinking: “We want revenues to grow at 20% per year. If we write it down, maybe it will happen.” As in physics, a business requires net new energy to be applied to speed it up or move it in a different direction.

• The Law of Gravity – what goes up must come down. Or my favorite variation, “trees don’t grow to the sky.” Many companies especially favor a revenue forecast that looks like a hockey stick with the handle pointed up and to the right. “If we can just get this [whatever] off the ground, it will take off like a rocket.”

• The Law of Entropy – like a toy spinning top, a business left to its own devices will eventually spin down. It requires periodic injections of net new energy to keep it going.

Where does this energy come from?

Management initiative, innovation, and investment. Starting and growing a business is hard work. It requires focused energy and lots of it.