Quick Action Averts Crash of Aerospace Manufacturer: CEO's Ego Nearly Leads to Company's Demise
From the June 2008 issue of the TMA's Journal of Corporate Renewal.
Written by Ken Naglewski, Managing Director, Focus Management Group
Arriving at a potential client’s office, the turnaround professionals sensed that the majority owner of the company had no intention of hiring a consulting firm and remained in denial about his need for help at all.
The owner, a well-known “success story”, was quick to brag that his customer list was a Who’s Who in the aerospace industry, that he was a recent recipient of a prestigious Entrepreneur of the Year Award, and that he had been selected for a private meeting with President George W. Bush prior to a town hall meeting. Yet, he later conceded that he felt he could not afford to pay his telephone bill, let alone hire a consultant who did not know about this business.
A few probing questions revealed that the company was, in fact, in a full-blown financial crisis and most likely would not survive more than a few days in the absence of decisive action acceptable to its working capital lender. The company, a manufacturer of precision components and assemblies for the commercial and defense aerospace industries, faced myriad financial and operational issues portending immediate business failure.
The company’s working capital lender had advanced several million over collateral values and was screaming for an immediate sale of the business so it could be paid. Equipment lenders had initiated foreclosure proceedings. Net losses had climbed to $500,000 a month. Vendors were stretched - current liabilities were twice current assets - and almost all material suppliers had cut off supply pending payment on past-due debt. The company’s law firm was pushing for a bankruptcy filing as a means of holding off secured lenders.
To make matters worse, the company was the sole supplier on key components of military hardware supporting ongoing military actions in Iraq and Afghanistan.
Overcoming Ego
Turnaround advisors who have been behind the wheel during a a full-blown crisis understand fully that managing the crisis is like driving a racecar at 200 miles per hour. One wrong decision or miscalculation will result in a failed effort. This was the situation with the potential client, and the consultant believed that filing bankruptcy would be a miscalculation - the consultant didn’t believe the company would survive the bankruptcy process.
Veteran turnaround consultants understand that knowing what must be done is often the easiest part of an engagement. Far more challenging is getting all the constituencies, including the client and its other advisors, lenders, employees, creditors and customers, on the same page and following the same agenda of saving the value of the business.
Ego is a powerful character trait. Most owners who have established businesses have that have enjoyed past success have more than their of ego. The need to hire a turnaround advisor/consultant to guide the company through a crisis is not an easy reality for a successful entrepreneur, particularly one who has won accolades and a private meeting with the president of the United States.
In the aerospace manufacturer’s CEO’s mind, the blame for the company’s problems lay elsewhere - with unreasonable lenders and customers, irrational competitors and employees who didn’t follow his strategic vision, among others. The view of the secured lenders was that the owner and CEO had lost control of the situation and was “hiding underneath his bed.” In their opinion, the business needed to be sold, and they would not advance additional funds outside of a chapter filing that contemplated a Section 363 sales as its end game.
The owner eventually agreed to retain a turnaround consultant, but only in an advisory capacity. Final decisions were to be left to him. In light of the depth of the problems and the need for decisive actions, however, the consulting firm pushed back. It had decided that it would accept the engagement only if it was given full control of the financial and operational aspects of the business in an interim management role. The owner was forced to capitulate to that demand after the lender threatened to cut funding otherwise.
Faced with a looming cessation of funding from the working capital lender, the consultant, who was named chief restructuring officer (CRO) and interim CFO, went to work and put together a turnaround plan. The most noteworthy strategic action taken by the advisor dramatically changed the cash position of the company by altering the business model to require customers with major contracts to pay for materials upfront.
In addition, the plan called for the advisor to:
- Take control of the company’s checkbook so that only the advisor could sign checks.
- Handle all phone calls with vendors, customers, and lenders.
- Suspend all equipment lease payments and use that cash to buy raw materials.
- Raise cash by arranging a sale and leaseback of the manufacturing facility.
- Negotiate settlement agreements with unsecured trade creditors.
- Obtain extended payments with certain equipment lenders, resulting in lower monthly payments.
With full control of the financial and operational aspects of the business, the consultant executed the plan quickly, resulting in a fast turnaround of the fortunes of the business. The senior working capital lender was paid in full in four months. Cash flow; earnings before interest, taxes, depreciation, and amortization (EBITDA); and net income turned positive in 60 days.
Authority to Act
No less a management authority than Peter Drucker once observed, “Most turnarounds don’t.” Many turnaround efforts fail because the experienced turnaround advisor introduced into a crisis situation is not given the authority or support to execute a turnaround plan.
Knowing what to do is often the easy part. Managing the emotions of the various constituencies and getting everyone on the same page, particularly the owner of a heretofore successful business, is the challenge part of the turnaround advisor’s role. In instances when everything is on the line, a turnaround firm should heed singer Kenny Rogers’ word from “The Gambler,” and, “Know when to walk away and know when to run.”
‘The Sharks Were Circling’
As part of the consulting firm’s normal “after action” quality review process, a managing director not otherwise associated with the engagement followed up with the owner to gauge his perspective on the entire process. Here is a sampling of the owner’s comments:
Q: How did you first feel when the lender told you it wanted you to hire turnaround consultant?
A: I thought the lender was way off base. I could not pay my telephone bill, let alone hire a consultant who knew nothing about my business. I didn’t see the value. Until my lenders brought it up, I had never heard of turnaround consultants.
Q: What were your emotions during the period leading up to the lender telling you needed a consultant?
A: It seemed like the sharks were circling, and I wanted everything and everybody to just go away. Nothing was going right. I had some large contracts, and I thought everything would take care of itself.
Q: How did you feel about the meeting with the turnaround firm?
A: I just wanted them to go away. I wanted everybody to go away and leave me alone.
Q: Where you ready to engage the consultant on the first meeting?
A: No. I thought I would go through the motions of having a meeting with them and delay. As the day went on, it became clear that I was out of options with my lender and needed to engage the consulting firm if I wanted the support of the bank. The lender told me that it would stop funding if I did not get outside help.
Q: Did the consultant do anything that surprised you?
A: The consultant told me that he wanted complete control of the checkbook - or he was walking. I did not like that at all, but he was already handling all the phone calls from my suppliers and customers, and for me to get back to that was even worse.
Q: How did your views and feeling change during the engagement?
A: There was a metamorphous in my feelings. I see now that I had no credibility with anybody, and the consulting firm did. Once the consultant got started and took over handling all the phone calls, I was relieved. I no longer had to deal with extremely emotional, trying situations. The consultant took some bold actions I did not think about or at least had never done.
Q: What was your relationship with the consultant on site?
A: I was dubious at first. I did not see how someone who did not know my business could help. He took charge of the financial issues, and I just let him do his thing. Everything seemed to start getting better immediately.
Q: How did you feel at the end?
A: Relieved. In four months everything was back on track. The changes they implemented had a lasting impact on how I manage the business.
Q: What was the best advice Focus gave you?
A: They said not to file bankruptcy. My lawyers were arguing for a bankruptcy filing to fight off the lenders. When the consultants explained the process and the pitfalls, they were very persuasive. I didn’t have either the energy or the money to fight through a bankruptcy.
Q: Looking back, what would you have done differently?
A: I know what you want me to say – get help sooner. And you are right. With the benefit of hindsight, it is now clear that help earlier probably would have prevented the situation I found myself in.
Q: Would you hire a turnaround consultant again?
A: Not if I can help it – this was the worse time of my life, and I never want to go through it again.
Ken Naglewski is a Managing Director of Focus Management Group, a crisis management and turnaround consulting firm. He is a CTP, a CPA and a CIRA. He can be reached at (615) 491-7331 or k.naglewski@focusmg.com.