SNAPSHOTS: JCR July/August 2019
FILKOFF: I started my career at KPMG. I was there for 12 years and spent the first nine years auditing mostly privately held businesses in the manufacturing, retail, and distribution industries. That gave me good experience across multiple industries. I left KPMG to become CFO for one of my clients. I did two stints as CFO, in two different manufacturing businesses. That gave me the inside scoop on managing accounting and finance. We did a lot of financing at both companies, so I learned a lot there.
For different reasons, both companies needed to hire financial consultants. I engaged Altman and Company, the firm I’m with now. Back then, Jonathan Altman was still running it. Working with him, I learned a lot about the turnaround process. When it was time to leave my second post, I realized I liked consulting better than operating. While I was looking for my next opportunity, Jonathan made me an offer, and I never looked back. I’m in my 19th year now, so it’s worked out well. It was a perfect job for me, and I’ve really liked it.
FILKOFF: I like the variety and working with a company’s top executives on strategy and negotiation, and working with different people to get them to agree on a plan and work together. I get a lot of enjoyment out of that.
FILKOFF: One was a smaller engagement. One Friday I got a call from a friend of a former client. He told me he was planning to shut down his manufacturing business in Pennsylvania on the following Monday, but his friend encouraged him to give me a call and run the situation by me.
He gave me the rundown and then asked me what I thought. Should he still shut down the business on Monday? I said, “Why don’t you plan to shut it down on Tuesday, and I’ll come down Monday and we’ll see what we can do.” I went down, and he gave me a tour and told me all about the business. He told me about a new product line they had that was really growing great. But he was still losing money and was concerned he couldn’t keep going forward.
It was a garment business. They used a process called sublimation to put designs on fabric, and they were running a new T-shirt line through the same machine as their other line. They made $5 of margin on the T-shirts, as opposed to $35 of margin for the other product, and the T-shirts ran at about one-tenth the speed.
I did a quick analysis since I was just there for a day. He was losing a fortune on the new product, and it was impacting his ability to deliver the historic product line. It was just bad on top of bad. We came up with a quick plan, and he decided to give it a try. That was about five years ago, and the business was just sold.
In a nutshell, that’s what we like to do—get in there, figure things out, and see companies survive. We hate to see a shutdown of a company in our business.
FILKOFF: It’s an interesting study of human emotion, I guess. We’ve rarely been hired by the entrepreneur. It’s almost always a referral from a lender, an equity investor, or a trusted advisor like an attorney. You always run into a little resistance up front. People say, “Look, I’ve been killing myself. I put my last dollar into this. I’ve been working 70 hours a week trying to figure out what to do. I’ve cut costs. How are you going to help me?” They don’t understand how someone who’s not so familiar with the business can come in and help them.
That’s consulting in any field. You learn a lot working with hundreds of companies over 20 years, and you develop the ability to help people see opportunities. It’s not like we come up with some real secret sauce. A lot of times we just help people decide to take action on what they’ve already come up with but were noncommittal toward.
Sometimes you confirm what they already know or point out what was sitting right in front of them, like the T-shirt example you used. They hadn’t thought of that because they were probably focused on running the product through and getting it right and everything related to that, and it’s easy to overlook the basics.
For whatever reason, people get focused on percentages. The T-shirt product was a 40 percent margin business for him, which was not unlike the other product. It’s just that 40 percent for the T-shirts was $5. As one of my friends always says, “You can’t eat a percentage, but you can spend a dollar.” A lot of people are focused on margin percentages, and it kills a lot of companies. You need a healthy margin percentage as one guide, but you really need to look at the dollars you’re producing as well.
We see a lot of companies where management doesn’t have the financial information they need to run the business. They get a P&L that’s very summarized, and you can’t make a decision just from that. You need to break it down by product, by product line, by production method, by customer, by region. You never know going in what you have to do; you just know you have to segment the information in such a way that you can figure out where you’re making and losing money. That’s what’s missing for many of our clients. That’s why they become our clients.
FILKOFF: The company of the guy who referred his friend to me had done a leveraged buyout. We came in about two years after they bought it. They’d lost some revenue, and the whole thing was having a problem making ends meet with all the debt they had taken on.
They had two businesses; one was a distribution business, and one was a manufacturing business. The manufacturer could produce a subset of what the distributor sold, so there were cases where the distributor had a customer that needed something and they could produce it also. They always felt that was a win-win.
But we found there were two things that had to be done to address the company’s problems. First of all, the manufacturer was running 24/7, and they only had enough work for 5½ or six days. They had a whole shift they didn’t need. It’s hard to transition a business from seven days to five, especially because they had too much business for five. We had to do an analysis to figure out the profitability of the different products and customers and determine which ones might have to go so we could squeeze the workweek back into five days.
The other thing that we strongly suggested was to operate the companies as two separate businesses, because long-term we felt no buyer would want to buy both together anyway. We improved the divisional nature of the two. We didn’t separate them as legal entities, but we made it so they had separate P&Ls for both divisions.
Then we told both divisions that the manufacturer needed to have the last right of refusal on any work. They didn’t have to take the work just because the distributor was selling it and they could make it. We were finding that the distributor would squeeze the margins on the product because they knew we could make it, so basically the manufacturer would take it at 0 margin and the distributor would get its full margin.
We’re firm believers in the idea that whenever you do two things, you need to make two profits. A lot of people say, “If I could just add something down the value chain to my business, I can be a lot more profitable.” But they’re typically thinking they’re going to shrink the margin on both, and it’s really not a good practice. If you’re running two businesses, you want to make two margins.
We did that, and a couple of years later they sold off the distribution business at a huge price. Then within a year or so, they sold the manufacturer and the building and exited the business. It was a really big win. They did very well with that. When we got in there, it was underwater—the debt was way more than the value, ostensibly, of the business.
FILKOFF: I can’t pinpoint exact milestones per se, but at each new level, you learn something new. When I was growing up, all my parents’ friends owned their own businesses. I always liked business. Then I went to KPMG and dealt with business owners and got a sense for it. It was a fantastic education on how to evaluate difficult situations and work as a professional with key decision makers. During my last three years at KPMG, I was in the corporate transactions group, which did corporate finance, corporate recovery, and litigation support. That gave me insight into things outside of auditing for the first time.
My roles as CFO were also good because I had to learn how to manage a business and cash flow. We had to deal with lenders and refinancing and private equity firms. Then, as I said, we ended up hiring Altman and Company at both my jobs. Working with Jonathan Altman at the time and also Gordon Lewis, who became one of my partners when I joined the firm, on the restructuring and bankruptcy work probably was the clincher for my experience in turnaround. It all adds up together.
Nine years ago, my partners and I bought the business from Jonathan, and we always continue to learn. You learn a lot from your clients. It’s continual. Even on some engagements, I learned a lot from other professionals that I brought into a job.
FILKOFF: The main thing for me is that it’s a great way to keep in touch with folks in the industry. Even if I get too busy to make a call or grab lunch or just keep in touch with my network, I know I’ll see a large group of people at a TMA meeting. I can keep in touch with a bunch of people all at once.
Also, in this business, professionals are not likely to refer you into a case unless they’ve worked with you and know you well. That’s one of the reasons I joined the board of our chapter. When you work with people on a board, it’s not the same as an engagement, but you can see who shows up and delivers on what they say they’re going to do. This helps build respect among your peers and relationships that are really important.
We often debate at the board level, “What are we trying to offer our members?” Some people are specifically looking for deal flow. They come to a meeting, and they could walk away with an opportunity on a deal. Others are focused on maintaining and building their network. I think TMA provides both types of value to members.
Even if you don’t get a direct referral at a TMA meeting, when you show up in a case and you’re looking across the table at an attorney that you know from TMA or another workout guy representing the other side, it just makes everything work a lot better. It increases your credibility in the industry.
FILKOFF: Our business is about bringing order to typically chaotic situations. I think the number one thing is you have to deliver on what you say will happen. To build respect in this business, you have to reduce the number of surprises people have to deal with. You have to manage expectations on what’s going to happen and follow through.
We always say in our engagement letter, “Direct, honest communication is critical to the success of any engagement.” You have to be able to talk to all of the stakeholders—the employees, the vendors, the lenders, equity, and whoever else is involved—and you have to build respect with them to get them to the point where they’re going to allow your company or your client to implement their plan.
When we get into these engagements, management has already tried everything that they could think of, and many times they’ve burned their own credibility when they tried things that didn’t work out. We spend a lot of our time rebuilding management’s and the company’s reputation and credibility. People are usually willing to give the outside consultants another chance, even with the same ideas sometimes. They’re hoping you can pull of what you say you can. They want to work with the company. They don’t want to fight this thing. They don’t want to go to court.
The other advice I would give is to be positive and help management see their options as opportunities because a lot of times, people are downtrodden. Things aren’t working out. The options might not seem great, but you have to sell it, and you share experiences. You have to try to give management and the owners hope that it’s going to work out OK.
FILKOFF: I’m a partner in a death care business. We own a couple of crematoriums, and we also manufacture, sell, and install concrete burial vaults, from New Jersey to New Hampshire. My partner runs the business full-time, but I get a lot of insights into what it takes to run a business and the challenges of owning and operating a business, which I think helps me relate to my clients.
FILKOFF: I got into that through one of my clients. My partner was the son-in-law of one of my clients. He was in private equity and was looking to buy this business, and his father-in-law, who was a private investor, said, “Part of my success was having a partner, and in my case, I had a financial partner. He was an accountant. You should consider having someone like that. Roy would be good.”
Mark called and asked me if I wanted to invest in the business with him, and I did. It’s been good. I think this is our 11th year with it.
FILKOFF: I have the greatest wife in the world, and we always enjoyed sailing. But I was never sure I wanted to own my own boat. Risa, my wife, started telling all my friends that I was getting a boat for my 50th birthday about a day after my 49th birthday. She told so many people that I couldn’t really back out, so we bought our boat that year, and
we love it.
It’s a 30-foot Nonsuch. The Nonsuch is a unique boat because it has one sail. The result is that this boat is especially easy to sail. We love sailing with friends and anchoring for lunch and taking a swim and then coming back to the house for dinner. It’s a great relaxer. There’s nothing like a warm sunset cruise to erase the day’s challenges from your mind.
FILKOFF: We have done a little of that, but we have our boat down in the Mystic area and in Fishers Island Sound, which is a great place to sail. We find that we like day sailing better. When you travel on the boat and have to sleep on it, it gets smaller every day you’re on it.
FILKOFF: We really like to spend time with our kids and family. Our kids both live in Brooklyn, and we try to have them up as much as they’ll come, which luckily is pretty often.
FILKOFF: I’ve been very happy with my career in the turnaround business and have met a lot of great people. I really think I enjoy TMA because I’m friends with so many people now. We show up and we’re networking for business, and we’re also having a drink or a meal with friends.
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