So many times, turnaround professionals are engaged in situations involving companies that have little or no liquidity or that appear to lack access to capital. Frankly, businesses that lack liquidity are one of the main reasons the turnaround industry exists. As such, it is imperative that turnaround professionals are creative in finding the possible various sources of liquidity and capital to turn around companies in these types of situations.
In many instances, this requires that turnaround professionals find or develop “internal” and “external” sources of capital and liquidity. Tapping internal sources of liquidity typically involves turning nonperforming assets into cash, quickly improving top-line revenues, eliminating or fixing operating losses, reducing business expenses, and possibly improving collateral values or reducing reserves for various types of asset-based loans. External sources may include debt or equity-type investments from various sources. Finding or developing these liquidity or capital sources is usually the only solution that can thwart a possible bankruptcy or liquidation of a business in the short term.
Turnaround professionals need to be properly equipped to handle these types of situations. Appropriate industry knowledge and specific turnaround experience go a long way toward assisting a client through these types of challenging situations. However, it is also critical to quickly develop a partnership with the owner(s), the lender(s), and any other critical constituent(s). Strong existing professional relationships with various sources of capital, including a number of banks, commercial finance companies, niche lending companies, private equity companies, etc., are imperative to ensure access to capital. Equally important are relationships with other industry service providers that can assist with asset sales, real estate services, and asset or brand valuations.
One of the truly critical characteristics needed in these situations, and one not often thought of or talked about enough, is the introduction of some level of patience to this process. Turnaround professionals are often noted for the speed with which they address tough turnaround situations. But in many instances, it is the turnaround professional’s expertise in creating a level of calm and the time necessary to improve liquidity and find possible capital solutions that leads to success. The professionalism, experience, and credibility of the turnaround professional often produce in others the patience required to achieve positive results.
The effects of patience, partnership, and professional expertise are highlighted by two recent case studies.
Situation: An 85-year-old privately held $90 million regional retail company with second-generation owners and managers had minimal levels of profitability for a few years and ran a loss for the most recent year. The company did not have much liquidity or availability on its line of credit. Following a covenant default, the company was placed in forbearance by its lender. Though the company had a long-term, 30-plus-year relationship with its lender, the lender decided to exit the relationship and required the company to find a new capital source within 60 days. The company had recently lost its CFO and had no financial forecasting capabilities, very poor business planning processes, and no financial plans. The legacy lender thought the company was unlikely to be refinanced.
Actions: The goal was to create the liquidity and time necessary to find a permanent capital solution. Key actions included implementing cash-flow forecasting and business planning processes, developing retail inventory plans, selling old inventory to create cash, reducing expenses to improve liquidity, and undertaking a plan to convince the existing lender that there was an achievable plan in place to refinance the company.
Results: The short-term actions helped create more liquidity, and the plans that were developed projected that liquidity would improve from near zero to more than $6 million in availability over 13 weeks. The legacy lender agreed to give the company an additional 90 days to complete a refinancing. The turnaround professionals’ relationships led to more than 30 lenders looking at the opportunity and eight term sheets being submitted, providing the company with a go-forward lender. Typical lender due diligence was completed, and the refinancing was completed in the timeframe required. The company is in the process of hiring a new CFO, establishing a long-term business planning approach, and developing a succession planning process.
Situation: A privately held $500 million wholesale fashion business suffered the depletion of its working capital line of credit due to an acquisition and an investment in a new distribution center within a two-year period. Additionally, the company had gone through a lengthy due diligence process with a potential acquirer but ultimately did not end up selling the business. With the combination of all of these non-normal course business issues, the company had a difficult time focusing on the day-to-day operations of its business and meeting its customers’ needs during its peak shipping season in late 2017. This all ultimately led to reduced levels of availability and a significant amount of aged/excess inventory. These issues were compounded by the fact that the company did not regularly forecast its cash flow and availability. The company’s lender was reticent to provide additional funding to assist the business.
Actions: Given the desire of the shareholders to embark on another sale process with the goal of selling the company, the need for the company to obtain/generate additional liquidity in the short/midterm was the focus. The immediate steps taken were:
Additional areas of focus for the longer term included developing a centralized inventory planning process, negotiating exits from multiple shuttered former retail leases, and creating a cash-focused culture.
Results: Those steps ultimately resulted in a stock purchase agreement for all the operating entities of the business, the return of the additional shareholder collateral and payback of its term loan, the complete payoff of the company’s asset-based credit facility, and full release of the remaining long-term lease guarantees. All the steps taken allowed the company to maximize the return to the shareholders by providing the additional time necessary for its investment banking team to organize a well-run, full-blown marketing process for the business and for the parties involved to complete extensive due diligence. Without that additional time, it is unlikely that the process would have been as robust and certainly would not have generated the interest and value that it ultimately did.
In both case studies, the turnaround professionals involved convinced all parties to be patient with the process. Patience by the lenders involved and by the many other constituents was key to each successful outcome. However, the constituents would not have been patient absent the partnerships and relationships that had been developed in both instances. All of the parties involved, eventually, grew confident that positive outcomes were possible due to the professionalism of the turnaround professionals.