In the restructuring business, many of our assignments come through referrals. During 2015 we were able to assist a number of companies because a trusted advisor to the CEO or owner suggested that they might need help. However, sometimes that suggestion comes too late or the CEO/owner decides that they can fix their problem without assistance. As we reached the end of 2015, we were referred to two companies that had reached the absolute brink of survival unnecessarily.
Company #1: A Family Owned Construction Company
The first example is a family owned company in the construction business. This company was successful in doing relatively small jobs, but wanted to move up into large commercial projects. Due to the quality of their work and their status as a minority contractor, they were given the opportunity to participate in a number of large public works contracts.
The problem was that management had no idea of what was required to operate in the larger environment and neither did the people that they hired. While they had a small line of credit from a bank, it was not sufficient to support even one large job, let alone the several that they undertook. In one year, revenue almost tripled without the management or infrastructure needed to support their growth.
As time developed, almost everything went wrong. Bids were underestimated, payments were often not as prompt as were needed, and overruns due to improper estimating were occurring on a regular basis.
When the company decided it needed a new computer system to manage the business, they began a transition without the proper understanding of how to do the job. As a result, invoices and change orders did not get out in a timely manner, worsening an already bad situation.
How did the company continue to operate? By not paying federal and state payroll taxes, union dues, benefit plans or their subcontractors.
As the large project managers began to see the threat of liens against their projects, they began paying the company’s subcontractors directly, reducing, and in many cases eliminating, payments to the company. Cash flow was further reduced.
By the end of the year, the company’s debt had ballooned to over $4 million, almost half of it “borrowed” from trust funds. As the company searched for a loan to pay off these past debts, instead of just saying no, a lending source referred them to Revitalization Partners. By this time, the IRS and the state had issued seizure notices, and the unions had cut off all benefits including health insurance.
As the year ended, there is still a glimmer of hope. The company continues to get work and has new estimating and project management support. Additionally, the IRS and state appear to be willing to cooperate with a workout plan. But without major changes in thinking on the part of management, the hole will continue to get deeper.
Company #2: A Food Distribution Company Purchasing Another Business
Our second year-end example concerns a food distribution company that purchased a highly profitable company twice its size. To finance the purchase, an SBA loan and significant line of credit was obtained. Shortly after purchasing the company, the new owner discovered that the company he had purchased really didn’t have systems in place to support the operation, and instead, it was successful due to the experience and knowledge of the sellers.
As that was discovered and the profitability began to evaporate, a financial advisor suggested that he speak with Revitalization Partners early in 2015. The owner declined, believing that he could resolve the issues without assistance.
As the months passed, the profitability situation did not get any better despite favorable projections. The company took on additional debt from an outside source. This violated the terms of the operating line of credit, as well as the several forbearance agreements issued by the bank, as the losses mounted.
Days before the expiration of the latest forbearance agreement, the bank decided that it would not go forward. As of the end of the year, the bank was declining to continue the relationship and would exercise its rights under the loan. The ultimate outcome will be determined in early 2016.
In Our Experience, Experience Matters
Operational and financial restructuring, like any profession, is a learned skill and, like most professions, experience matters. One of the skills required is the ability to remain objective and realistic about the business situation even as it changes, and to take rapid and effective action to ensure that change is positive.