Next up, Finance Monthly hears from James J. Loughlin, Jr. and Patrick J. Fodale from Loughlin Management Partners + Co who offer us a rich insight into the turnaround management sector in the US including recent trends, tips on when to retain a turnaround manager and strategies in regards to successful turnarounds.
In turnaround and restructuring, private equity value creation and corporate finance, LM+Co has distinguished itself with management teams and investors for more than a decade by focusing on actionable solutions across a broad range of industries, and delivering results that maximize value. The founder of Loughlin, James is a nationally recognized restructuring professional and has more than 25 years of financial and operational restructuring experience advising distressed companies, senior lenders and other creditors. He has led more than 150 engagements and has successfully restructured more than $100 billion of debt. He has served as an expert witness providing court testimony on valuation, plan feasibility, executive compensation and other financial matters. Jim earned a Master’s in Business Administration with honors from the University of Texas at Austin and a Bachelor’s of Business Administration from Southern Methodist University.
Pat, a managing Director with LM+Co, has more than 20 years of turnaround and restructuring experience. He’s served as CRO, COO, CFO, board advisor and lender advisor in more than 40 operational turnaround and financial restructuring situations. He has diverse sector experience in retail, distribution, transportation and manufacturing. Pat earned a MS in Accounting and a BBA from the University of Michigan, is a CPA, CTP and CIRA. Pat holds both Series 63 and 79 licenses.
Who can be helped by a turnaround manager and what are some of the main causes that drive companies to seek turnaround services?
Companies with operating losses and tight liquidity who are experiencing issues with their lenders are typically candidates to hire a turnaround manager. However, we find that any underperforming company with lagging revenue and profitability can benefit from the advisory services of a turnaround professional. LM+Co has helped many underperforming companies identify opportunities to improve profitability and cash flow with revenue enhancement and cost reduction strategies.
I can think of numerous causes, whether externally or internally-driven, which can lead a company to seek our services. Significant customer or revenue losses, operating losses, too much debt and the lack of liquidity to pay everyday expenses.
From time to time there is a management void, as the CEO or CFO have left the company and the business needs help. I see many of these elements showing up in a company breaking a loan covenant or defaulting on its debt. That often creates the need for a turnaround manager to help the management team chart the course to improve performance and to address the lender’s concerns.
What trends have you witnessed in your turnaround work recently? Why do you think these trends have formed?
We often see trends within entire industries that are struggling, most recently it has been the energy space, with oil and gas production and oilfield service companies struggling due to oil and gas price declines. Companies in multiple sectors have been negatively impacted by the growth of eCommerce: media businesses and retailers to name a few. Certain industries such as healthcare and trucking/logistics seem to perpetually be under pressure, depending on the economic cycle we are in.
Companies and their lenders seek to avoid bankruptcy court, preferring consensual out-of–court plans involving debt restructuring, debt-for-equity or debt-for-debt exchanges or even foreclosures exercised under UCC provisions. If bankruptcy is needed to effectuate a plan or to take advantage of debt relief or contract rejection opportunities, all attempts are made to shorten the time in-court through pre-packaged, pre-negotiated plans or Section 363 sales processes. Given the high expense of bankruptcy and the business and process risks associated with prolonged restructurings, the industry has moved toward expedited restructuring processes.
How does one rescue a failing business? What is involved in the turnaround process?
It’s fair to say that turnaround practitioners each have their own methodology when it comes to the turnaround process. At LM+Co, we focus on the following areas:
- Understand the situation – is it a crisis with dwindling cash or do we have some time before a default or liquidity crisis occurs. Are there issues that must be addressed immediately?
- Control the cash – in a crisis it is imperative to manage liquidity so we want to forecast weekly cash flows to identify funding requirements and implement actions related to collections, disbursements, inventory liquidations, asset sales and other cash maximizing opportunities
- Analyze the operations – determine the external and internal factors causing the operational and financial problems for the company, and design solutions to address these factors and ultimately turnaround the company. Where does the Company make money? Where are losses being generated?
- Prepare the turnaround plan – an effective plan will identify and quantify the benefits and the costs of the plan as well as the timing for implementing each of the turnaround initiatives.
- Communicate the turnaround plan – this will be required to obtain the support of needed constituents including lenders or equity holders who may need to fund the plan. This will likely require new budgets or financial forecasts the reflect the action plans and perhaps some additions or changes to the management team
- Implement the turnaround plan – as discussed previously, this may include restructuring the company’s debts either out-of-court or through a Chapter 11 bankruptcy process
At what point should a company consider retaining a turnaround manager? At what point is it too late?
It’s unfortunate, but we often see companies waiting too long to address their problems. Management often is in denial or believes things will get better on their own. Often a loan covenant default triggers a reaction from the company’s lenders that may lead to discussing the need for the hiring a turnaround manager. Lenders have usually been down this road before and value the insight that turnaround professionals can add to a troubled situation. It is better for management and ownership to adopt a proactive approach instead of waiting for their lender to demand that a turnaround professional be hired. This should take place after a string of continuing financial losses, budget shortfalls or issues impacting the ability to service debt. While it may not be too late in circumstances in which the underlying business model is sustainable, running out of cash and not being able to make near term operating disbursements creates concerns regarding a business’s ability to continue as a going concern. Liquidity or cash crises often require more drastic measures such as pay headcount reductions, inventory or other asset liquidations and a potential Chapter 11 filing to stave off creditor collection efforts.
What is the average success rate of business turnarounds and how do you ensure your turnaround is effective?
Very often we see businesses improve their performance. We try to ensure success with buy-in on the process from all the stakeholders. When lenders recognize that management and ownership are willing to take the necessary steps to right the ship, and if the lenders are willing to support the process, then developing and implementing a plan to achieve a sustainable business model with the right capital structure will likely lead to a successful turnaround. Hard decisions like asset divestitures, customer or product rationalizations and operating cost reductions are still necessary. Of course a key to that buy-in is effective communication between all parties. An effective turnaround manager knows how to facilitate that communication.
How complex are the rules that govern the turnaround management sector in the US?
Hiring and engaging turnaround professionals is not generally very complex. We have seen some increased complexity around hiring turnaround professionals as it relates to Chapter 11 filings where the turnaround professional was or will be hired as an officer of the company, often in the role of Chief Restructuring Officer or “CRO”. We generally work with bankruptcy counsel in these situations to ensure our firm is properly retained and potential conflicts that the US courts frown upon are avoided.
How does one choose a turnaround professional?
In choosing the appropriate turnaround professional, management and the board of directors needs to focus on the following:
Who will be leading the assignment?
It’s critical that the individual who sells the work and impresses the buyers with his or her experience, industry knowledge, as well as personal fit with the team and the situation, is the person who actually shows up and will be there throughout the course of the engagement. Fixing a business is a full-time job. Unfortunately, in many situations, the “pitch team” team is different from the execution team and often you don’t get the experience you are paying for.
You hire an individual, not the firm.
Often the big-name firms are viewed as the leading contenders to be hired for the important role of turnaround consultant. These larger firms often successfully sell their “firm” capabilities when the reality is – you are hiring an individual and a small support team to perform the work needed to help turn the business around. Make sure that the individuals who will be working on your assignment bring deep restructuring experience, industry knowledge and the leadership skills to deliver all that is required for the assignment to be successful. Hiring a name brand firm does not guarantee a successful engagement.
Does the turnaround team have established relationships with key stakeholders that will be critical to the success of the turnaround?
In most situations there will be a need for either additional capital or relief from current debt service obligations in order to accomplish the turnaround. Hiring an individual who has credibility with the lenders goes a long way to improving the odds that the business will be successful in getting key stakeholders on board and willing to support the business and financing proposals associated with the turnaround plan.
Make sure that the turnaround team you hire will be working sufficiently and effectively and deliver value commensurate with the fees being paid.
Many turnaround firms have fee structures which are inappropriate for the size of the client company and the complexity of the engagement. Charging high hourly rates often can lead to inefficient projects where the incentives of the professional are not aligned with the needs of the business. Our preference is to structure engagements where our ongoing fee structure does not exacerbate already stressed liquidity situations. We find that the market appreciates a willingness to provide monthly fee caps and to structure success fees that are payable only upon the delivery of a successful outcome. The alignment of interests is an incredibly important aspect of negotiating a fee structure which everyone is comfortable with and which is tailor-made for the specific situation.
Do I go with a large firm or a specialty boutique?
I believe it is important that the individuals who are leading the turnaround project have the stature and influence within their own organizations to deliver a successful project for a client. I have always found that it is a great selling point to be able to commit to my clients that as the owner of my firm, I can commit all of the resources to their company necessary for the turnaround to be successful. Being able to make decisions that impact the success of our clients often gives us an advantage that practitioners in larger organizations may not have.
Again, the focus should be on the individuals being retained, not the business card that they carry. There are solid turnaround professionals in large organizations and in smaller boutiques which play an important role in the turnaround and restructuring profession.