Challenges Facing Small Businesses
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Challenges Facing Small Businesses



The post-recession U.S. economy offers many opportunities but also challenges for small businesses. Company owners and management teams must understand the ways in which the landscape has shifted if ...

The post-recession U.S. economy offers many opportunities but also challenges for small businesses. Company owners and management teams must understand the ways in which the landscape has shifted if they are to maximize value in the coming years.



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    Challenges Facing Small Businesses Challenges Facing Small Businesses Presentation Transcript

    • Challenges Facing Small Businesses Speaker: David Johnson July 7, 2011 1
    • Opening Words • “Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem.” – Charles Munger, Vice Chairman Berkshire Hathaway 2
    • Biography • David Johnson is a finance professional with more than 10 years of experience in business plan development, business process optimization, restructuring and turnaround. • David earned his Master in Business Administration from the University of Chicago with concentrations in Accounting and Finance. • With engagement experience spanning North America and involving companies ranging in size from pre-revenue start-ups to nearly $1 billion in sales, David has shown the flexibility to thrive in the dynamic situations that are a constant in turnarounds. 3
    • ACM Partners Overview • ACM Partners is a Chicago-based boutique crisis management firm serving companies and municipalities facing current or impending financial distress. • The advisory services of ACM Partners, which include Due Diligence and Performance Improvement as well as Restructuring and Turnaround, are centered around the concept of crisis management. • We define a crisis situation as one in which either the current state of affairs or the trend, left unaddressed, threatens the viability of a company. • As crisis managers, we view our role as preserving and growing enterprise value. A company in crisis is a melting ice cube, and it is our job to turn down the heat enough that that ice first stops melting and then begins to grow again. 4
    • ACM Partners Overview Cont. • The principals at ACM Partners have deep experience driving value in businesses in the following ways: – Due Diligence: Identifying risks and opportunities in investment opportunities (both organic expansion opportunities and acquisition opportunities). – Performance Improvement: Assessing revenue quality and identifying customers who, due to pricing, terms or customer service issues, are more trouble than they are worth. – Restructuring and Turnaround: Multiple successful balance sheet restructuring (both in and out of court) and numerous companies that were able to avoid restructuring through the execution of a turnaround plan. 5
    • Crisis Management • In our experience, these type of crises arise from problems in one of a limited number of areas: • Cash: The lifeblood of a company is its cash. When cash (regardless of source) runs out, operations grind to a halt. Understanding not only the current cash situation but also past and future trends is essential. • Liquidity: The availability of credit, combined with cash on hand, is key to understanding the constraints on a company. Liquidity dictates how quickly a company can grow, what type of terms can be offered to customers, and what types of terms it needs from suppliers. 6
    • Crisis Management Cont. • Profitability: Understanding profitability such as gross margin, operating margin, EBITDA margin, and net income margin can shed light on potential areas of concern (for instance declining gross margins offset by reductions in operating expenses). • Risk: In business, as in boxing, it is the punch you don’t see coming that can knock you out. Issues such as commodity and currency volatility, loss of a key customer, a sudden increase in cost of capital, etc can send a company reeling. 7
    • Challenges in the Current Decade 1. A Multi Speed World: Mohamed El-Erian at Pimco has made much of the “multi speed world” we now live in. While the U.S. is technically in a recovery, it is a tepid recovery at best. GDP growth in the 2% range feels more like treading water. • With emerging economies taking on the mantle of drivers of global economic growth, developed economies are seemingly consigned a much less vibrant, slow-growth mode. U.S. middle market companies must now seriously consider either international expansion plans, or significant growth, at the expense of competitors. 8
    • Challenges in the Current Decade 2. Commodities Prices: We are in the midst of a remarkable demand-driven commodity price shift which threatens the gross margins of all companies lacking pricing power. • Not only are prices reaching new heights, but quarterly volatility in these prices is also remarkably high, presenting a purchasing manager’s nightmare. 9 -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% Mar2008 Jun2008 Sept2008 Dec2008 Mar2009 Jun2009 Sep2009 Dec2009 Mar2010 Jun2010 Sep2010 Dec2010 IMFPrimary CommodityIndex Quarterly Volatility (2008 - 2010) Period Change Avg
    • Challenges in the Current Decade 3. The Lending Market: Recovery from the recession of 2008-9 has been uneven, especially among lenders. Community banks remain extraordinarily troubled, with nearly 50 having failed in the Chicago metro area since 2007. • As multi-national and regional banks grow increasingly large, smaller businesses face a challenging lending climate in which smaller companies face a substantially higher cost of capital than their larger competitors. 10
    • Challenges in the Current Decade • The combination of local bank failures and the high cost of capital differential imposed on smaller businesses present challenges in financing growth opportunities in the current decade. 11 42 1 6 Failed Banks Since Oct 2008 IL IN WI 0.0% 5.0% 10.0% 15.0% 20.0% - 5,000 10,000 15,000 20,000 25,000 30,000 CostofCapitalbyLoanAmount LoanAmt ($000s) MedianCost of Capital
    • Challenges in the Current Decade 4. Private Equity: With private equity firms sitting on enormous sums of unallocated capital, many companies can expect to find their niches invaded by private equity portfolio companies acquired at aggressive valuations and under urgent orders to grow. • Competition against these well-funded companies hungry for growth will be fierce. 12
    • Challenges in the Current Decade 5. Managing the Data Flood: We are living in an age of an awe-inspiring flood of data, but this flood is both a gift and a curse to middle market companies. • Those companies that fail to seize this opportunity by converting raw data into actionable business intelligence will increasingly find themselves at a disadvantage to their more nimble, data-savvy competitors. 13
    • Facing the Challenges • The challenges facing small and mid-sized companies in the current decade are significant, but not insurmountable. • All areas of a business must regularly undergo an objective assessment in order to identify areas for improvement. • Companies will need to aggressively adopt both general and industry- specific best practices in order to achieve steadily increasing efficiency in their operations. • Management according to rules of thumb or by focusing on relationships that may no longer be mutually beneficial will prove to be paths to relentless value destruction that companies must avoid at all costs. 14
    • Case Study • In June 2010 the predecessor firm to ACM Partners was retained by a private equity owned restaurant company that had recently exited bankruptcy. • David Johnson assumed responsibility for cash management of the $85MM company, developing a detailed forecast of cash receipts and disbursements and generating weekly variance reports on same. This tactical tool allowed senior management to adjust the timing of certain key disbursement in order to maximize liquidity. 15
    • Case Study Cont. • David Johnson, working closely with senior management, developed a detailed 3-year financial forecast that provided a roadmap for an aggressive and sustainable growth plan, which was supported by the company’s private equity owners and lenders, and which energized the staff. • At the conclusion of ACM Partners’ 4-month engagement, the company had in place a detailed cash management tool, a 3-year financial forecast that envisioned an aggressive return to growth (both through increases in same-store sales and new locations) that had received buy-in from all stakeholders and an updated budgeting methodology that permitted individual restaurant managers to measure actual results against budget. 16
    • Closing Words • “The best advertisement for our value is a list of clients who no longer need us.” – Margaret Bogenrief, Partner ACM Partners 17
    • About ACM Partners • ACM Partners is a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services. • David Johnson can be contacted at: – Email: – Ph: 312-505-7238 • For more information visit: 18