Growing Toward Distress
Speaker: David Johnson
November 19, 2012
ACM Partners Overview
• ACM Partners is a boutique financial firm focused on navigating the
increasingly complex and dynamic U.S. and global economy.
• We have deep engagement experience working with financial sponsors,
lenders and management teams. Our service offerings include:
Restructuring and Turnaround
• ACM Partners provides the assistance needed for management teams as
well as all stakeholders to adjust to a changed environment while
minimizing disruption to a company’s core operations.
David Johnson, Partner
David Johnson is a founding partner of ACM Partners, a boutique
financial advisory firm focusing on turnaround and restructuring.
His advisory experience spans North America and ranges from pre-
revenue start-ups to advisory roles with Fortune 500 companies.
An active member of the turnaround community, David currently
serves as Director of the Chicago/Midwest chapter of the Turnaround
Management Association. He has numerous publications to his
credit and has completed all qualifying exams for the CIRA and CTP.
David earned his MBA from the University of Chicago. His
undergraduate studies were completed at Fairleigh Dickinson
David can be reached at email@example.com or 312-505-7238.
• In April 2012, Galaxie Home Remodeling (“Galaxie”) was a Chicago-area
company providing home improvement throughout the Chicago metro area.
• Since the company’s founding in 1984, Galaxie had established itself as the
trusted name in the Chicago home improvement market (the 3rd largest in
• Through a strong network of trusted subcontractors, Galaxie offered
interiors (bathrooms, bedrooms and rec rooms), exteriors (masonry,
porches & decks, roofing, siding and windows) and additions (attics &
dormers and room additions).
• Since its founding, the company had completed more than 25,000
Company Overview Cont.
• Over the past few years, Galaxie had evolved into a leader in the Chicago
metro area home remodeling market.
• Due to the highly fragmented nature of the home improvement industry, the
benefits of a strong brand and a sophisticated marketing infrastructure are
• By developing and implementing a sophisticated and industry-leading
marketing and sales infrastructure, Galaxie was well-positioned to generate
compelling profitability due to its highly-strategic positioning.
Galaxie’s multi-channel marketing strategy, initiated in 2009, successfully drove strong growth, with a CAGR
• Galaxie Home Remodeling
enjoyed a negative cash
conversion cycle, which permitted
the company to grow faster than
would normally be possible.
• The combination of very
attractive collection trends and
attractive terms with suppliers
was both powerful and fragile.
Galaxie’s ability to fund its
operations was heavily reliant on
maintaining supplier relationships.
Days Sales Outstanding 19.0
Days Inventory Outstanding 0.0
Days Payable Outstanding 40.0
Cash Conversion Cycle -21.0
Innovative Business Model
• The driver of Galaxie’s growth was an innovative approach to marketing.
Essentially, Galaxie had transformed itself from a construction company to
a sales and marketing organization.
• Galaxie spent heavily on marketing through a number of channels, with
leads processed at an inbound call center. Management had achieved a
90% sit rate (i.e. 90% of calls led to an in-person sales call) and a 20% sell
rate (i.e. 20% of in-person sales calls led to sales).
• The benefit of this model was that it led to rapid growth. The downside
was a need for careful controls to ensure that costs were managed and that
maximum value was derived from the leads generated.
• During the 2009 – 2011 period, Galaxie profitability fell from a profit of
over $1MM in 2009 to a loss of nearly $350,000.
• The impressive growth of Galaxie temporarily masked severe deficiencies:
1. Financial Controls: Lacking both a CFO and an accountant, Galaxie was unable to
forecast liquidity and identify, much less correct, issues of over-spending or declining
margins. As a result, all financial challenges were seen to be problems that could be
cured through additional sales.
2. Strained Sales Force: As Galaxie’s multi-channel marketing strategy drove a growing
number of leads, the company struggled with a close rate that hovered at 20%, despite
management’s projections that a 25% rate should be achievable.
3. Disparate Systems: Galaxie ran three separate systems (Paradox for tracking jobs,
QuickBooks for accounting and Sugar CRM for lead tracking). None of these three
systems was integrated, and reporting capabilities for all were dangerously limited.
A failure to prioritize spending or implement an ROI analysis of marketing channels led to explosive growth
in marketing spending, both in nominal terms (up nearly $2.8MM) and as a percentage of sales (up 12.1
Lack of Spending Discipline
A Developing Crisis
• Galaxie faced a severe liquidity squeeze starting in December 2011.
– A real estate backed line of credit was called, resulting in a short-sale of the property and
the loss of the company’s credit line
– Relations with key suppliers were becoming strained, as Galaxie struggled to pay bills in
a timely manner
– Tax liabilities were growing in severity
• The company owner provided $500,000 to fund operating expenses during
this period, with key partners and employees providing additional support
of approximately $200,000.
• Management did not seek outside assistance until the personal resources of
the owner had been exhausted. By this time, cash balances at the company
were regularly negative.
• In April 2012 management retained David Johnson of ACM Partners to
serve as Chief Restructuring Officer in order to develop and execute a
turnaround and restructuring plan.
• Immediately a comprehensive analysis of the company was undertaken,
and a pitchbook was developed for prospective capital providers. Initially
outreach to capital providers was managed by an investment banking firm,
but later ACM Partners assumed that role.
• Accounts Payable was carefully analyzed and high priority trade creditors
were contacted in an effort to improve relations.
• It was determined that Galaxie would need to be sold through an
assignment for the benefit of creditors, a process similar to bankruptcy.
• Three interested parties were identified:
– Two separate private equity firms, both with portfolio companies operating in adjacent
– One of Galaxie’s largest suppliers
• The major point of contention with each of the prospective buyers was
persistent owner demands for a rich guaranteed compensation employment
• Due to the highly distressed nature of Galaxie, and an inability of
prospective buyers to get comfortable with the risk, the company was not
able to complete a transaction in the limited time available.
Chapter 7 and Next Steps
• On July 21, 2012 Galaxie Home Remodeling filed a chapter 7 bankruptcy.
• A company that had repeatedly been honored by industry publications and
had successfully increased sales in a very challenging market was undone
by a spiraling cash crisis and an inability for ownership to come to terms
with prospective buyers.
• The former management team of Galaxie is currently in talks with an
investor who is interested in purchasing the intellectual property (website,
customer database, etc.) of Galaxie from the chapter 7 trustee. They are
hopeful that they will in operation by the spring of 2013.
• Additionally, the chapter 7 trustee is pursuing a fraudulent conveyance
claim against Galaxie’s largest supplier.
1. Undisciplined Growth is Dangerous: From 2009 – 2011, Galaxie
increased sales by approximately $10 million, while profitability declined
by approximately $1.4 million.
2. Systems Matter: Galaxie outgrew its systems, but management did not
invest the time and money necessary to upgrade. The result was that
management was often forced to act on incomplete or incorrect
3. Egos Kill Deals: Galaxie had interested buyers, but management was not
interested in the terms of a distressed transaction and sought to press
demands despite a lack of any leverage.
About ACM Partners
• ACM Partners is a boutique financial advisory firm providing due
diligence, performance improvement, restructuring and turnaround
• David Johnson can be contacted at:
– Email: firstname.lastname@example.org
– Ph: 312-505-7238
• For more information visit: www.acm-partners.com.