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Cal Cpa Bic 10 19 11

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When Real Trouble Hits …

When Real Trouble Hits
How To Speak To Your Bank

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  • 1. CalCPA When Real Trouble Hits How To Speak To Your BankCalifornia Society of CPA’s LA B&I October 19, 2011
  • 2. Agenda When Real Trouble Hits - How To Speak To Your BankBackground of Jonathan Wernick and Kibel GreenStakeholdersCurrent Pulse of the Banking EnvironmentSigns of TroubleWhat Banks Want to SeeToolsAsksConsideration of a Third PartyQ&A 2
  • 3. Biography – Jonathan J. WernickJonathan J. Wernick Professional Experience:Managing ConsultantKibel Green Inc. Jonathan Wernick is a Managing Consultant with the Turnaround Practice at Kibel Green. He brings nearly 20 years of audit, finance and accounting experience to Kibel GreenContact Information:Phone: 310-829-0255 x205 Mr. Wernick has assisted clients with forensic investigations, creditor negotiations, sale of assets, lossFax: 323-843-9385 mitigation, litigation support, solvency analysis, financial restructuring, strategic and business plan development, capital sourcing, and operational improvementE-mail Address: Prior to joining Kibel Green, Mr. Wernick served as an interim CFO/Controller for public and privatejwernick@kginc.com companies. Jonathan has also held management roles at Trader Joes Company, Softline Software & Patina Restaurant GroupOffice Address:2001 Wilshire Blvd., Prior to working in the private sector, Jonathan was a CPA with KPMG LLP where he focused onSuite 420 middle market companies in the real estate, manufacturing, healthcare and retail sectorsSanta Monica, CA 90403 Mr. Wernick is an active participant in many professional associations including the California Society of CPA’s Members in Industry, Association of Certified Fraud Examiners, Association for Capital Growth, Growth Turnaround Management Association American Bankruptcy Institute and Provisors Association, Giving back to the community is important to Mr. Wernick. He sits on the board of the Downs Syndrome Association of Los Angeles and the Etta Israel Center. In addition, he has been a mentor to USC students and a sponsor of field projects so students could acquire real world business experience Education & Certifications: MBA – University of Southern California B.S. – Yeshiva University Certified Public Accountant State of California – Active License Certificate in Culinary A t C tifi t i C li Arts
  • 4. Kibel Green Inc. - Firm OverviewWe offer three synergistic capabilities for middle market companies Over 1,500 clients since 1984 Primary focus on public and $5B in transactions private middle market companies Turnaround Operations Lender negotiation Profitability improvement Cash flow maximization Organization simplification Business plan vetting Supply chain efficiency Cost management Project management CRO services A one-stop solutionBroad experience Financial Strong partnership with management Retail Restructuring Senior-level professionals Manufacturing Debt negotiations Distribution New funding sources Resources and expertise Service Bankruptcy plans for urgent situations Real Estate Sale of assets A regional presence in Technology the Western U.S. 4
  • 5. More SimplyKibel Green is a financial advisor that connects the dots for all stakeholders 5
  • 6. Stakeholders Vendors V d Customers Ownership Employees Financial Institution Professional Advisors 6
  • 7. Current Pulse of Banking EnvironmentQuarterly profit for Wells Fargo and Citibank close to $4 billion 7
  • 8. Current Pulse of Banking EnvironmentDespite profitability the banks are holding on 8
  • 9. Current Pulse of Banking EnvironmentPer Marketplace this past MondayCoronado: Well if you look through the details, the results are just OK. Banks are actually having atougher time making money and growing revenue. So unfortunately, I think that what it means iscredit standards are probably going to stay pretty tight for a while -- it doesnt look like its going toease up anytime soon.Hobson: But when people hear about $3, $4 billion profits, and they know that these banks are p p $ ,$ p , ysitting on a lot of cash; theyve got access to cheap money from the Fed, theyre going to say,"Why arent they lending?"Coronado: So we have a bit of a chicken and egg situation. After the financial crisis, we want tomove to a world with smaller banks, with more tightly-regulated banks. So that means banks haveto set aside more of their earnings to shore up their capital position so that theyre safer.And what that means is that theres going to be less of that money available for lending. And ofcourse b k know theyre under tighter scrutiny about the kinds of loans that they make. So in the banks k th d ti ht ti b t th ki d f l th t th k S i thprocess of moving to a world of tighter regulation -- that by definition means less free moneyaround. 9
  • 10. Current Pulse of Banking EnvironmentPer Marketplace this past MondayBig b k are also being hurt by the problems in Europe. So to get the true sense of how America is i banks l b i h b h bl i S h fh i idoing, look at the little banks. Heres Fred Cannon at Keefe Bruyette & Woods.Fred Cannon: Theres a lot of regional banks -- small community banks -- that are doing OK.The reason: Those banks are lending more money to local businesses and dont depend on volatilemarkets.markets 10
  • 11. Signs of Trouble Broken Covenants Declining Missed Cash Flow Projections Diminishing Vendor Relationships 11
  • 12. More Signs of TroublePotential Distress Signals Checklist Breaches of key performance covenants (i.e., Late filing of financial statements/other minimum EBITDA, maximum leverage or EBITDA information i f ti interest coverage, minimum FCCR) Tightening of availability/taking more reserves Failure to meet business plan Vendors tightening terms Significant declines in cash flow Significant litigation Increases in days payables Capital infusion by owner Piecemeal asset sales Large write-downs Loss of key customer or vendor Transfer to special assets division Layoffs Sales of debt obligations to other parties High turnover at officer level Death/incapacity of owner 12
  • 13. What do Bankers Want to See 13
  • 14. What do Bankers Want to See CLARITY 14
  • 15. What do Bankers Want to SeeNo Surprises “They are for birthdays” 15
  • 16. What do Bankers Want to SeeFull Disclosure 16
  • 17. What do Bankers Want to SeeSolutions / Not just Citing a Problem AKA “A Plan” 17
  • 18. What do Bankers Want to SeeSkin in the Game 18
  • 19. What are the Tools ? 19
  • 20. What are the Tools ?a. 13 week cash flow Yesb. Current Balance Sheet, Income Statement and cash flow Usually required Quarterly and  statements outside of quarterly reporting are subject to adjustments defeating the  purpose, but willingness/ability to provide statements quickly suggests the owner is  actually looking at their financials to make adjustments to operations from a borrower  actually looking at their financials to make adjustments to operations from a borrower that is losing interest/ignorant/etc. In the same respect, a business owner that  understands their financials and can discuss with the banker distinguishes them and  goes a long way in likelihood of working together instead of arguing. c. Quarterly cash flow If not a quarterly requirement, beneficial but cash flow and debt  service ability usually performed by banker. d. 12 month projection with debt and covenant coverage Projections are important, bank  usually likes to determine ability to cover covenant requirements. When the borrower  usually likes to determine ability to cover covenant requirements. When the borrower tells the bank they will meet covenants in projections, it looks more like the projections  have been established around ensuring the covenant requirement is met. e. AR/ AP / INV aging with explanation of items over 60 days Yes, explanations are  important.  i t tf. Executive summary on the key business issues and plans on how to improve Anyone can  say how things will get better, I could tell you the housing market will reach 2005 levels  in the next year. Identifying ways the company has made improvements over the last 3‐ 6 months would be more beneficial.g. Listing of expense reductions Again, showing the benefit of expense reductions already  made would be better.  20
  • 21. Asks What should you be asking for ? 21
  • 22. AsksOver advanceTimeInterest OnlyForbearanceAdditional CollateralBe prepared to pay higher interest in exchange for the asks. 22
  • 23. Client Profile – Sample of Recent EngagementsWe have broad industry experience and strong expertise in distressed situationsFunction Size Description Service ProvidedManufacturer $75M Consumer Products OperationsManufacturer $310M Consumer Products Operations, Financial RestructuringManufacturer $1.0B Technology OperationsManufacturer $300M Automotive Turnaround, Financial RestructuringManufacturer $1.1B Sports Equipment OperationsDistributor $90M Food Turnaround, OperationsDistributor $65M Consumer Products TurnaroundDistributor $80M Automotive TurnaroundRetailer $85M Home Furnishings Turnaround, OperationsRetailer $ $135M Consumer Products Operations pPublisher $330M Media Turnaround, Financial RestructuringServices $10M Entertainment Turnaround, Financial RestructuringServices $56M Staffing Turnaround, Operations, Financial RestructuringServices $41M Logistics TurnaroundServices $100M Hospital TurnaroundReal Estate 1 $115M Residential TurnaroundReal Estate 1 $400M Residential TurnaroundReal E t tR l Estate 1 $175M $ Commercial C l Turnaround d 1) Size measured by annual revenue except for real estate which represents asset value 23
  • 24. Service Offerings - TurnaroundOur turnaround service offering concentrates on four key activities to address visibility, costand business model issues Developing a Projecting and Reducing Costs – Improving Plan – Current Managing Cash Lowering Break Management State vs. Future Flow Even Reporting State Develop a rolling 13- Renegotiate real estate Develop a detailed Create weekly week plan and personal property current state income information package leases statement Tie projections to Develop company balance sheet Evaluate facility Build a target future dashboard / key driver consolidation state – profitable report Create goals and business model assign responsibility Reduce payroll Improve expense Identify actions communication among Identify potential yp necessary to lenders, lenders equity and sources of cash Reengineer processes implement plan management 24
  • 25. Service Offerings – Financial RestructuringIntegrates diverse skill-set to offer powerful Financial Restructuring p g p g platform Deep understanding of the restructuring process (in and out of Chapter 11). Restructuring Long-standing presence in the distressed environment and reputation for Expertise knowing the players and sources of capital. Forge constructive deals deals. Combination of Financial Restructuring, Turnaround and Operations under one roof provides a differentiated platform. Powerful Platform Can develop capital structure solutions, provide credible reporting and implement value enhancing operational improvements value-enhancing improvements. Able to vet Plans of Reorganization and formulate alternative Plans. Client Advocate Will fight on behalf of client constituency to ensure they are not taken advantage of. of As a smaller firm, better able to prevent market knowledge of a transaction. Confidentiality Preserve confidentiality where creditor wants to stay unrestricted (i.e., not receive non-public information) and needs party to review that information information), information. Provide objective 3rd party perspective on a Company’s situation and recovery Objectivity prospects for constituencies. Honest broker that can manage intra-creditor differences. g 25
  • 26. Service Offerings – Financial RestructuringRepresenting Creditors and Debtors in various types of Financial RestructuringsRestructuring Balance Sheets Renegotiating Debt Covenants/Terms $645M meat processor and sandwich maker $140M mobile phone distributor $250M contract manufacturer of field rations for $200M chain of regional casinos the military $96M global provider of telecommunications $366M natural gas plants in the Northeast services $150M chain of furniture stores $350M chain of electronics and furniture storesRaising Capital Selling Distressed Assets/Companies $350M manufacturer and distributor of medical $100M Group of wineries in Northern California consumables for the elderly $114M Jeweler targeting low-middle income $126M manufacturer and distributor of dairy Hispanic market products $200M retailer of denim and casual clothing for $75M chain of Mexican restaurants teens $100M integrated media publishing company $125M manufacturer of consumer and (trade magazines, journals, conferences) commercial cooking equipment 26
  • 27. Service Offerings – Financial RestructuringWhen to contact us The earlier Kibel Green is brought in, the wider the range of restructuring options. As operations and enterprise value deteriorate, the probability of a successful turnaround or restructuring declines dramatically.Potential Distress Signals Checklist Breaches of key performance covenants (i.e., Late filing of financial statements/other minimum EBITDA, maximum leverage or EBITDA information i f ti interest coverage, minimum FCCR) Tightening of availability/taking more reserves Failure to meet business plan Vendors tightening terms Significant declines in cash flow Significant litigation Increases in days payables Capital infusion by owner Piecemeal asset sales Large write-downs Loss of key customer or vendor Transfer to special assets division Layoffs Sales of debt obligations to other parties High turnover at officer level Death/incapacity of owner 27
  • 28. Kibel Green’s ApproachOur standard approach translates objective, fact-based analyses into tangible client benefits Objectivity and Experience A 3rd party that is the Honest Broker and can achieve results with key constituents Critical, Thorough Analyses Detailed cash flow, financial forecasts and valuations, and analysis of stakeholder interests flow valuations Development of Strategies and Plans Vetting d/ d V i and/or development of business plans that are believable to all key constituents l fb i l h b li bl ll k i Practical Solutions and Action Steps p Converting the Plan into action and guiding the client through the process Positive Results for Clients Achieving the client’s objectives 28
  • 29. Stabilized cash flow, enhanced relationship with outsourced billing company, evaluated viability of expiring service contract. Company Challenges Results Delivered Multi-unit medical service provider Negotiated new lower cost contract experienced strained relationship with provider. with outsourced billi provider. ith t d billing id Identified a discrepancy in data Procedure revenue was in excess of transmissions, illustrated the previous year yet cash difference and expedited the funds reimbursements were considerable due to them. lower. Provided tools to monitor and Company knew something was estimate timely reimbursement. wrong but felt paralyzed in how to Recommended to not renew go about fixing the issue. contract and arranged for a fair and Contract with local hospital was equitable wind down of operations expiring and the company was unsure if renewing would fit their long term profitability goals goals.Jonathan J. Wernick Steven J. GreenManaging Consultant Co- Co Founder & President 310-829-0255 x205 310-829-0255 x220 jwernick@kginc.com sgreen@kginc.com
  • 30. Guided company through default with lender and restart operations. Company Challenges Results Delivered Established multi-location $50 Negotiated forbearance agreement million manufacturer in over with bank. advance position with lender. d iti ith l d Prepared 13 week cash flow and Forecasting tools and inventory streamlined financial reporting management tools deemed package. unreliable from bank. Initiated plan to get suppliers to Suppliers refused to ship raw ship raw materials. materials. Convinced management and Bank and management considering bankers on the viability of a going to close operations. operations concern. concernJonathan J. Wernick Steven J. GreenManaging Consultant Co- Co Founder & President 310-829-0255 x205 310-829-0255 x220 jwernick@kginc.com sgreen@kginc.com
  • 31. Enabled turnaround and achieved long-term agreement on $130 million syndicated loan. Company Challenges Results Delivered Multi-unit $350 million retailer Prepared an objective assessment required line of credit for consumer providing clarity to the lenders. financing. fi i Implemented a weekly cash flow Loan was in default and needed modeling tool to navigate tighter restructuring. loan availability. Lenders were concerned about the Created a dashboard of key reliability of the business plan. performance drivers (KPI’s) to Expanded rapidly in last 3 years assess and improve financial and and internal infrastructure of operational results. financial and purchasing practices Identified costs savings and did not keep pace with growth. inventory reduction programs Measures to cut costs and improve leading to significant improvements working capital were not enough to in liquidity and profitability. address decreasing revenues.Jonathan J. Wernick Steven J. GreenManaging Consultant Co- Co Founder & President 310-829-0255 x205 310-829-0255 x220 jwernick@kginc.com sgreen@kginc.com
  • 32. Fostered confidence in financial oversight for an equity sponsor and asset based lender Company Challenges Results Delivered Equity sponsor of $30 million health Delivered a robust financial and beauty aid manufacturer reporting package using the unsure of company’s fi f ’ financial i l existing software. S l d back the i ti ft Scaled b k th stability and ability to report need for equity sponsor’s oversight results. meetings from weekly to monthly. Asset based lender concerned Increased credit line and reduced about finance operations. bank fees. Vendors losing trust with lack of Developed AP payment plan that follow through on commitments clearly communicated to vendors and communication. and adhered to. Distributors were lax in paying in a Created weekly AR review process timely manner. and customer contact campaign that improved cash receipts.Jonathan J. Wernick Steven J. GreenManaging Consultant Co- Co Founder & President 310-829-0255 x205 310-829-0255 x220 jwernick@kginc.com sgreen@kginc.com
  • 33. Contact Information – Los Angeles Office2001 Wilshire Boulevard Suite 420 Santa Monica, CA 90403866.875.0255 Tel 310.453.6324 Fax www.kginc.com Steven J. Green, Co-Founder & President 310.829.0255 x220 sgreen@kginc.com Jonathan J. Wernick, Managing Consultant, Turnaround Group 310.829.0255 x205 Jwernick@kginc.com J i k@k i 33 33
  • 34. The Book - How to Turn Around a Financially Troubled Company* By Harvey R. Kibel Selected by the Library Journal as one of the ten best business books. This unique turnaround manual gives you principles and practical advice for survival in very tough situations Here are just a few of the key questions it situations. answers: • Can I find a way to buy time for my company? • When is a bank willing to function as a working partner rather than as an adversary? • How can the vendor be given enough confidence in the company to deliver products. *This book, a bible for the workout field, was selected as one of the ten best business books by the Library Journal and resulted in Mr. Kibels receipt of the National Award of Excellence from President Reagan at a White House ceremony. 34

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