Best Practices in
Turnaround Consulting

 Jim Davidson CTP, CIRA, CPA/CFF, CFE, CM&AA
7 Questions to be Answered
•   Complexities of turnarounds this recession?
•   Who engages turnaround consultants?
•   Imm...
Current Turnaround Environment
• More than other consulting services
• Less than previous recessions
• Why?
  – Excess fin...
Current Environment (cont’d)
– Credit market collapse
– No liquidity, credit drought
– Fewer financing options
– Lenders “...
Current Environment (cont’d)
• Bankruptcy is questionable
  – Under secured creditors
  – Lack of DIP financing
  – Comple...
Current Environment (cont’d)
• Bankruptcy Law Changes
  – New 20 –day supplier administrative claim,
    e.g., Circuit Cit...
Current Environment (cont’d)
• Result?
  – Fewer traditional Chapter 11 reorganizations
  – Increased:
    • Straight Chap...
Current Environment (cont’d)
• Costs and timing are overriding
  – Fast “pre-packs,” e.g. 32 hours
  – More 363 sales
  – ...
Types of Insolvency Consulting
• “Stressed” e.g., Covenant violation
  – Best chance for course correction
  – Business as...
Types of Insolvency Consulting
• “Distressed,” i.e., Zone of Insolvency
  – Legal determination based on financial paramet...
Types of Insolvency Consulting
• Operational Stress
  – Loss of revenues (industry or macroeconomic)
  – Increased expense...
Types of Insolvency Consulting
• Financial Stress
  – Poor financial structure
  – Excess debt
  – May be fundamentally st...
Types of Insolvency Consulting
• Both Operational and Financial Distress
  – “True” corporate turnaround situation
  – Ext...
Types of Insolvency Consulting
• Both Operational and Financial Distress
  – If factor(s) are overriding, then,
  – Likely...
Turnarounds – Who?
• Restore lender confidence and credibility
  – Experience and expertise
  – Former CEOs, COOs, and CFO...
Types of Insolvency Consulting
• Out of court workout/financial restructuring
• Turnaround (strategic, operational, financ...
Requirements of a Turnaround
• Financial expertise, e.g., financial statement
  restatements (fraud)
   – 13-week rolling ...
Requirements of a Turnaround
•   Management replacement
•   Viability analysis
•   Liquidation analysis/valuation versus
•...
Requirements of a Turnaround
• Customer profitability analysis (large/small)
• Inventory analysis (turns, margins, non-cor...
Required Skills and Experience

• Financial expertise (e.g., CFO, Controller,
  CPA, CVA)
• Distressed operational experie...
Consulting Specialties
• Functional experience
  – Strategy
  – Marketing/revenue enhancement
  – Lean manufacturing/Suppl...
Turnaround Case
         Issues and Moving Parts
• Alternative Strategies impacted by:
  – Industry
     • Macroeconomic/ ...
Turnaround Case
           Issues and Moving Parts
• Products and Markets
  – Quality and differentiation critical
  – R&D...
Turnaround Case
          Issues and Moving Parts
• Legal issues
  – Product liability
  – Environmental liability
  – Emp...
Turnaround Case
          Issues and Moving Parts
• Management and Corporate Governance
  – Misdirected board involvement/...
Turnaround Case
          Issues and Moving Parts
• Operations – Pluses and Minuses
  – Lean manufacturing and efficient s...
Turnaround Case
          Issues and Moving Parts
• Significant asset write-downs and operating
  losses
  – Loss on disco...
Turnaround Case
          Issues and Moving Parts
• Capital Structure, Financing, Liquidity
  – Negative equity, significa...
Turnaround Case
       Issues and Moving Parts
• Turnaround Strategy
  – Variable expense reductions
  – Marketing and pro...
Turnaround Case
      Issues and Moving Parts
• Sales Process and Alternatives Evaluation
  – “Naked” out-of-court asset s...
Fees –When and How
• Retainers or guarantees
  – Risk of bankruptcy
  – Unsecured creditor
• Carve-outs
• Fee applications...
Takeaways – Turnaround Consulting
• Takeaways
  – Challenging, demanding, and exciting
  – Risks and opportunities in turn...
Takeaways – Turnaround Consulting
                         (cont’d)

• Lessons learned/ideas for your own practice
  – Spe...
Takeaways – Turnaround Consulting
                                 (cont’d)
• Lessons learned/ideas for your own practice
...
QUESTIONS?




                   35
  Avant Advisory
Avant Advisory Group
                  Presentation by:
          Jim Davidson, CTP, CIRA, CFE, CPA, CM&AA
          Manag...
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Best Practices/Techniques Operational Turnarounds and Financial Restructuring - Association of Professional Consultants Presentation

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Operational Turnarounds and Financial Restructuring Consulting - Best Practices and Techniques

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Best Practices/Techniques Operational Turnarounds and Financial Restructuring - Association of Professional Consultants Presentation

  1. 1. Best Practices in Turnaround Consulting Jim Davidson CTP, CIRA, CPA/CFF, CFE, CM&AA
  2. 2. 7 Questions to be Answered • Complexities of turnarounds this recession? • Who engages turnaround consultants? • Immediate turnaround issues to focus? • Consulting skills required for turnarounds? • Best practices and techniques? • How to ensure prompt payment? • Takeaways/lessons learned for your practice? Avant Advisory 2
  3. 3. Current Turnaround Environment • More than other consulting services • Less than previous recessions • Why? – Excess financial leverage coupled with decreased collateral values – High valuations/financing - enterprise value not asset based – Greater capital structure complexity 3 Avant Advisory
  4. 4. Current Environment (cont’d) – Credit market collapse – No liquidity, credit drought – Fewer financing options – Lenders “kicking can down alley” – Amend, extend and pretend – Out of court workouts – Significant uncertainty and legal minefield 4 Avant Advisory
  5. 5. Current Environment (cont’d) • Bankruptcy is questionable – Under secured creditors – Lack of DIP financing – Complexity and lack of visibility (feasibilty) – Few successfully reorganized – Many unsuccessful – Several Chapter 22s 5 Avant Advisory
  6. 6. Current Environment (cont’d) • Bankruptcy Law Changes – New 20 –day supplier administrative claim, e.g., Circuit City – New utility deposit requirements – Expanded inventory reclamation rights – Tighter deadlines – Filings shifted to states out of California 6 Avant Advisory
  7. 7. Current Environment (cont’d) • Result? – Fewer traditional Chapter 11 reorganizations – Increased: • Straight Chapter 7 liquidations • Chapter 11 liquidations, i.e., 363 sales • Chapter 7 conversions • State alternatives • Less turnaround consulting 7 Avant Advisory
  8. 8. Current Environment (cont’d) • Costs and timing are overriding – Fast “pre-packs,” e.g. 32 hours – More 363 sales – More out of court sales/liquidations • Consensual “friendly” foreclosures • ABCs • Receiverships 8 Avant Advisory
  9. 9. Types of Insolvency Consulting • “Stressed” e.g., Covenant violation – Best chance for course correction – Business assessment/financial analysis – Identification /correction of underlying problem – Likely out of court “workout” – Easiest on the restructuring/turnaround continuum 9 Avant Advisory
  10. 10. Types of Insolvency Consulting • “Distressed,” i.e., Zone of Insolvency – Legal determination based on financial parameters – Balance sheet and cash flow criteria – Expanded D&O duty of care – Tension and competing goals between creditors and corporation/shareholders – Insufficient assets and/or cash flows may results in suits against “deep pockets” 10 Avant Advisory
  11. 11. Types of Insolvency Consulting • Operational Stress – Loss of revenues (industry or macroeconomic) – Increased expenses – Fixed expenses (high operating leverage) – One or all reflected in operating losses – Result in negative cash flows – Turnaround/operational restructuring candidate 11 Avant Advisory
  12. 12. Types of Insolvency Consulting • Financial Stress – Poor financial structure – Excess debt – May be fundamentally strong/operationally solid – “Good-Company-Bad Balance Sheet” – Inability to refinance, extend, or restructure – Maybe timing or short-term liquidity – Financial restructuring candidate – Balance sheet make-over 12 Avant Advisory
  13. 13. Types of Insolvency Consulting • Both Operational and Financial Distress – “True” corporate turnaround situation – Extensive, pervasive revamping of operations and financial structure – Potentially performed out of court subject to: • Industry • Timing • Complexity of capital structure • Number and cooperation of constituents 13 Avant Advisory
  14. 14. Types of Insolvency Consulting • Both Operational and Financial Distress – If factor(s) are overriding, then, – Likely Chapter 11 reorganization – Retailers and restaurant chains • Reduced sales (consumer retrenchment) • High operating expenses, e.g., leases and franchise agreements • Low collateral values • High debt levels • Extensive legal obligations, i.e., executory contracts – Alternative - Chapter 7 liquidation 14 Avant Advisory
  15. 15. Turnarounds – Who? • Restore lender confidence and credibility – Experience and expertise – Former CEOs, COOs, and CFOs – Professional certifications (e.g., general practitioner versus specialization surgeon) • Financial advisors (CIRA, CPA, CFE, etc.) • Certified Turnaround Professional (CTP) 15 Avant Advisory 15
  16. 16. Types of Insolvency Consulting • Out of court workout/financial restructuring • Turnaround (strategic, operational, financial) – All encompassing and pervasive – May be out of court or in-court (bankruptcy) • Reorganization - Chapter 11 bankruptcy rehabilitation via in-court legal process) 16 Avant Advisory
  17. 17. Requirements of a Turnaround • Financial expertise, e.g., financial statement restatements (fraud) – 13-week rolling cash flow forecast (Detailed cash analysis – Liquidity critical - preserving, maximizing – Working capital - receivables, inventory, payables – Balance sheet -Scour for any sources, e.g., tax refunds, noncore asset sales, sale-leaseback – P&L analysis – Revenues, logistics, outsourcing, lean manufacturing, fixed costs reduction (e.g., facilities) 17 Avant Advisory 17
  18. 18. Requirements of a Turnaround • Management replacement • Viability analysis • Liquidation analysis/valuation versus • “Going-concern” valuation • Identification of and return to core operations 18 Avant Advisory
  19. 19. Requirements of a Turnaround • Customer profitability analysis (large/small) • Inventory analysis (turns, margins, non-core products by item) • Vendor analysis-critical versus non-critical • Four-wall analysis • Dashboard metrics – KPIs and CSFs • Cash flows - Incessant, detailed scrutiny 19 Avant Advisory
  20. 20. Required Skills and Experience • Financial expertise (e.g., CFO, Controller, CPA, CVA) • Distressed operational experience • Turnaround expertise (CTP, CIRA) • Industry experience (retail and restaurant, healthcare, manufacturing, high technology/E- commerce, energy, real estate, hospitality, etc.) Avant Advisory 20
  21. 21. Consulting Specialties • Functional experience – Strategy – Marketing/revenue enhancement – Lean manufacturing/Supply chain/logistics – International/import/export – Product development – Organizational/management – Human resources/incentives 21 Avant Advisory
  22. 22. Turnaround Case Issues and Moving Parts • Alternative Strategies impacted by: – Industry • Macroeconomic/ recession, i.e., cyclical trough • Industry concerns may dominate • Highly competitive • Consumer retrenchment • Financing dependent 22 Avant Advisory
  23. 23. Turnaround Case Issues and Moving Parts • Products and Markets – Quality and differentiation critical – R&D and intellectual property – Co-dependency with dealership network – Expanded into additional product lines – Increased capital expenditures (e.g., molds, facilities, fixed costs) – “Stuffed” sales channels – Cannibalized other higher margin sales 23 Avant Advisory
  24. 24. Turnaround Case Issues and Moving Parts • Legal issues – Product liability – Environmental liability – Employee litigation – Successor liability • Continuing management • Continuing products • Continuing name/brand Avant Advisory 24
  25. 25. Turnaround Case Issues and Moving Parts • Management and Corporate Governance – Misdirected board involvement/arrogance – Sales dominated versus oriented (unbalanced) – $85MM purchase/investment now $12MM – Management assessment • Competence and industry experience • Related party affiliations • Loan guarantees Avant Advisory 25
  26. 26. Turnaround Case Issues and Moving Parts • Operations – Pluses and Minuses – Lean manufacturing and efficient supply chain – Strong supplier relationships – Strong dealer relationships – Industry leader – Poor information technology utilization – High facility fixed costs Avant Advisory 26
  27. 27. Turnaround Case Issues and Moving Parts • Significant asset write-downs and operating losses – Loss on discontinued operations – Goodwill, intellectual property, and asset write- downs - $65MM – Lender repurchase requirements - $5 - $10MM – Industry and company sales declines exceeding 70% Avant Advisory 27
  28. 28. Turnaround Case Issues and Moving Parts • Capital Structure, Financing, Liquidity – Negative equity, significant debt – Lenders withdrawing from market – Primary floor lender curtailed lending – Primary bank group swept $3MM cash – Negative cascading effect – “Melting ice cube” Avant Advisory 28
  29. 29. Turnaround Case Issues and Moving Parts • Turnaround Strategy – Variable expense reductions – Marketing and promotion/dealer refocus – Retrenchment to core products and business – Reemphasis on product development/innovation – Working capital reductions Avant Advisory 29
  30. 30. Turnaround Case Issues and Moving Parts • Sales Process and Alternatives Evaluation – “Naked” out-of-court asset sale – “Loan to own” and/or “Own to Own” – ABC (Hand over the keys”) – Prepackaged bankruptcy – 363 sale (clear title) – “Friendly” UCC Article 9 Foreclosure Avant Advisory 30
  31. 31. Fees –When and How • Retainers or guarantees – Risk of bankruptcy – Unsecured creditor • Carve-outs • Fee applications – Trustee reviewed – Parties-in-interest objections – Court approval Avant Advisory 31
  32. 32. Takeaways – Turnaround Consulting • Takeaways – Challenging, demanding, and exciting – Risks and opportunities in turnaround consulting – Riches in the niches – Be qualified, prepared, experienced, credentialed – Align with other experts and specialist consultants 32 Avant Advisory
  33. 33. Takeaways – Turnaround Consulting (cont’d) • Lessons learned/ideas for your own practice – Specialization, i.e., core competencies and differentiation in services have value – If diversify service offerings, do so cautiously – Do not stray too far afield of your competency – Track margin trends by service offering – Focus on higher margin not commodity services 33 Avant Advisory
  34. 34. Takeaways – Turnaround Consulting (cont’d) • Lessons learned/ideas for your own practice – Track and project your cash flows – Monitor cost structure, especially, fixed costs • Debt • Office facilities • Expanding too quickly • Staffing – Incessantly focus on core competencies 34 Avant Advisory
  35. 35. QUESTIONS? 35 Avant Advisory
  36. 36. Avant Advisory Group Presentation by: Jim Davidson, CTP, CIRA, CFE, CPA, CM&AA Managing Director 714-928-7888 • Operational Turnarounds, Financial Restructuring, Bankruptcy • Mergers, Acquisitions, Capital Transactions • Forensics, Fraud Investigations, and Dispute Consulting • CFO and C-Suite Interim Management Services Los Angeles Newport Beach San Francisco Santa Barbara 36 Avant Advisory

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