Stories from the Field: Issue 01

“Always have a Plan B”

By Jeff Thommes

“Very rarely is it your Purchasing Manager who’s the first to tell you that it’s over…”

“But when ours came into the office and announced that our two best suppliers – our aces in the hole – had both closed up shop the same week, I knew we had to move to ‘Plan B’ immediately.

“This was no lightweight outfit. This was an American-owned and operated apparel manufacturer that for 100 years had beat the odds. They dug in and survived when 99 % of their industry moved to Asia, turning entire towns in New England into ghost towns. They developed a niche, they protected their niche and… their niche dried up.

“Clear thinking in a crisis…”

“They tried to recreate themselves as distributors but with their manufacturing mentality, they were like a fish out of water – a minnow, really – and the online guys ate them alive. When they stopped making payments on their secured lender debt, their banker lost faith and told them to pick a crisis management firm from a list of 3, including Beane Associates.

“The owner wanted two specific capabilities. First he wanted a real business consultant who could help him turn the business around. Second and to his credit, he recognized that he needed a firm with solid accounting expertise to help him navigate a wind down – his Plan B – if one became necessary.

“He saw that Beane was strong in both areas and we immediately started down our Situation Assessment Checklist. We knew we didn’t have much time.

“The answer was hiding in plain sight…”

“Our initial assessment was pretty ugly. All their attempts to break out of their shrinking market had failed. But I had a ‘Lightbulb Moment’ when I ran their Sales History through our Dynamic Analysis Tool. There, hiding in a pile of failures was a success.

“They had steadily added new Sales and Profits in one underserved market, yet their market share in that area was still tiny. With hard work and little luck, they could get the growth they needed for a turnaround from this niche market.

“This company was like a big old airliner that had been grounded because the engine was shot, there was too much dead weight on board and there wasn’t enough runway to get airborne again. We thought we might have a replacement engine and we knew we could shed weight but it was going to take a lot of trust from a lot of people to lengthen that runway.

“Everybody has to give, or nobody gets…”

“When we ran our 13 Week True Cash Flow Analysis we saw that we were really short on runway. We were going to run out of cash well before we could get our new growth engine cranked up. The lender – and the borrower were counting on us to find answers fast, so we turned to the weight problem.

“We prescribed and got quick approval for an immediate cash improvement plan. Fortunately we were able to win the trust of the employees and the suppliers, allowing us to quickly streamline overhead and reduce or postpone payables. Then we resumed making nominal payments to the bank, who really controlled our runway.

“The bank was encouraged by the discipline we showed by quickly lightening the load and resuming payments. And Beane had already earned their trust through several previous engagements, so they gave us the go-ahead to develop an extended financial and cash flow plan.

“You never really know until you do the numbers…”

“The deep dive Cash Flow and Liquidation Analysis revealed that if the bank pursued immediate liquidation, they stood to lose close to $600,000. But if they released an additional $350,000 to allow us to implement an extended business plan , the business could pay that back in 45 days and establish a fully collateralized liquidation position in 5 months.

“The bank’s support would also give us time to fully develop a longer term, Game-Change Plan (the new “engine”) that could get us out of Work Out. To reduce the bank’s exposure, Beane prescribed and got approval for a Performance-Based Funding Plan that tied additional funding to the company achieving weekly milestones. Our detailed analysis coupled with our track record with the bank convinced them to trust us and fund our plan.

“Always have a Plan B…”

“The business executed exactly to the planned cash and collateral plan and our airliner was rolling nicely down our extended runway when it happened. Like two crucial oil lines rupturing on our new engine, our two key suppliers closed up shop in the same week through no fault of the company.

“With no chance of lift off, we immediately went to Plan B, a controlled wind down. Because we had kept this option on management’s radar the whole time, we were able to safely ‘taxi back to the hangar’. Both the bank and the owners fully recovered their debt and the core employees received a generous severance package including a significant bonus for executing the plan.

“Everybody got to walk away and go on with their lives. At the end of the day, I feel good about that.”