Good advice for hard times – management techniques on turning around a failing company; includes article on how to avert bankruptcy

Steven B. Kaufman

In June 1991, Gene Manno, the president and chief executive of Arix Corp., a small Silicon Valley computer manufacturer, was contemplating filing for bankruptcy–a decision he found impossible to avoid. The company’s chief customer had dramatically cut orders, and Arix was on the verge of completing seven consecutive quarters of red ink. The firm had already laid off most of its work force and begun vacating buildings.

Manno did proceed with bankruptcy, but in an innovative way that ultimately allowed the Sunnyvale, Calif., company to buck the odds and survive. Manno turned to Brooks & Raub, a Palo Alto, Calif., law firm that specializes in prepackaged bankruptcies, and together they developed a debt-reduction plan while formally spending only 45 days in bankruptcy court. Essentially, creditors agreed to swap Arix debt for Arix stock.

Relying on a prepackaged bankruptcy significantly sped up the normal bankruptcy route by laying much of a bankruptcy’s foundation–such as assembling a committee of creditors and negotiating with them—outside of the court arena. “If I had gone the traditional bankruptcy route, Ark would have died, and I would have been known for taking a company into bankruptcy, rather than out of bankruptcy,” Manno says. “At least I have proven that I can manage a company through very tough times and make it survive.”

Manno’s experience helps paint an encouraging picture against the backdrop of soaring business failures nationwide. According to Dun & Bradstreet Corp., 96,857 businesses failed in the U.S. in 1992–a record, up from 88,140 in 1991. The outlook for 1993 shows little sign of improvement.

Joseph Duncan, D&B’s chief economist, says the failure rate typically stays high well after the end of a recession, largely because of a lag between the failure of big businesses and the ripple effect on smaller businesses. The most recent recession ended officially in the spring of 1991, but the recovery so far has been less than robust.

A separate D&B statistic that tracks the bill-paying performance of 1 million U.S. firms also suggests more trouble ahead. (The index measures whether firms are paying their bills more promptly or less promptly; a healthy reading of zero means that most companies are paying their bills within 31 days.)

In the fourth quarter of 1992, the index stood at minus 5.0, an improvement from the recession low of minus 10.2 a year earlier. But the smallest firms—those with fewer than 20 employees– aren’t faring nearly as well as the average. According to D&B, their reading was minus 7.5 in the fourth quarter of 1992. And preliminary data from the first quarter of 1993 indicate that the payment index figures have deteriorated, not improved.

D&B Vice President David Kresge says bill-paying performance isn’t likely to improve much soon because the big companies on which many small companies depend aren’t experiencing much of a sales increase. As a result, small companies may find that the only way they can preserve cash is by paying their suppliers more slowly. “Small businesses are still facing a long, painful period,” he says. “The number of small-business failures will remain high for at least another year.”

But, like Manno’s company. troubled companies can often manage their debt if they face up to their problems before it’s too late. A key to solving such problems, say business-crisis consultants, is to avoid denial.

“Many entrepreneurs have tremendous egos,” says Bud Bergeron, president of Bentley Banks & Cross, an Irvine, Calif., debt-management firm. “They start business with the attitude that they can’t fail. They just don’t want to admit failure and look for help.”

Says Charles Boynton, a principal at Bibeault & Associates, a San Francisco crisis-management firm: “Many businesses stumble onto a slippery slide and then begin to fall down. They say, ‘My God, something must be done.’ But they procrastinate, and eventually it becomes too late. Denial can have an almost catatonic effect throughout an organization.”

Another reason business owners delay seeking help is because they believe that their sales will improve as the economy improves, says Susan Sutton, a bankruptcy attorney and turnaround specialist in the San Jose, Calif., office of Gibson, Dunn & Crutcher. “If they can just hold on long enough, they figure, the economy will turn around. If they bet right, fine. But if they bet wrong, the results are disastrous.”

Once businesses decide to address their problems, they can seek the help of reputable debt-negotiation companies, crisis-management firms, or, like Manno, bankruptcy attorneys who favor informal workouts or relatively speedy, “prepackaged” bankruptcies.

In the case of very small businesses with relatively simple problems, the tab for some of these alternatives can be as low as $2,000. The potential rewards: Their companies are salvaged surprisingly often, creditors are paid something, at least some employees keep their jobs, and owners and top managers become imbued with a new sense of optimism.

For a Washington, D.C., auto-parts store, turning to a crisis-management firm was its answer. When the store’s revenues began to plummet last summer, it blindly reacted by doubling its radio advertising. The store, which declines to be identified, didn’t even bother to find out which stations appealed to the demographics it sought. “The owner was wasting his money,” recalls Tom Thompson, the crisis-management consultant who stepped in to help. “And the worse things got, the more he spent.”

At Thompson’s urging, the store trimmed its advertising and focused on hard-core cost cutting that included laying off 40 percent of its employees (it wouldn’t disclose the number). He also helped the owner renegotiate his lease at far more favorable terms. Now the store is breaking even and rebuilding its business by selling more of its wares directly to service stations.

A turnaround has also occurred at Air Comfort Corp., a Broadview, Ill., heating, ventilation, and air-conditioning contractor that got into trouble after a new executive pushed the company to pursue bigger and more expensive–but also much riskier–installation jobs. As a result, the $10 million company racked up a half-dozen jobs with cost overruns totaling nearly $1 million. On other projects, the company wasn’t paid at all. With the help of a crisis consultant, President Nancy Smerz fired the executive, laid off 25 employees, and refocused the company on its original business.

Today, Air Comfort’s sales are rebounding, and the company is back in the black. And Smerz says she has learned a valuable lesson: “It’s definitely best to stick with the work you know best and the customers you know well.”

Debt-management consultants are also proving to be good negotiators on behalf of those with credit problems. Bob Nance, owner of Bob’s Tire, a Red Bluff, Calif. fire store and brake-repair shop, last year got help from one such firm–Huntington Beach, Calif.-based Arbitronix, Inc.–in reducing a $54,000 bill to $27,000. Nanco had massed that bill to buy animal-feed grain to give away to customers during a promotional campaign. That sparked more business, but not enough to cover the grain costs.

“Before I hired Arbitronix, I would say the odds were 100-to-1 that my business would not survive,” Nance says. “Now I would say my odds of survival are almost 100 percent. When a stranger represents you in a debt problem, it helps to show that you really don’t have the ability to pay what you owe in full.”

Clearly, seeking expert help early is the key to survival once a company falls on hard economic times. Bibeault & Associates’ Boynton says it’s imperative that businesses face up to the problem early, no matter how painful that process may initially be. “If they confront their problems quickly and seek help,” he says, “people can save their businesses nine times out of 10.”

To Avert Bankruptcy

The following suggestions are drawn from various experts’ recommendations on ways to keep a firm from going bankrupt.

Generally, owners should avoid getting bogged down in day-to-day activities. Pay close attention to what competitors are doing, and ask customers what they like and don’t like about your operation.

If sales are slowing, don’t let your salespeople automatically talk you into lowering prices. This may not generate more business, and salespeople may be coming to you only because you’re the point of “least resistance.” In a sluggish economy, salespeople often find it easier to persuade management to offer better deals than to convince customers there is genuine value in what you’re selling.

Plan ahead, with heavy employee input, and have a contingency plan in case things turn out worse than expected.

Regularly collect solid financial data. If inventories start rising or long delays begin cropping up in accounts receivable, pay close attention. It may be a sign of trouble, and it’s best to address it before it evolves into a serious debt problem.

Until it’s crystal clear that the economy is stronger, be wary of the credit-worthiness of prospective new customers. If you’re not, you may put on your books a company in precarious straits.

If debt becomes a problem, don’t deny it. Seek outside help quickly. This often spells the difference between survival and collapse. Three good sources of outside help are reputable debt-negotiation companies, crisis-management firms, and attorneys who specialize in informal workouts and “prepackaged” bankruptcies. They all speed formal Chapter 11 bankruptcies and bolster the odds of survival.

Consider also free counseling from the U.S. Small Business Administration’s Service Corps of Retired Executives.

Steven B. Kaufman is a free-lance writer in San Jose, Calif.

COPYRIGHT 1993 U.S. Chamber of Commerce

COPYRIGHT 2004 Gale Group

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