by James E. Jobes
Link Magazine
February 2004 Spring Issue
Eighteen years ago, David Hartwig was an experienced sales representative for a large fastener distributor who declared that Just-in-Time delivery was a business fad and there was no future in considering it. Hartwig recognized the mistaken judgment, and unable to convince his employer otherwise, left to form his own fastener company in 1987 working out of a two-car garage.
It was the right decision. His company, Interplex, Inc. of Lake Villa, Illinois, a far northern suburb of Chicago, enjoyed a string of 14 years of solid growth. Hartwig built it up to 25 employees with monthly sales in the mid-six figures, an expansive office and warehouse, bagging machines, dedicated computers and a blue chip customer list that included many Fortune 500 companies.
Business continued on an upward path until the end of 2000. The economy began to soften at that time; and in December of that year five of Interplex’s good customers filed for bankruptcy. Ten months later, the 9/11 disaster occurred and business slumped even further. His accounts receivable ballooned; and where previously Hartwig had had to write off at most $15,000 a year in bad debts, the figure jumped to $100,000. In all, Hartwig estimates he lost 70% of his business between 2001 and 2003.
To survive, Hartwig consolidated his inventory so that half the building that Interplex owned could be leased to another business, and reluctantly started reducing the headcount. He also tried using an outside sales representative, and on another occasion, hiring an operations manager so he would have more time for outside sales calls. Neither of the hires proved successful and the business continued its slide down the slippery slope toward insolvency at an increasingly accelerated pace.
By the end of 2003, Interplex had fallen behind on its state and federal payroll taxes as well as local real estate taxes, was seriously delinquent on principal and interest payments with its bank, and was reduced to using credit card loans to pay for its inventory from vendors. Supplier relations was another of the thornier problems for Interplex. Volume was such that it was difficult to get quantity discounts and small order shipping costs further cut into profit margins.
As the situation worsened an astute vice president at the bank suggested that Hartwig contact the Turnaround Management Association (TMA) for help. The vice president was quite aware of the totality of Interplex’s problems, but had no interest in seeing it file for bankruptcy even though 75% of the loan was backed by a Small Business Administration guarantee. Foreclosure would have lead to a fire-sale of the building, inventory and accounts receivable leading to a shortfall on the loan and possibly personal bankruptcy for Hartwig. He followed the advice and contacted the TMA seeking assistance.
The TMA is a national organization of turnaround practitioners, accountants, lawyers, lenders, academics and others devoted to leading distressed companies to recovery. The Midwest chapter, headquartered in Chicago, is the TMA’s largest and has over 700 members. They help under performing companies return to profitability all over North America and the world.
The Midwest chapter also offers a valuable pro bono assistance program that provides a free service to troubled companies that meet certain criteria. Organizations needing help must have been in business for at least three years, not part of a franchise organization, have fewer than ten employees and sales of less than $2.0 million.
Lloyd Singer, managing director of Business Renewal Solutions and a TMA member, undertook the assignment and formed a team along with his partner, Joe Tesoriere of Business Renewal Solutions and Charles Winternitz of Winternitz, Inc. The bank also participated in the turnaround process. The group, lead by Singer, started an intensive investigation of Interplex in January, 2004.
They recognized that Hartwig had already done the preliminary work to better match expenses and revenues. Headcount had been halved, and space cleared that was now available for rental income. On the positive side, Hartwig had a loyal following among his customer base, the remaining employees were experienced workers and Interplex owned the building where the company had its operations.
Following the investigation of the problems facing Interplex and an evaluation of the alternatives, the team instituted a number of actions that one year later has halted the decline and provides a platform for recovery.
Here are the actions they took. The first was to obtain concurrence with the bank to refrain from immediately enforcing the basic terms of the defaulted loan for 90 days. An appraisal of the building Interplex occupied was conducted and the building was put on the market for slightly less than the appraisal. The building appraisal is approximately 80% of the loan obligation. In addition, the front of the building that had been cleared was leased to a retail establishment and the second floor converted and rented as a loft apartment. This yielded monthly payments from the tenant equal to approximately 80% of the bank interest.
Through one of Singer’s business contacts, a new sourcing strategy is evolving that will both lower the cost of acquiring inventory and provide much needed vendor credit. He knew of a publicly held electronic assembly company with a purchasing office in Taiwan that was looking for ways to expand business. The CEO of the company especially wanted to absorb the cost of the 13 person purchasing office by having them take on new activities.
The consequence of the symbiotic need is that the electronics company is now sourcing major parts Interplex needs at better prices as well as handling credit with the vendors in return for a percentage of the resulting sales. Singer also put together a small investor group to make revolving cost of goods sold loans in order to maintain the flow of merchandise to Interplex’s customers.
In addition to these cost reduction and sourcing strategies, Interplex is working on an acquisition of another parts distribution company that is approximately 70% of Interplex’s size. The CEO of the acquired company will join Interplex and assist with sales to existing accounts as well as create new business.
Real estate taxes have been paid, a payment plan for taxes owed the state has been worked out and Interplex is current with its quarterly IRS obligation. An offer has been made to the IRS for the arrears portion of their Federal taxes.
While the solutions to Interplex’s problems and owner Hartwig’s haven’t been brought to a complete resolution, the pro bono service of the Midwest chapter of the TMA lead by Lloyd Singer has certainly reversed the slide down the slippery slope. Morale at the company is up and the business is once again growing. In fact, sales for the fourth quarter for Interplex are up 50% compared to the first quarter; and Hartwig expects the growth to continue throughout 2005. There’s comfort in knowing that arrangements that have been put in place to assure that Interplex will continue to be dependable supplier of fasteners to the manufacturers of northern Illinois. So dependable that Interplex is looking for additional acquisitions as well.
As the bank representative said, “We really didn’t want to take a bath on the Interplex loan, and I knew that the Turnaround Management Association’s pro bono service could be of real service here. Companies within the TMA organization such as Business Renewal Solutions that participate in the pro bono service have to be large enough and have had the experience to be able to afford to do pro bono work so I knew Interplex wouldn’t get any dilettantes to help work out the problems. Lloyd Singer and his team proved that.”
“I’m surprised that more banks in our area aren’t aware of the services. After all, strong companies, providing good service that contribute to America’s economy are what it’s all about.”
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The Midwest Chapter of the Turnaround Management
