January 10, 2005
Can our struggling firm be saved – or is it time to pull the plug?
by Dee Gill
Entrepreneurs love to talk about perseverance. But knowing when to give up on a business is at least as difficult as deciding to stick it out.
That was the position Bart McCartin found himself in four years ago, when the future of his family’s industrial construction business looked particularly bleak.
Hammond, Ind.-based McCartin Industrial Services, which Mr. McCartin’s father, grandfather and uncles had run for nearly a century, started sinking fast when the steel mills and power companies that had been customers for decades defaulted on payments.
“All of a sudden, we started watching our customers and competitors go bankrupt or close their doors,” Mr. McCartin says.
Faced with the same fate, Mr. McCartin took a last desperate chance: In 2001 he hired turnaround specialist Ray Anderson, founder of Burnham Venture Management in Chicago, and McCartin Industrial began its comeback. Revenues went from about $20 million in 2001 to around $135 million in 2004, with profit gains to match.
Every struggling entrepreneur hopes his situation turns out to be like Mr. McCartin’s: temporary, something like what Steve Jobs endured on the way to making Apple Computer Inc. great. But how can you tell if you’re engaged in a worthy fight or one that you’re doomed to lose?
While there is no formula for determining whether a suffering business can turn prosperous, there are a few clues. Turnaround specialists — professionals who work with businesses on the brink — offer a few red flags they commonly see in doomed businesses, in order from most to least obvious:
The business consistently burns more cash than it produces.
“A lot of business people we see have the hope that the next quarter will be the one that will fix the accumulated sins of the past,” says turnaround consultant Tony Natale, president of Shepherd Partners Inc. in Chicago.
Such eternal optimism leads owners to justify escalating risks, such as borrowing against trusts in addition to spending the money from the house, the retirement account and the kids’ college funds.
“They end up getting personally liable for a lot,” Mr. Natale says. “If they are always having to pour things into the business, it is a huge red flag to me.”
The debt situation is dire.
Of course, “dire” is a subjective term, and what’s fatal in one situation is curable in another.
Turnaround consultant Lloyd Singer of Business Renewal Solutions in Lincolnshire recalls a client who went to the brink of bankruptcy before Mr. Singer arranged a purchasing partnership that both salvaged the company and led it to a 50% sales increase.
But even Mr. Singer admits those kind of late-game solutions are rare. When cash flow after interest and principal payments is negative, or the bank is threatening foreclosure, there is seldom time to fix core problems.
“If you can’t get flexibility out of your bank on secured debt, it’s very difficult” to pull off a turnaround, Mr. Singer says.
You have done everything possible to reduce receivables, and you’re still in the red.
The good news: Most people haven’t done all they could to lower their receivables. Sometimes it takes a new manager or consultant who can get tough with clients, as many entrepreneurs are reluctant to fire even really rotten customers.
“It’s hard to walk away from work,” admits Mr. McCartin, the construction company owner. “It really goes against the entrepreneurial spirit to turn down business.”
But by doing just that — dropping customers who were default risks or simply not paying high enough rates — he was able to go after much more profitable business. Largely as a result, he doubled shareholder value for his company in two years.
You can’t get any more help from your customers or vendors.
“When was the last time you asked your customers for a price increase?” asks Jeffrey Hyland, partner at Fort Dearborn Partners in Chicago. Or a price break from a vendor?
Most entrepreneurs are too embarrassed to admit their problems to vendors and customers, who are often friends, Mr. Hyland says. But if your service or product is valuable to a customer, or your orders are important to a vendor, they might rather cut you a break than see you go out of business. “And you know what?” he says. “They already know you’re in trouble.”
That brings up a final point: Oftentimes, pulling the plug on a business to salvage value for the people owed is the most honorable thing for a business owner to do. It’s a far more appreciated move than stringing out the operation until the last dime is spent.
“If you handle yourself admirably with your creditors, your suppliers and your customers, you will be more likely to get a second chance,” says Mr. Natale of Shepherd Partners.
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