Restructuring a Problem Company
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Your company is in trouble. Your orders are down, your customers don't pay, your employees are scared, and the ATM consistently spits back your card at you with disdain. Certainly you'll have to make some changes if you intend to survive. But what can you do?
Plenty, believe it or not. It may not seem like it now, but it's possible to dig yourself out of that hole and even come back stronger--provided you're willing to commit yourself to making some adjustments in the way you do business. We must warn you, this process is probably not going to be terribly pleasant. But walk yourself through the following 12 steps, in no particular order, and it'll all be worth it.
1. Find out how long you have to live.
You know it's all about the green. It doesn't matter a lick that you are close to profitability or have thousands of satisfied customers if you run out of cash. So if you're not obsessed with your OOC ("out of cash") date, you should be. Write it backward on your bathroom mirror in red lipstick.
Improving your cash-flow position starts with awareness. George Mueller, 31, CEO of digital lighting company Color Kinetics Inc. , is all too familiar with this concept: "At Color Kinetics," says Mueller, who has grown his Boston-based company from two to 80 employees in just about four years, "the CFO e-mails our exact OOC date to all senior management on a weekly basis, so that everyone is aware."
2. Get paid.
Go to work on your working capital. Howard Anderson, senior managing director of venture capital firm YankeeTek Ventures , says you should work on your accounts receivable every day. That's right, every day. It sucks, yes, but if you don't, two things may happen: 1) Some other guy gets paid first, or 2) Your customer goes out of business before paying you.
Mueller expands on the concept: "Bring the small-company aspect into it. Get your relationships to drive the payment process. You need to be able to say, 'Look, we are just a small company, and we need to be paid on time to work with you.' " In other words, work your contact, and stop dealing with that accounts payable department in Ireland.
In addition, don't be afraid to ask for upfront payments, offer special discounts for a limited time on accelerated payment and tighten up your credit policy. "Be careful about who you extend credit to," advises Anderson. At this point in the economy, you should have no reason to assume that the other guy isn't having the same financial problems you are.
3. Negotiate everything.
You have to balance your moral obligation to your suppliers with your goal of staying alive. Your major vendors constitute important relationships, particularly those that aren't easily replaced, and you also have a reputation to uphold. (Remember, for most entrepreneurs, you are your business.) However, your vendors would rather be paid later than never at all, and they would rather be paid 50 cents on the dollar now than 10 cents two years from now in bankruptcy court. You can negotiate with your vendors, as long as you're forthright. Say, "Look, I can pay you X percent now, and if we make it, I can pay you the rest later and we'll all win. Otherwise, you'll wind up getting a lot less."
4. Diet and exercise.
The key to survival, says Anderson, is to cut your burn rate. He recommends that you frame the following motto and hang it on your wall: "Use it up, wear it out, make it do, or do without."
Mueller agrees that even if you are a relatively new company, you can do better on cost control. "Frequently most people don't manage the expense line well enough," he says, "and that is the one line you have complete control over."
Variable marketing costs and travel and expenses are the first line items to look at. Mueller recommends asking your salespeople, "Do you really need to fly there this week? Can we send fewer people to the trade show?"
If you have experienced staff on hand, they should know the benchmarks for appropriate costs in your industry. "Once at Color Kinetics," explains Mueller, "our VP of manufacturing put out a notice that all overnight shipments had to be signed off by senior management. I thought this was a far too bureaucratic process at first, until I learned that our shipping costs where about three to four times that of our competitors. The result was significant cost savings."
If you don't have these benchmarks available in-house, go out and get them. For instance, six years ago, at age 31, Robert Kelly purchased Chicago-based skin care cosmetics wholesaler Phyto Cosmetics. Because Kelly was new to the field, he approached industry experts to find out where to get the most bang for his buck. "They told me which trade shows to go to and what returns to expect from various marketing techniques."
5. Beat the streets.
You need to get as much revenue in the door as fast as you possibly can. Change your pricing structure, increase shipping and handling charges, add an "administrative fee," look for new markets, seek out extensions to existing markets--or all of the above.
Meet with your sales team 10 times a day. Mueller says you better make sure your sales team knows what's important--the key accounts that will generate immediate cash and so forth--and get them focused on collections as well. In fact, why not get the whole company involved? Says Mueller: "Tell everybody to call five accounts. Everybody in the whole firm, start smilin' and dialin'. Give them the quick and dirty sales process, and for the next two weeks you've quadrupled your sales force."
6. Get the whole company involved.
You'll be surprised at the ideas that come up if you take the time to discuss your current situation with your employees. After all, they have a vested interest in your company's future as an ongoing concern, and they can really highlight the inefficiencies in your organization. Plus, if they come up with the idea, they'll be more willing to deal with the painful consequences. If it's your employees who together decide they can do without unlimited KitKats, then instead of an ogre, you're a hero. And instead of productivity suffering, it may actually increase.
Just the act of cleaning house can be a catharsis that gets your company in the mind-set of change. Moving offices is even better-a new look, lower costs and greater efficiency can often result.
Sometimes your problems are structural. Liz Goldberg, 32, owner of 2-year-old Chicago-based art consulting firm Design Arts Inc., learned that lesson when she started her firm with a partner, splitting the company 50/50. "I spent a lot of time just nursing the relationship," recalls Goldberg. "I was selling less and helping her more. Within six months, it became clear that it just wasn't working, so I decided to buy her out."
The resolution didn't come cheaply or painlessly for either party (ultimately it took enlisting lawyers to settle the buyout), but Goldberg was finally free to grow her business.
Kelly, of Phyto Cosmetics, outsources teachers for his educational line of business. "I tried three separate hires, and none of them worked out," he says. However, with outsourcing, he has about a dozen instructors delivering his product. Kelly says this solution gives him more coverage over a wider range of customers, allows him to hire better-quality staff and lowers his costs.
You can also try to outsource your bill paying, finances, taxes, payroll, IT and other time-consuming functions. If you have an outside investor, see if there are economies of scale to be gained by combining sales or administrative functions with other portfolio companies.
You may not think you have any room to cut staff, but you do. And if cash is really tight, a termination or two is practically unavoidable. This is tricky business, but if handled properly, it can really get your firm on solid footing. (The second article in this series, appearing in two weeks, will review the details of this painful but necessary step.)
If all else fails, consider a proactive liquidation. There are tremendous advantages to liquidating part or all of your company rather than being forced into bankruptcy by your suppliers.
First, if you liquidate, you call the shots. You can come up with your own game plan, reserve money for appropriate severance packages for laid-off employees, get your best vendor relationships their fair share, and best yet, go out in style.
Joel Toner, for one, SVP of business development for the now-defunct Garden.com, worked through the liquidation of the 350-person firm. "We made the liquidation decision primarily to protect employees and the customer base," he says. Going further out on a limb, explains Toner, would have jeopardized Garden.com's ability to pay severance. Furthermore, says Toner, it allowed them to "plan to go down in a dignified way."
Legal bankruptcy, on the other hand, means that you have no control. The court may take over, liquidate assets for a far worse price than you could have fetched yourself, and may not allow for your employees to be treated in a manner you think appropriate. It can also drag on for years.
12. Pull it together.
Remember these keys in implementing a restructuring:
- Be a realist: Your company is not going to change into Microsoft overnight, and changes take time to take effect. Make good business decisions, and the rest will come.
- Communicate often: As Mueller says, "More communication is always better than less communication." Your employees, customers, suppliers and investors are in this with you. Let them help out.
- Lead by example: "If you're going to ask your employees to take a salary cut," says Anderson, "start with yourself. If you want them to work extra hard, don't leave early on Friday afternoon."
- Know when to call it quits: Not all great ideas are great businesses. Furthermore, it's no fun to live a constant hand-to-mouth struggle. There are a lot of things to do in this world, so don't waste too much time trying to raise the Titanic.
Being a small company offers you many advantages-you are nimble and can change direction at will. Use your small size to your advantage, and change often. All the pain you go through now will prolong your life and ultimately make your firm more efficient. And don't get distracted from moving from A to B because of long-term concerns. Remember John Maynard Keynes's platitude: "In the long run, we are all dead."
Watch for our article on how to lay off employees, appearing in two weeks.
As a CFO, CEO and consultant, Dale Galvin has noticed an inverse relationship between the quantity of hair on his head and the number of employees he's terminated. He holds a degree of economics from Cornell and an MBA from MIT, neither of which was able to save his last two companies from the guillotine. He is now traveling the world seeking new methods of making employees' lives miserable.