Chapter 1
Understanding Corporate Turnarounds

If stupidity got us into this mess then why can't it get us out?

-Will Rogers

The U.S. Federal Bankruptcy Court in New Orleans would never be described as regal or stately. Instead of marble floors and ornate molding it held all the charm of a Soviet era department of motor vehicle office: pale fluorescent lighting washed the stale air, dingy yellowing cinderblock walls sweated with the morning's dew. Metal chairs were lined up in orderly rows across the dead linoleum tile. A judge and her clerks worked behind two large wooden tables stacked high with files. It was just me and all the other losers assembled there that day to file personal Chapter 7 bankruptcy. I had a 780 credit score but that was about to tank because I'd personally guaranteed corporate debt on our family business prior to Hurricane Katrina and was now at rock bottom of society surrendering my assets to the court in exchange for a release of my debts.

Forty years of my life had led me to this low point. Our family home and neighborhood were wrecked in the storm, so my wife, our three young children, and I spent eight months living in a small camper in the driveway while we rebuilt the house on nights and weekends. My participation trophy was this day in court. I'd reached bottom and it was time to push off and rebuild, but I had few options; no corporation would hire a failed entrepreneur and I was dead broke without money to start or buy another business, and my credibility and confidence were both pretty well shot. Metaphorically I was naked and alone, picking myself up from the dust of my own failure. Every bone in my body yearned for security and comfort, and I dreamed of a cushy corporate job at a cushy company far away from the chaotic and punitive nature of insolvency. Well, almost every bone in my body yearned for that security and comfort, a small upset part of me wanted to stay right there in the dirt and fight my way back, which is ultimately what I did.

In those brief moments when my mind was not racing with anxiety, I reflected back . I'd played my cards wrong. I zigged when I should have zagged. The bank and its attorneys always seemed to know what was happening, but I rarely did. My corporate attorney didn't understand insolvency, whereas my bankruptcy attorney was a one-trick pony who only knew how to file bankruptcy. I'd been a checkers player trapped in a game of chess.

I'm a godawful loser, so I began to obsess about what could have been. I gave up hobbies and casual reading and churned through every book and article I could find on the topics of insolvency. I re-read all my college finance and accounting textbooks and obsessively relived the last five years of my life which had led me to this gut-wrenching failure. I sought out corporate turnaround pros and befriended them. I talked my way into interviews with most of the major East Coast restructuring firms, I helped friends with their challenged businesses and took a terrible job with a distressed art company just to get back in the arena (plus I desperately needed a paycheck). Eventually, my father gave me the boost of confidence I needed to launch my own consulting business focused strictly on corporate turnarounds. Five lean months later I landed my first real assignment, a Detroit machining company whose sales had dropped 90% in nine months. The bank was hostile and moving aggressively toward liquidation, and the owner was leaving for three months of intensive cancer treatments. I hit that place with a vengeance and dug in for the battle of my life. For the creditors we were just another Detroit business going down the tubes in 2009, but for me and 80 families it was personal; this was the rematch I'd been obsessing over for years. I went straight for the jugular, every jugular, and they went straight for mine. I was there to save 80 jobs, but I was also there for vengeance, and this heartless, bureaucratic banker was merely a proxy for the heartless, bureaucratic bankers I had to deal with in my own insolvent company. I was punching through targets trying to reach back and alter history. It was a street fight, but it worked. We turned profitable in month two and stayed that way. The business healed me as much as I healed it and I left Detroit with a calm confidence that I hadn't known in a very long time.

For 18 years now, I've worked exclusively in distressed businesses, five on my heels as an outgunned, stressed-out entrepreneur, and the last 13 on my toes as a corporate turnaround specialist helping entrepreneurs keep their businesses, wealth, and dignity intact. This book is written for the beleaguered entrepreneur that I once was and all the ones I hope to help over the rest of my career. This is the book I should have read before I first personally guaranteed corporate debt. It's a complete primer on fighting your way out of corporate distress, saving jobs, fortunes, and the communities they support.

Turnarounds versus Corporate Change

In my MBA program, we studied corporate change agents, the people who initiated and championed change in big corporations - you know, the crowd celebrated in pop management literature. But this is as deep as our study went: heroic characters like the team who launched Post-it Notes off 3M's massive and stable balance sheet. We never touched on insolvency or distress and we darn sure didn't discuss personal guarantees and debt collection. It's as if we studied life without ever considering illness and death.

Despite this failing in education, everyone pretty much knows that corporate turnarounds happen and are generally a good, though uncomfortable, thing. Turnaround is an imprecise term in corporate parlance. Sales managers claim a turnaround when they increase the top line. Presidents and general managers claim a turnaround when they produce significantly better profits and CEOs when they produce a significantly stronger balance sheet. Most mainstream business books and magazines have a loose definition of turnarounds ranging from banal change to trauma surgery, each associated with symptoms of decline.

Turnarounds are often like a corporate illness; sometimes a person or business just gets a bit of malaise and they need a little pick-me-up to regain focus and motivation. Sometimes the underlying issues are more serious, like flattening sales, where we just need to get the top line growing again. Turnarounds get interesting as the problems stack up; combine your malaise and softening sales with growing overhead. Throw in margin compression and factory bottlenecks and you start needing some real turnaround expertise. The problem here is that the entrepreneur or CEO has probably never been through this before and probably doesn't really understand the balance sheet as well as they should (I didn't). So, the CEO bravely tinkers with the business but doesn't move out ahead of the problems.

But imagine that, as a CEO, you've persevered in maintaining your entrepreneurial optimism and remained convinced that the angel of good fortune will return to you as she had at other critical times in the past. But this time she's late and you just lost a key employee, customers have taken you off the bid list, and vendors are shutting you off. This is when you are sliding on ice, turning the wheel of your car, pumping the brakes but not changing the business's dangerous trajectory.

At some point, you'll trip one of the financial covenants in your loan agreement, which means it's very late in the game, because these are backward-looking formulas. The game-changer is tripping the approximately 1.2 minimum debt service coverage ratio, which is a trailing 12-month calculation, so it's old news by the time you trip it. When this happens, you'll be called to the carpet at your friendly neighborhood bank. This is an awful experience, but in reality, it is great news because you now have concerned and committed partners focused on your business. They exert all sorts of pressure and may hand you the name of a turnaround consultant. Because they are a bank, the consultant they recommend will likely be a vetted and experienced professional who they trust in situations like yours. You will suspect this person is an agent for the lender and working counter to your interests; it's only natural to have that suspicion. I've found that most turnaround specialists are more like surgeons - trusted professionals who are fully committed to your long-term survival, regardless of your personality or how much near-term pain you'll have to endure.

The worst crisis situations require a special breed of turnaround pro, someone with a perverse love of the challenge and a deep emotional commitment to their work (a grudge from prior failure helps). Imagine you've got all the troubles we've previously discussed and then federal agents raid the facility. Customers scatter, the lender calls the loan, the union is unpaid, the IRS is foreclosing, 401k trust funds are missing, your accounting is a disaster, and vendors all hold you hostage. There are actually people who can't stop smiling when they get to fix these disasters. The higher the flames the happier they are walking in the front door.

This book discusses the techniques, tactics, and strategies deployed in the most pressing turnaround situations because a good crisis amplifies issues and brings about clarity. Collecting receivables more quickly is...