Sometimes Even An Interim Executive Has To Say …
December 7, 2009
Interim Executive
By Al Davis, Principal, Revitalization Partners
At Revitalization Partners we are often asked to serve as an interim executive for companies ranging from start-ups to those with $100 million or more in revenue. This is a true story of one start-up Company that we became involved with.
It It begins when we were approached by a friend to look at a company in the alternative energy space.
The founders were two scientists, neither with any real management experience, but with what seemed like a true breakthrough idea in the market they were targeting … and they clearly needed an interim executive.
While the idea was new, the market wasn’t. In fact, ten’s of millions had been invested in the market by quality venture capital firms with no real commercial success. So how could a couple of guys from Seattle, working in the equivalent of their garage, come up with a breakthrough in the space? And more importantly, given their inexperience and no real team, how could they build a company?
After burning through the small amount they raised from family and two years of trying to raise money, they had gotten nowhere.
So they asked us to serve as their interim executive and to raise money to take the company forward. Since we believed that, in this case, the VC’s, despite the money seemingly wasted in related technologies, were wrong, we agreed.
As their Interim Executive, the first thing we did was have a smart, aggressive business development person, who was also serving as an interim executive with the company, talk with potential customers. The feedback was pretty much the same: “We’ve heard the claims you’re making before. We believed them, even invested in them and none of them worked out.
Bring us a fully formed working device with the characteristics you’re talking about and we’ll be very interested.”
Our challenge as their Interim Executive was how to get from a demonstration in a lab to a fully formed prototype with no money? The budget said the company needed several hundred thousand dollars to get the device built. Since there are, even in this financial climate, quality VC firms investing in pre-revenue companies, as their Interim Executive we told the owners it was just a question of time before one of them saw the potential. In the meantime, as their Interim Executive, we secured a bridge loan from angel investors could keep the company moving.
The company received several firm commitments to the bridge loan. One of the introductions made was to an experienced angel investor in California. He liked the idea, but not the bridge loan. He suggested he bring in one of his friends who headed a small investment bank to do a seed round.
As their Interim Executive, within two weeks I got them a term sheet.
The proposed valuation was very low by almost any standard, but it was a term sheet. They indicated that they might be willing to change the terms following some due diligence.
The potential investors came to Seattle and even brought in a local expert in the field from the University of Washington. Following due diligence, they came back with a new term sheet.
The valuation increased slightly. The terms proposed that the investors take control of the company. They did not like the fact that the company was being managed by an interim executive and wanted to bring in their own management team “right out of central casting”.
The founders would have about 40% of the company prior to any dilution for management or future offerings. They would not hold board or management positions … and the Interim Executive would no longer be needed.
The bank was in the process of doing a reverse merger into a public shell. The new public entity would make the investment. If the founders finished the prototype within six months, they would each get a small bonus. On the basis of the prototype being finished and the “story” that would generate, the “bank” would take the company public.
And yes, the bank had done this several times before in the past. Sometimes it worked out, sometimes it didn’t, but the insiders always made money. In fact, the shell that the bank was merging into was a medical device company that had failed after its public offering due to never getting its technology productized.
The inexperienced founders heard “public” and “bonus” and decided to go in that direction despite the advice from their entire very experienced interim executive management team. We decided to not go forward with this adventure in financing. And long after the time for due diligence has expired, the “investors” are still asking for more information.
When a company of any size brings in an interim executive, they do so in order to get the experience brought by that Interim Executive. Most individuals serving as an interim executive have a focus on creating value for all of the stakeholders. And when necessary, the Interim Executive is often willing to stick with and support their client companies over a long time horizon, creating “real” value as opposed to the value of a quick hit.
While it may seem that “money is money”, the quality of the source of that money is often the difference between creating a “story” and building a company.
Sometimes Even An Interim Executive Has To Say No …
Ten Key Steps To A Successful Business Turnaround
December 7, 2009
Business Turnaround
The majority of business turnaround books written about are written by executives who have fixed Fortune 500 companies. These individuals implement a business turnarounds by cutting large numbers of employees, tapping pension funds and getting banks to infuse capital, and selling off assets to raise cash and decrease debt.
However, few small and mid-size companies can make such dramatic business turnarounds changes. These businesses can have a difficult time getting a line of credit from a bank, typically don’t have meaningful assets to sell to increase the company’s cash position, and can’t afford to lay off large numbers of people.
To implement the ten keys in a successful business turnaround, you have to perform the following ten steps.
If you believe that you cannot execute these business turnaround steps in a timely manner, do not hesitate to seek out assistance. There are business turnaround firms such as Revitalization Partners that are focused on working with and helping small and mid sized companies.
BUSINESS TURNAROUND – 10 STEPS TO SUCCESS
Business Turnaround – Step 1: Write business, sales/marketing, and operation plans
Rarely do companies who write and maintain plans on an annual basis get into trouble. Plans chronicle the good and bad of the past and set a vision for the future. Investors, management, and employees all need to know what the company’s future plans are so they can avoid the need for a business turnaround. They need to see where they fit in, how they can help, and to share suggestions based on their expertise that will help the company succeed.
Business Turnaround – Step 2: Meet with key personnel and a board of directors or advisors
You must get the key people in the business together to have a no-holds-barred discussion on how to fix the company through a business turnaround. Don’t go into the meeting without a plan of your own. People lose confidence in leaders who lack a plan and vision for their business turnaround. The key in this type of meeting is to be self-assured, open-minded, and flexible.
Business Turnaround – Step 3: Revise plans
After listening to key executives in the business, revise and ask key executives to review the plans a second time before presenting the business turnaround plan to the board of directors and employees.
Business Turnaround – Step 4: Meet with employees
Have a company meeting, admit that there are things wrong with the business, and discuss how management plans to fix it. Provide employees with a copy of the company business plan and ask for their input. For an established business, this step demonstrates that careful consideration has been given to the development of the business.
Business Turnaround – Step 5: Meet with customers
Rumors of your imminent demise are probably swirling around the business community. Key customers are becoming nervous and some may even be looking for new vendors. Don’t stick your head in the sand. Inform your customers about your situation and tell them how you plan to implement a business turnaround. Be reassuring, but not deceitful.
Business Turnaround – Step 6: Meet with vendors
Company vendors get very nervous when they hear “on the street” that one of their customers is having trouble. Sometimes word travels faster than you can thoughtfully alert the appropriate people about your problem. With that said, you need to develop a prepared statement outlining the problems and how your plan for a business turnaround. You will receive plenty of concerned telephone calls. Respond quickly and thoughtfully to all of them. Make sure they know that you have a plan to execute your business turnaround.
Business Turnaround – Step 7: Contact tax authorities
If you can’t pay your local, county, state, and federal taxes, notify the authorities. Tax authorities will work with you. You’ll be on much better terms with them than if you fail to pay and have it appear as if you are trying to avoid your obligation.
Business Turnaround – Step 8: Contact your bank
If you have loans or a line of credit, call—don’t write—your loan officers and tell them you need to meet in person. Give them the bad news followed by your plan for a business turnaround. Appear confident and reassuring. This is an area where a third party business turnaround specialist can be especially helpful. When a bank knows that they are getting information and plans from an experienced, independent third party, you will often find that they are flexible in allowing you time to work through the problems.
Business Turnaround – Step 9: Keep only employees who are essential to the business
Figure out which employees you can let go without damaging your business. Nobody likes to let people go, but for the business to survive you want to keep only people who are bringing in, making, or servicing sales.
Business Turnaround – Step 10: Cut unnecessary costs
Make a list of all your expenses and eliminate what you don’t need. You need to buy time in order to fix your problems, and cutting expenses is a good way to buy “financial” time.
A Business Turnaround is not only possible, it’s relatively simple if you take the right steps. We are Business Turnaround experts and can help your business return to financial success.
Corporate Advisors
December 6, 2009
Companies always need a fresh perspective to make sure that they are still on the path that will lead to corporate success. In today’s world of ever increasing schedules and demands on the corporate executive’s time, many executives are finding it harder and harder to step back and take an objective look at their business and industry. Having access to an outsider with considerable business experience and perspective, who develops an understanding the business and acts as a sounding board can be one of the most valuable resources for the company’s success.
As a measure of the value of these services, the principals of Revitalization Partners serve on the Board of Directors of a number of public and private corporations.
Investor and Creditor Support
December 6, 2009
The Principals of Revitalization Partners bring extensive experience to working with equity investors and lenders in assisting them in evaluating their exposure and assessing the proper actions necessary to evaluate a company’s financial and operating position.
We leverage our management, investment and financial experience to provide clients an in-depth understanding of the issues behind the numbers. Each of the Principals brings due diligence experience that transcends financial due diligence and enables us to identify operational flaws and opportunities that are not readily detected by financial analysts. Our services include:
- Reviewing the feasibility of management’s business plan and assessing the company’s industry and market
- Evaluating key personnel
- Evaluating loan collateral, especially intellectual property
- Preparing a liquidation analysis
- Monitoring implementation of strategic initiatives
- Evaluating M&A prospects from a financial and operations perspective
Crisis Management and Bankruptcy Support
December 6, 2009
- Negotiating arrangements with creditors
- Arranging short term rescue facilities
- Aggressive A/R collection
- Cutting overhead
- Defining and dealing with the underlying causes of the cash crisis
Turnaround Management and Advisory Services
December 6, 2009
During a corporate crisis, specialized management skills are required to contain, and reverse, a spiraling downward trend. Companies in crisis need leadership that can quickly identify core capabilities, take advantage of available opportunities, and effectively size operations to the appropriate level. Additionally, the failure to meet financial goals, coupled with cash flow and operating disappointments has often created uncertainty with customers, investors, lenders, vendors and employees. Revitalization Partners has extensive experience in addressing the salient issues, managing expectations, and bringing rapid credibility to the restructuring process.
- A competent management team capable of dealing with the crisis and rebuilding the business
- Access to cash, internally or externally, sufficient to fund the turnaround
- A competitive advantage, be it a product or process, distribution channel or intellectual property, that will allow the company to be viable in its marketplace
Corporate Revitalization and Redirection
December 6, 2009
Constant change is the norm in business today. Yesterday’s management direction may become today’s liability. For companies slow to adapt, or Boards unwilling to make changes in a timely manner, financial viability may be at stake. When a downturn occurs, a company must divorce itself from the internal strife that nearly always accompanies the lack of performance, and focus on the future.
- Obtaining highly experienced management, accustomed to operating under pressure with short time frames and high expectations
- Securing these resources on a flexible basis, often at short notice, for a limited time frame
- A cost effective alternative to management consultants
- Having hands-on, focused and independent management, bringing greater insight into the business issues
- Hand picked for relevant industry or situational issues
- Able to attract a level of talent that might not otherwise be available to the company
Privately Held Technology Company Acquired By Buyout Fund
December 6, 2009
Description: Supplier of computer simulation systems that encountered a revenue decline of 67% over a two-year period.
Challenge: Restore revenue growth, improve the business operations and move the company toward profitability. Venture capital financing was required to fund the revitalization.
Actions: Determined that the company was pursuing a non-existent market. Guided the company into new markets. Raised $40 million in venture capital, acquired five companies, domestic and international. Developed three new product lines.
Results: The revenue growth was re-established and over a four- year basis increased sixteen-fold base while providing the basis for continued growth following the turnaround.
Enterprise Software Company
December 6, 2009
Description: A publicly held high technology supplier of software development tools where revenue had not met expectations. The company had run out of money and was in the process of declaring bankruptcy.
Challenge: Avoid bankruptcy, generate revenue, raise appropriate funding and reposition the company for growth.
Venture-Backed Enterprise Software Company
December 6, 2009
Description: A software and services company in digital signature technology that had not been able to generate new revenue.
Challenge: To substantially increase the company's revenue, determine and execute a viable exit strategy thereby avoiding a write off for the investors.
Actions: Hired new sales team that generated $10 million in new contracts from banks and Fortune 500 companies. Reduced operating expenses and improved margins. Identified potential merger partners and arranged new funding for a merger.
Results: The Company established positive revenue growth that provided the basis for acquisition by a strategic partner and created value for the investors.
