What an Asset Based Lender Looks for When Recommending a Turnaround Professional

Miles Stover, CIRA, CTP

In a manner different than banks and other lenders who employ turnaround professionals, Asset Based Lenders (“ABLs”) usually have some basic criteria that serves as their basis for considering, selecting or recommending a turnaround professional. Do you know what most ABLs think and consider when looking for someone to protect or recover their assets? You will need to, if you want to make their “short list”.

In theory, ABLs enter into transactions with the belief that they will provide themselves with enough “coverage,” so that if everything that can go wrong does go wrong, they can still liquidate their collateral and get “100 cent dollars”. The trouble is that sometimes they loaned 80 cents to a dollar on the accounts receivables and 60 cents to the dollar on the inventory, and when the company heads towards bankruptcy or collapse, it turns out to be 60-cent receivables and 10-cent inventory.

ABLs understand there are different types of turnaround specialists. There are interim managers and consultants. Interim managers will replace the CEO and take the decision making reins, whereas consultants advise existing management without taking an operational role within the company. One is not preferable to the other; the decision as to which type of turnaround professional to recommend usually is determined by the circumstances.

ABLs have been taught or have learned that it is important to understand why the business is failing. Knowing what is happening usually will dictate what needs to be done. When they have to decide what the next logical step is, ABLs usually have a list of questions they ask themselves.

SIGNS AN ASSET BASED LENDER LOOKS FOR AND AT

The list that follows was provided by more than one ABL. Even if the collateral was believed to be sufficient, if any of these signs and conditions were apparent before the lending agreement was executed, one could wonder why they loaned money to the organization in the first place – but you be the judge. The following factors are what ABLs review when considering if a turnaround specialist is needed:

Company goals not understood
Lack of timely and accurate financial information
Uncontrolled or mismanaged growth
Ineffective communications
Unclear lines of authority in the management ranks
Deteriorating levels of business from established customers
Excessive turnover
Management blames their misfortunes on external factors – see list below – and doesn’t accept responsibility and take action to solve or rectify the situation e.g.:
- Interest rate fluctuations
- General economy
- Labor unrest
- Raw material price increases
- Competition
- Labor cost increases

ABLs generally have a good understanding of the warning signs that indicate that their client is heading towards trouble. (If the warning signs are correctly identified, these “signs” provide excellent questions to ask the turnaround specialist as to the way he or she would attack the situation – therefore be prepared to address these issues.) While several factors will go into being selected to manage the engagement, at a minimum, you must be able to articulate how you would address these situations:

Decrease in profits
Management and employee turnover
Increased fixed costs relative to revenue
Lack of planning – short-term and long-term
Board resignations
Late or slow deliveries
Auditor resignations
Decrease in cash
Return of former management to active operational positions

On the financial performance side of the business, warning signs include:

Declining accounts receivable turnover ratio
Creeping loan balances
Declining inventory turnover ratios
Financing fixed asset purchases out of working capital
Changing accounting principals

Most, if not all, of the signs are symptoms, not the problems. The signs are indications that problems exist. You must be prepared to address how you would attack the problems.

If enough of the signs are identified, the ABL will consider approaching the client and discussing the need to hire a turnaround specialist.

While the ABL might have the ability to force the client to bring someone in, a closer look at the problems usually indicates that mismanagement is at the root of the situation. A successful resolution is more likely to occur if management agrees to participate in the recovery and understands that fighting the ABLs desire to bring someone to assist is not constructive. If management is committed to assist the turnaround specialist and understands that he or she is the catalyst to the recovery, they will be better able to take over at the conclusion of the turnaround engagement.

Before we identify what the selection process will probably look like, a comment on the difference between ABLs and traditional lenders might be helpful.

Traditional lenders, given the choice, would generally want to see the client survive and thrive in hopes of having a long-term relationship with the client and the opportunity to generate fees over time. ABLs, while not opposed to wanting a long-term relationship, generally have a different, shorter time perspective on the relationship. Experience suggests that given the choice, ABLs see the recovery of their collateral in a turnaround or liquidation effort as their source of recovery, not a recovery over years in a relationship. All ABLs have personalities, as traditional lenders do, and those personalities change over time. Needless to say, many ABLs are part of traditional banks as well, but usually separated in some way.

TYPICAL SELECTION PROCESS OF A TURNAROUND PROFESSIONAL

Management’s interview process and selection process usually involves getting a list of potential turnaround specialists to consider from the ABL. The ABL typically will not demand a certain firm be selected due to lender liability issues, among other concerns. Management might have heard of a firm that they want to consider as well, but usually the ABLs list will serve as the starting point.

ABLs will usually inform the client that there is a logical process to follow that will result in the selection of a qualified turnaround professional. It includes:

Interviews and background checks
Obtaining a written proposal

Before any “short list” interviews take place, a management team should have checked the potential firms’ references and resumes in advance. As a potential firm to be selected, make sure there are no errors in the resumes that are submitted of any type. Make sure all the references provided know that they might be contacted. Make sure all of the reference contact information is current and correct. Make sure the resumes presented are firm members that can actively serve on the engagement. Firms are rarely selected from resumes alone, but firms are regularly eliminated from contention when they provide inaccurate resumes or incorrect information.

During the interview, several questions should be expected to be asked. Be prepared with specific answers.

Is the team available to work on the engagement? What are their schedules? What functions will each of the members presented perform?
Who will be the professional-in-charge of the engagement? (With chemistry so important to a successful engagement, recognize that if there is not a chemistry fit, it would be better to say that another firm member could serve in that position. Don’t be locked into one person, if at all possible.)
Have the professional-in-charge be prepared to discuss his or her background with all of the parties involved in the engagement e.g. lenders, banks, law firms, accounting firms etcetera. This plays to the person’s credibility, as well as their ability to “hit the road running”. If the current ABL wants to be “taken out” of the lending agreement, a discussion about the firms’ contacts at other potential lenders would be important and valuable information to present.
Be prepared to discuss the fee situation. Most organizations that have not been in this situation are very concerned about the cost of the engagement. It is normally acceptable to say that the exact fees of the exact team that will work on the engagement will be identified in the proposal, but giving a range of fees by staff category is necessary. Identifying the value the firm brings to the situation in excess of any costs is appropriate to bring out at this point.

If you get through this stage of the process, you should be prepared to present a written proposal.

The proposal must identify the initial issues. This makes it mandatory that you ask probing questions during the interviews about not only the issues but the impediments and ideas the management team has.
The proposal should also discuss fees, anticipated use of the company’s staff, a time line overview, clarification as to how much time the turnaround team expects to commit to the engagement, whether the turnaround specialist will just identify the problems and identify the solutions or will implement the plan and at what point they will withdraw from the engagement. Don’t forget to take this opportunity to disclose as well as inform.
The proposal should also define what “deliverables” the client should expect and confirm that confidentiality of all information will be respected within the terms disclosed. Make sure everyone knows you respect their position, but you also have a job to do.

Knowledge of the business of asset based lending is vital. Knowledge of what the ABL is watching and thinks is important is vital. As time is money, excellent communication of information to the parties of interest is vital. If you want to be recommended by asset based lenders, knowing how they are evaluated by their community and the person you are working with to get the recommendation is vital.

Asset Based Lenders, somewhat unlike traditional lenders, have a different approach to and idea of what is a successful conclusion to a turnaround engagement. They want to recover their investment period. The ongoing survival of the organization might not be paramount on their list of goals. Recognize that being the “go to guy” of an ABL is different than a “go to guy” for traditional lenders – not better or worse, but different.

Knowing that ABLs look differently at the value of their collateral and the value of a long-term relationship with the client than the more traditional lenders is important as you attempt to be one of the firms recommended by ABLs to their clients. Hopefully knowing a little more about what they look at and how they suggest to their clients they evaluate potential turnaround professionals can mean more business for you and your firm.

Working with ABLs requires different skills and knowledge. Working with ABLs requires demonstrating to them that you understand their world as well as the world the turnaround professional works in. ABLs typically don’t want to hear the bankruptcy word used. ABLs can be a tremendous source of revenue for your firm. Know their business as well as you know your business. Hopefully, this short article was a step toward that base of knowledge. Keep learning – keep earning.

Author bio:

Miles Stover has been in the business of working with under-performing companies for more than two decades. He has acted as CEO, COO, CRO, CFO, President and Advisor to more than two dozen companies in bankruptcy. Mr. Stover’s credentials include: Certified Insolvency and Restructuring Advisor, Certified Turnaround Professional, Certified Fraud Examiner, Certified Management Consultant, Certified Professional Consultant to Management and Certified Confidentiality Officer.

He can be contacted at 253.857.6730 or www.turnaround-inc.com