Thanks to your support, we now work with Banks, Private Equity Groups, and business owners, helping businesses in the United States and abroad. All of our engagements start with an introduction to a business owner or investor who usually resists the idea of outside help.

Most tough business issues never get the attention they deserve, which eventually costs the business dearly. We understand this as well as a few other realities. First, business owners often wait until they have a roaring fire before they seek help. Second, the belief that no outsider can possibly understand his or her business. However, when business owners find someone who has already treated their ailment and knows the cure, they wonder why they waited so long.

We are often asked: “If I know a business that could benefit from your help, how do we begin the introduction process with a ForteCEO executive?” My response is that we operate a bit like the dating service “It’s Just Lunch”®. Both parties need to determine if a relationship makes sense, and a no obligation discussion over a short meal is a good way to break the ice and test compatibility.

In this issue our theme is Smart Intervention. Read our success story with a fast growing manufacturer, and meet one of our executives who lives by the credo of rapid response. We also show how smart intervention can build business value and discuss the issues Banks encounter with customer assistance.

Our job is to make your life more fulfilling and more profitable. As always, we value your feedback and suggestions.

Marshall Waksmundzki, President of Cabworks, Inc. and his four partners had all the energy and optimism needed to make their small business succeed. They had taken their small enterprise from assembling stainless steel elevator cab interiors and shrouds into two other markets and integrated the activities from assembly to full fabrication. They now considered themselves to be a full architectural stainless steel fabricator and assembly business serving markets such as new and renovated elevators-construction and installation, commercial and institutional stainless steel kitchen ensembles, and miscellaneous metals requirements in the general construction market. Cabworks was growing at better than 35% a year and all seemed OK.

Such was not the case. When Marshall was urged to call ForteCEO by one of their banking relationships, the company was struggling mightily to meet payroll, banking agreements and suppliers invoices. For the partners, their ability to sell strong and make great product was being strained for lack of solid financial management, and leadership guidance. Marshall and his team, however, were anxious to learn and make the necessary changes to the business and to grow themselves in order to save Cabworks.

In October of 2004, ForteCEO placed the first of two executives with Cabworks. Mr. John McGinnis served as the initial ForteCEO and conducted the upfront diagnostic work, discovering the need to make changes in cash flow management techniques, accounting processes and price management. ForteCEO then placed Mr. Pat McDonnell into the role to execute the initial corrective actions and to mentor the partners. Pat is very well suited to positively move companies through tough change agendas. With his mentoring, the partners gained deeper understanding of their roles as leaders, and grasped the necessary acumen for managing the business from vision to tactics.

Over the course of the engagement, Cabworks in conjunction with ForteCEO, was successful in raising $750,000 in new equity, and secured new banking credit that will support the aggressive growth and profitability objectives of the business. The business has been cash flow positive and achieving targeted profitability since QIV of 2004. Marshall’s response to ForteCEO’s efforts; “…you guys have done everything you said you would do, and the medicine for us was right on!”

Cabworks is well positioned to pursue their vision “To be the leading architectural stainless steel and sheet metal design, fabrication and installation company in the Midwest.

Building effective management teams that are able to sustain themselves has always been John McGinnis’ focus. In a career spanning over 25 years, John has served as a CEO and Chief Financial Officer for eight private businesses, creating profit and value for each one. Every company John has managed over the years has required a change in culture, a new business definition, team building and regular communications, enabling John to develop a certain knack for intuitively knowing how to get the best from people in an organization and an extraordinary ability to articulate a business’s mission at all company levels.

Also during his career, John has been involved with extensive bank negotiations and has been personally involved in ten acquisitions and sales of businesses, including all financing aspects. In addition, he has significant operational experience in manufacturing, sales and international areas.

John’s industry experience includes: health care, specialty chemicals, diversified software, security software and services, fluid power equipment, industrial, non-durable consumer goods and venture capital firms.

Following is some of his real-world experience:

• Reduced operating costs for an international hydraulics manufacturer by $985,000 and returned the company to plus profits in 2003.
• Lowered breakeven for an international company providing protective apparel to safety markets by $6 million through effective international outsourcing.
• Increased sales of a national printing company by $2 million and increased its income by more than $1 million − plus located buyer, managed and negotiated the company’s sale.
• Produced significant revenue and profits for a finishing company for agencies, publishers, and marketers and sold the company for over $22 million more than the purchase price.
• For a warehouse logistics software company that was in violation of all bank covenants, developed a standard product to replace custom software, and increasing sales for the company by over $4 million in one year.
• Established and managed the Dutch subsidiary of an international proprietary adhesives company.
• Opened 24 new centers in 36 months for a Midwest provider of weight-loss programs and food products. Bought the company for $3 million in 1998 and sold it for $7 million in 1990.

Currently, John serves on the board of Templeton Kelly, a private, family-owned and professionally managed company in Chicago. From 1984-1989, he also served on the board of five other businesses that he managed.

John holds an MBA in finance and is a Certified Public Accountant. He also has a bachelor of science in business with a concentration in accounting from Marquette University.

Industry studies show that over 30 percent of private business transitions are driven by circumstances not controlled by the owner, such as health and ownership issues, divorce, external market consolidation, unsolicited offers, and other unplanned issues.

Many owners of private businesses will not have the luxury of time to get their business house in order and “prepare” it for sale; they need to run it as if a sale could happen at any moment. By adopting this mindset owners receive the dual benefit of a business with higher value to any external buyer, and enhanced profits until a sale occurs. Yet the path to preparing a business to maximize value is foreign to many owners, and often requires refinements in the way the business is operated. ForteCEO executives have owned hundreds of private businesses, and learned many expensive lessons through our involvement in hundreds of business transactions, both with their own businesses and with client businesses. Our “both sides of the table” experience gives us a unique understanding about the issues business owners face, what buyers actually pay for, and how to create buyer interest and business value.

Following is some advice on how to recognize and avoid common mistakes that we often encounter in the course of our work with private business owners, and that we made ourselves in growing our own businesses. If not identified and corrected, these practices will reduce both the value of the business and the pool of interested purchasers:

Understand who might represent a likely buyer for your company, and what would make your business valuable to them. Most sellers do not consider “buyer needs” until a sale is imminent. We have worked with business owners who saw no need to put good financial systems in place, or to hire and train management who could run the business in their absence. If you wait until your child is graduating from high school to look into the admissions requirements for attractive colleges, it is too late to prepare them for entry! The same holds true for businesses and profitable exits. In our experience, when you sell a private business using the services of a top-level investment banker (and we work with many of the best), two things occur: the chances of the sale actually happening are higher, as are the net proceeds to the seller. The world of business brokers is like any other service profession; there are a select few companies whose calls are always answered by potential business buyers because they can pick and choose among the best companies to sell. Because these investment bankers can be selective, unless you have an attractive business without major “impairments” (which is a nice way of saying there are elements that make it a risky investment) you will have a tough time attracting reputable business brokers. While selling a business might be a once in a lifetime experience for a business owner, brokers do it all the time and have the skills and know-how to review your business and decide if they can find qualified buyers. The good brokers will not waste their time on impaired businesses that will be difficult to sell, and they complain that there are few “easily sell-able” businesses. When you do build one, however, you can get the best broker to sell it, and there will be plenty of bidders. Many of the client businesses we work with have operated for years without a clearly understood plan for the future of the business. When it comes time to sell, buyers have a hard time valuing a strategy of “doing more of what you did last year”. Through a simple written strategic plan you create a believable and shared story for the future of your business. Further, when you attach financial projections to this future plan, you create your version of future revenue and profits for the business. The most valuable reason to have a plan that is communicated throughout your business is because that plan is a key element in achieving extraordinary results from ordinary people. This is what will make your business an attractive investment.

Poor internal bookkeeping has hindered many potential sales, and cost owners millions in proceeds. We see this often with fast growing businesses whose owners’ don’t see the value in investing in internal financial people and systems. Once these same owners have suffered through a buyer’s financial due diligence the value is apparent, but by then the damage (to the sale price) is done. If you can’t measure it a buyer can’t value it.

If your business cannot survive without you, then you have unwittingly attached yourself to the business for the long term even after the sale. For many buyers, this is a deal killer. They will not consider a business where the owner is “indispensable” because owners who are “committed to staying with the business” can easily change their mind post-sale, even when there are large earn out bonuses on the line. The solution is to attract and train managers in your company who can run the business in your absence. The added bonus for the owner is that the ability to work on (not in) the business increases, and your life changes for the better. For many owners, escaping the founders trap is an impossible task without assistance from someone who has taken that journey. If so, find that experienced operating executive, and begin the journey. You will thank yourself.

To truly maximize value in their business, owners need to look at their firm from the perspective of external buyers, who see it not as “your business” but as a future stream of earnings. Taking the “buyer mentality” one step further will cause the business owner to see that the litmus test of how they spend their time and money needs to be: does this use of my time or the company’s money enhance the value of my firm?

For Operating Executives who can help you lead your business like you are planning to sell it, call Mark Rittmanic, President of ForteCEO, at (847)291-9944.

ForteCEO works with Bankers throughout the Midwest, who recommend our unique services to assist their Watch List clients. Although we have helped many troubled businesses by inserting Operating Executives at the request of their Bankers, there are many more that never receive any operational assistance from their bank.

Watch List clients need positive intervention because often they cannot solve their own tough business issues. These clients need a trusted advisor to recommend hands-on assistance from experienced operating executives who have walked in their shoes. ForteCEO is the largest Team of experienced operating executives in the United States, and we are experts at balancing the interests of business owners and banks.

In the course of our work, we have seen a variety of bank practices dealing with Watch List clients and many of them never achieve the desired results. It is likely that this Watch List problem will grow in years to come because we are now in a growth environment for Middle Market lending. Midwest banks are competing to add new commercial loan assets, and the increasing interest rate environment will undoubtedly cause a rise in the number of problem loans in future years.

Watch List clients are a growing problem for many banks, but there are workable solutions.

In this white paper we review:

1. Current Watch List practices in detail – the myths and the reality.
2. The long term cost to the Bank and to the local economy of failing to provide meaningful assistance to Watch List clients.
3. Solutions for assisting these Watch List clients – and returning them to health.

Watch List clients represent a real dilemma for most banks because there is no clear mandate to action even though the business is clearly in trouble. With the focus on the generation of new business, who wants to tend to the sick and dying? We are reminded of a person whose health is slowly failing, but who is still able to function on a daily basis and refuses to seek medical help for their condition. These patients are in denial and the doctors will not act. Only a medical emergency will cause them to seek help. Unfortunately, that is how most banks respond to their sick business clients. There is a stalemate between the Bank and the business, with both sides fearing the other’s actions and neither side knowing what to do.

Watch List practices we have seen range from genuine concern and positive intervention to the more common “quarterly paper exercise.” Here, the sick business is reviewed by a large group of credit and account management officers but no new action is taken. Some banks will not permit clients to stay on the Watch List; it’s either up or out. Others permit clients to languish for years, slowly watching while the business deteriorates, often increasing their credit facility (and allowing the customer to dig a deeper hole) in the process. Although most operate somewhere between these two extremes, by examining these practices we have come to understand how they impact the Bank’s profitability and reputation. We have reviewed below the key challenges with Watch List clients, as well as how banks typically respond to these challenges. We also look at how these practices impact Bank clients, while hurting the Bank’s bottom line and reputation.

• Challenge: Most account managers, including loan officers and even senior credit personnel who help manage problem loans, generally have no experience running or renewing a business and lack the tools or bank-supplied training to assist Watch List customers.
  • Common Practice: Take no action to assist the client with their business issues. Wait until the business has deteriorated to the point where the bank has maximum leverage – i.e., the business is well out of covenants and/or can no longer support the note – and then make it clear that intervention is required or drastic actions will be taken. At this point, the client will have no choice but to accept one of the “workout” consultants that the Bank recommends.
  • Reality: By not taking action months or years sooner and recommending an operating executive with renewal credentials, the Bank is often making the problem worse. In cases where additional credit is advanced (with no clear “get well” plan), the Bank can actually be contributing to the downfall of the business.

• Challenge: The credit has not yet deteriorated to the point where the loan is turned over (“sent down”) to a Special Asset (i.e., Workout) division or given to an external workout consultant. Short of that drastic step, most banks have few or no internal processes to manage problem loans in the early stages.
  • Common Practice: Most banks have no standard practice for helping Watch List clients, and when they do take action it is often based on an internal suggestion and not a mandate. So the result is that these loans continue to be handled by the originating officer, who institutes increased reporting and monitoring, increased collateral requirements, and often increased interest rates or other fees (to compensate for risk). None of these actions help the business, but they do protect the Bank and make the loan officer feel like he or she is “doing something.”
  • Reality: While these steps protect the Bank in the short term, they do not help the business owners or address their underlying business issues. Clients are not fooled. They perceive the Bank acting in its own best interest and doing little to assist them in fixing their business. These clients rarely return to that Bank for future business, or serve as recommendation sources for other business owners.

• Challenge: Loan officers fear that if they recommend external assistance for their clients, the clients will feel the Bank has “lost faith” in them and may move their account to another bank.
  • Common Practice: Wait for many months until the financials have deteriorated to the point where a new bank is not an option, and the current Bank has decided they may want this loan out of their portfolio. Then recommend external assistance – with a clear message to the client that lender fatigue has set in and the client needs to move the loan as soon as possible.
  • Reality: The fear of accounts moving is generally unfounded. When the loan officer has a strong relationship with a client, the business owner will accept advice much sooner. More importantly, he will appreciate the referral. Ultimately, the loan officer will strengthen the relationship with helpful referrals.
    • Bankers rarely know about a business issue until it has existed operationally for many months and the issue begins to be reflected in the financial statements. This means the business owner has often been trying to solve the underlying problem unsuccessfully for some time – and is actually looking for solutions.

• Challenge: Loan officers believe that, if they recommend an operating executive to help their client, they could open the Bank to lender liability exposure.
  • Common Practice: To avoid any perceived liability, do nothing and let the business owner struggle unsuccessfully trying to solve his or her business problems.
  • Reality: Our experience with “lender liability” suggests that this is largely a smokescreen – and an excuse for inaction. The very few cases that have occurred in the past decade have involved egregious examples of banks influencing and running businesses. We have not found a single instance of a lender liability suit based on a good faith recommendation of operating assistance for a Bank’s client. For business owners who view their Banker as a friend or trusted advisor, this lack of assistance can be seen as a breach of trust.

All banks have a process for dealing with their clients “in extremis” – but very few offer any assistance to those who are slowly bleeding to death. It is a fact that operationally “challenged” clients can be quite profitable to the Bank. With proper collateral coverage, the Bank has little short-term risk even if the business is liquidated.

Ultimately, however, there are many long-term costs to the Bank that may not be fully appreciated and are often overlooked.

These costs include:

• The substantial executive time – often years – invested in managing Watch List clients. This is a case where the 90/10 rule applies: the organization spends 90% of its resources managing 10% of the portfolio. The cultural message that is sent to loan officers that it is OK to ignore client problems. Long-term damage to the Bank’s reputation from clients who believe the Bank has ignored them, as well as contributed to the failure of their business. Surveys show that customers with a bad service experience will tell, on average, nine to thirteen other people about their bad experience.
• Loan losses from clients who appeared on the surface to have adequate collateral coverage. Upon liquidation, the Bank learns these asset values have declined over time and the Bank is under water.

The Solution for Watch List Clients:
The solution for these clients is straightforward. They need rapid assistance from an organization that understands their underlying business issues and can work with them – and the Bank – to correct them. Since these clients are not “in extremis” they cannot be forced to accept assistance. Watch List clients need to see and accept the value. In our experience, that requires an organization that can supply an Operating Executive who has been a business owner with experience in a related industry. ForteCEO has a group of carefully selected Operating Executives with hands-on leadership experience in every major industry. The service we have developed for Bank Watch List clients begins with an Operational Assessment. This rapidly provides the client and the Bank with the information needed to understand the current situation and determine a “get well plan” for the business. The Assessment very quickly looks at:

• Overview of the client’s operations, tactical, financial and strategic plan Management team and their ability to resolve the company’s current situation
• Markets and the client’s position within those markets

We also provide written findings and recommendations (the get well plan), and an oral review with the loan officer and other interested parties. The powerful outcome of this short process is that it provides both the Bank and the Business with an action plan and the executive to execute it. It also breaks the “Watch List” cycle of no action. The most common outcomes of this Assessment process are:

• The client (not the Bank) retains ForteCEO to assist them in implementing the Assessment recommendations. The Bank has taken positive steps to move the company off the Watch List, with an experienced Operating Executive to assist in the process. The Bank is demonstrating and reinforcing a culture of client assistance. The client remains a profitable customer to the Bank. The community is served through the preservation of jobs at the client’s business.
• The client sees the Bank as the catalyst that brought them the help they needed to renew their business, maintaining a long-term positive relationship between the Bank and the client.