Turnarounds Require Creditor and Customer Support By Lisa N ...


Turnarounds Require Creditor and Customer Support By Lisa N ...

Turnarounds Require Creditor and Customer Support

By Lisa N. Johnson

Behind every business that teeters on the edge of bankruptcy there is a long line of

creditors and customers that take enormous financial and operational risk by waiting out the

financial uncertainties, hoping these businesses pull out of a tailspin. For many creditors, the

decision to be patient and support their customer can often rely on intangible and subjective

criteria like trust, honesty and loyalty.

J&R Machine Inc., of Shawano, Wis., machines parts for 35-40 other manufacturing

companies. Tim Tumanic, the majority shareholder and owner of J&R, had operated the business

since 1993, growing it successfully until 2001 when the business started to unravel. The

company’s problems were created by a combination of international competition, poor customer

mix, increasing costs of raw materials and post 9/11 manufacturing doldrums.

“Our losses reached 15% of sales and the company’s negative book equity was 46% of

assets,” Tumanic explained, adding that the company was receiving about 20 overdraft notices

from its bank each month. Things got so dire that Tumanic met with employees and gave them

the bad news about the prognosis of the company, telling them that if they stayed, he would need

wage concessions of five percent.

“But, I told them if they were with me, I would give them 110 percent and return the wages

to them. If they left, I would understand,” he said. All 30 employees agreed to stay and Tumanic

did not lay anyone off.

“In representing distressed companies, particularly outside of bankruptcy court, we have

found that creditors want to continue doing business with their established customer even if they

are experiencing difficulty, but only if they are open, honest and realistic about their plans to turn

the business around,” recommends Norman B. Newman, attorney with the Chicago law firm, Much

Shelist Denenberg Ament & Rubenstein PC and president-elect of the Chicago/Midwest Chapter of

the Turnaround Management Association.

After he talked to his employees, Tumanic went on a road trip to visit the company’s

customers and suppliers. One stop was Lapham-Hickey, where Tumanic visited his friend Steve

Ford, the executive vice president of the company.

“We have a long term relationship with Tim,’ Ford said. “My father did business with Tim’s

father and my company was a steady customer of J&R. I trusted Tim and when he got into some

financial woes, we decided to help him.”

Ford explained that in these circumstances, many factors play a role in final decisionmaking.

“Tim had a plan and he came to us and presented it,” Ford said. Tumanic’s plan included

hiring a consultant and firing his largest but most unprofitable customer. Additionally, Ford’s team

crunched the numbers and considered alternatives, as well as more subjective issues such as trust

and honesty, that may not always play a role in many business decisions.

“Was it a financial risk to support Tim? Yes, but it was one worth making.”

Another stop was J&R creditor M&J Manufacturing, a machining and fabrication company

that provides ‘just-in-time’ parts for lawn and garden tractor companies and disposal truck

companies. Jim Norton, who owns the Sturgeon Bay, Wis.-company, opened his doors in 1992.

J&R was among Norton’s first customers. Because of how the relationship developed, there was a

close bond between the two up and coming small businessmen.

“When we first started, we needed machine shop parts and J&R provided those for us,”

Norton recalled. “Then Tim needed some of our services and products so a nice two-way

relationship developed.”

After J&R’s business began to suffer, Norton was among the companies to support J&R.

“I guess part of it is what my father told me: you don’t kick a dog when he’s down,” Norton

said. He backed up those words with a line of credit for J&R to help him through the rough stretch.

“Some businesses might have left after that but when Tim turned around his business, he

has treated us very well,” Norton said.

Norton said he had no second thoughts about supporting J&R and believes that any

business could find themselves in that position.

“I’d like to think if it were me, others would act just like I did,” he said.

Turnaround specialist David Finkbiner, of Wausau, Wis., who was retained by J&R to assist

with the recovery, said that normally a company has to approach a bank with a plan to secure the

loans to get them over the hump.

“However, I discovered that J&R’s parts were so crucial to its customers’ business that many

of them agreed to wire Tim money as soon as the parts were produced. They were so loyal that

they didn’t need to see the parts before paying.”

The combination of J&R’s loyal customers’ speeding payment, the employees believing in

Tumanic, the willingness of J&R’s creditors to see the benefit of a future and ongoing profitable

relationship and Finkbiner’s steady financial hand achieved dramatic results in a two-year period:

• All jobs were preserved.

• The original ownership remained intact with no dilution.

• 90.9% of the unsecured debt realized a 100% recovery.

• Accounts payable are now averaging 28 days. Bank credibility and trust was restored: The

original bank became the most aggressive bank proposing long-term financing.

• Manufacturing contribution margin increased from 19% in 2003 to 36.9% in 2004 while

gross profit increased to 24.7%; both were historical highs. In 2005, the gross profit

climbed to 30.1%.

• Within 24 months, operating profit improved by $629,000. The 2005 operating income was

11.1% of sales; return on assets was 17.0%-record highs.

For these efforts, and the work of his turnaround management specialist, Finkbiner, the only

one in Wisconsin to have earned the Certified Turnaround Professional designation, J&R was

selected the 2006 Small Company Turnaround ($50 million or less) award winner by the

Turnaround Management Association. Finkbiner is a member of the Chicago/Midwest Chapter of

the TMA.

The Turnaround Management Association (www.turnaround.org) is the only international

non-profit association dedicated to corporate renewal and turnaround management. The

Chicago/Midwest Chapter of TMA has over 1,000 members and is comprised of turnaround

practitioners, attorneys, accountants, consultants, investors, lenders, venture capitalists,

appraisers and liquidators. For more information, visit the Chapter’s web site at

www.chicago.turnaround.org or call 815-469-2935.


Lisa N. Johnson is Senior Vice President of Wells Fargo Business Credit. She is president of the

Chicago/Midwest Chapter of the Turnaround Management Association. She earned her BA cum

laude from Baylor University and has been involved in the credit industry for over 20 years.

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