Businesses Also Need a Heath Care System
By Aldo Svaldi
The Denver Post
Posted: 01/09/2011 01:00:00 AM MST
Harold Massop helped design the new Lindsey-Flanigan Courthouse in Denver, the Hyatt
Regency Denver at Colorado Convention Center and Scott United Methodist Church in Park Hill.
But the construction downturn has left his firm, a survivor for 25 years in Denver, crumbling.
The last two years "were disastrous," Massop said. "This is absolutely the worst I have ever seen."
His firm, Harold Massop Associates Architects, has shrunk from 14 workers at its peak to just Massop and an assistant.
He lost his bank credit line and has struggled to find another one. With construction at a virtual standstill, design jobs are nowhere to be found.
"When you have done all the cutting, what you need is work and cash," he said. "It is very difficult."
After a slew of rapid business failures in late 2008 and early 2009, the situation has stabilized and there are fewer surprises, bankers and professionals who work in the turnaround field said.
But many firms that survived the initial shock by cutting back, like Massop's, are limping along with dim prospects for a return to full health in the New Year.
"We are seeing a drawn-out scenario," said John Ruby, chief lending officer at Bellco Credit Union.
The longer unemployment remains high and consumer spending suppressed, the more enterprises will eventually fail, he predicts.
Other businesses face looming debt repayments they can't meet or refinance, even if they are making enough to cover day-to-day expenses.
"There is a huge wall of debt maturities coming between now and 2015," said Thomas Kim, a turnaround consultant with r2 advisors in Denver.
Businesses, like individuals, have their own version of a health care system, one that includes accountants, loan officers, specialty lenders, turnaround consultants, attorneys and the U.S. Small Business Administration.
But in both systems, patient denial can be a big problem and treatments aren't always affordable.
"The earlier you can catch some of the warning signs, the much better the likelihood of surviving the process," said Rand Gambrell, an accountant with BKD LLP in Denver.
Accountants are usually the first outside professional to spot problems and among the first to help a business owner craft a plan back to profitability.
"Usually the most difficult thing for people to do is to recognize when they need to make significant cost adjustments," said Dave Steiner, a partner in the audit service area of EKS&H.
Larger accounting firms are also equipped to help clients find alternative financing to shore up their balance sheets. Most accountants can also help in talks with bankers and other creditors, Steiner said.
"A good CPA will hold you accountable," Steiner said. "It is easy to want to do business the way you have done it and hope things get better, but you have to do something."
Debt complicates cutting of expenses
When revenues fall, cutting expenses becomes necessary to restore profitability. But too often business expansions are funded with debt that complicates a downsizing.
Bankers said they prefer borrowers come to them with problems, which they usually find out about anyway through quarterly or semiannual reviews.
"It really comes down to how close the client keeps his cards to the vest," said Jim Hitz, business banking team leader at Key Bank Colorado. "The worst thing that can happen to us is when the client is evasive."
Bankers said they walk a fine line between trying to help a borrower recover and protecting their own depositors and investors.
"We don't want to own their company. We don't want to liquidate their collateral. The last thing we want to do is shut somebody down," said Bruce Alexander, president and CEO of Vectra Bank Colorado.
Regulators require lenders to "grade" loans based on the likelihood of repayment, and that grade will help determine the attention a borrower receives.
Milder cases may require more visits with a commercial loan officer, who can provide advice.
More severe cases go to the workout or special assets department, where more veteran loan officers can provide closer supervision.
"Move it up or move it out" is the motto, said Joanne Reilly, senior vice president of special assets at Colorado Business Bank in Denver.
"If we have determined there are good prospects for repayment, we will sometimes advance funds to get them there," she said.
Turnaround pros can't ensure success
Businesses that have steady cash flow from sales are sometimes handed over to a factorer or asset-based lender, most typically an outside firm.
That financing is much more expensive than traditional bank loans, and the supervision more intense. But it can allow a business a way to meet payroll and other expenses when no other options exist.
"We are providing the last level of a lifeline," said Chris Smith, CEO and president of CSI Financial in Denver.
Most businesses will either improve and find other financing or fail within 18 months, he said. And in some cases, bankers said, they will pull the plug, but not before trying other remedies.
When creditors or investors believe a business needs more help than they can offer or are getting from their current advisers, they will often request they hire an outside consultant.
The field is a wide-open one with low barriers to entry, making it important that any business owner check references, Kim said.
A good place to start is with the Turnaround Management Association, which attempts to add a level of professionalism to the field.
"It is a tough business. We can't ensure success and not every situation goes well," Kim said.
Sometimes a consultant can sit down and talk with a business owner for a few hours and help them see things in a different way or confirm for them what they already know.
They also can play the fall guy for unpopular layoffs or cutting off slow-paying customers who are draining a business.
"Good turnaround professionals act as mediators. They will be saying all the hard things that need to be said," according to J. Smiley, a partner with Lindquist & Vennum in Denver.
In severe cases where creditors or investors have lost faith in management, they may want a turnaround consultant on-site to help run things.
Business owners and executives tend to be optimists by nature, and often underestimate the difficulties they are in, turnaround experts said.
"When they get into trouble they have a hard time thinking through problems clearly," Kim said.
Attorneys step in when a struggling business has enough value to justify a bankruptcy filing or a workout with creditors, a step short of bankruptcy.
"An attorney does a lot of the heavy lifting to restructure those legal relationships that might have gone awry because of the default," said Daniel Garfield, an attorney with Brownstein Hyatt Farber Schreck in Denver.
If individuals tend to file for bankruptcy protection too soon, businesses err on the side of filing too late, said Craig Christensen, a restructuring attorney with Lindquist & Vennum.
"Most of the time neither the bank or the company have sufficient motivation to take the steps early enough," he said. "They watch the capital burn down."
Counselors will meet for free with owners
And the severe downturn has made it difficult to restructure certain businesses, such as raw land development. The U.S. Small Business Administration provides a resource when a business can't afford outside help.
"We can offer all of those services that typically would require a fee at no cost," said Greg Lopez, director of the SBA's Colorado district.
One chief resource is the SCORE program, a consulting service provided by retired executives and volunteer professionals.
SCORE counselors will meet for free with business owners to help them analyze their situation and explore ways to improve it, said Jack Scott, director of the program in Denver.
SCORE also offers a more intensive fee-based program that brings in a team of experts to work with a business owner in a turnaround situation.
Most businesses helped are smaller, typically under $1 million in revenues. And Scott said SCORE consultants, who have no vested interest, can be more objective than a consultant a business hires directly.
"A consultant tells you what you want to hear," Scott said.
Massop said he has sat down with consultants who told him what he already knew, that he needed to cut costs, but who couldn't find him new business or new credit.
Counseling with SCORE helped, even if the message was a simple one — "Don't jump off the ship, or you will drown."
As for Massop, he said he will consider anything, including consulting work with other struggling businesses.
"I am open to any opportunity that will provide an income at this point," he said.
To contact the author Aldo Svaldi: 303-954-1410