U.S. Banks are growing concerned — if not alarmed — and are reevaluating just how lax they are when it comes to handing out commercial loans. With sour loans on the rise, that’s not a pretty picture for companies that rely too much on credit lines or commercial loans. This is, in essence, a self-imposed business risk, as they are more dependent and susceptible to any fluctuations that occur.
A recent Financial Times article reported that non-performing loans increased by 20% at ten large commercial lenders. How much of an impact is that on the bank industry exactly? According to the Financial Times analyst, that’s a hefty $1.6B in the first quarter alone, a significant shift from credit quality since 2016, an era where the dust had settled from crashes and subsequent defaults on loans. The future started looking bright. Lending portfolios and credit quality began to improve.
With merely three years of positive momentum, fast forward to present day and all that has changed and not for the better. “Since most businesses utilize a credit line or other commercial loans, any slowdown will impact all types of commercial lenders – banks, asset-based lenders and factors,” said Yoav Cohen, an interim executive who has spearheaded eight turnarounds and liquidations, each one successful in paying off secured lenders in full. Cohen has seen it all, serving in roles as varied as interim CFO, COO, and a Chief Restructuring Officer.
We were having a conversation with an executive recently who shared about their experience parachuting into a business that was struggling with operational inefficiencies.
This executive, like many interims, kicked off the assignment by meeting face-to-face with the management team and employees to learn how the business functions, what’s working, and what isn’t. Their findings would turn into an operational roadmap of the business, where they would set out and implement a go-forward plan. When meeting with one team member and learning about what they did, the executive pointed to a process they had in place asking “why do you do that?”
The answer: “Because we’ve always done it that way”
Like a good spy movie, turnarounds used to center around a strong central figure making things happen. Turnaround stars and distress experts were born, like Stephen Cooper of Enron and Krispy Kreme fame.
In 1985 the Turnaround Management Association started as a conference of company turnaround specialists in Chapel Hill, ultimately creating a rigorous formal program and exam for Certified Turnaround Professionals.
“Back then the time frame for turnarounds was long,” Richard Lindenmuth, an executive who has completed 23 turnarounds over the years said. “There was bridge financing from banks that would facilitate a turnaround and bankruptcy was really used as a tool for restructuring a company.”
Times have changed. Many of the Fortune 500 companies from those days have merged or disappeared due to outdated technology, products, or services (think RCA, Blackberry, Zenith). At the same time, the way to turn around a struggling business has transformed, being driven by several factors:
The Olympics are the perfect example of the difference between champions who win gold, silver or bronze, and everyone else who goes home empty handed. The winner could be winning by just one ten thousandths of a second.
Why do you think you or I are any different in our work – if we could improve our performance just a couple percentage points, we’d stand out from the masses clear as day.
Steve Jobs was genius at nuance, the subtle improvement that could cause massively asymmetric outcomes in favor of Apple. Thirty companies had MP3 products delivering hardware, software and content for streaming music. The category was done. Then along came the iPod. Not major changes, but so much better!
Non-Profit, Vision Share, is the consortium of eye banks that banded together in 1998 to get corneas ready for transplant, into the hands of surgeons around the globe. With 18 eye banks, the consortium provides a space to share best practices, help advance innovation and technology, and pool resources to reach surgeons fast.
After having a full-time CEO on board for two years, the board determined they were not getting the results they were looking for.
Everything seemed to be going well for a public software company. Growing at a rate of 50-100% for three years straight, the company was gaining momentum until one day it all came to a screeching halt. Just weeks before the annual 10-k report was due the board uncovered that the CEO and CFO had been taking a few too many creative liberties with expense reports and were stealing money from the company…yes, they were embezzling funds – a nightmare scenario for a public company.
The board went to work, firing both of the full-time executives for cause. They immediately appointed an Interim CEO and reached out to us at InterimExecs to bring in an Interim CFO to help them navigate through murky waters.
“It was a full-fledged crisis that included issues with culture, staff, investors, analysts, debt holders, Board members, auditors, the SEC and activist shareholders,” said a board member.
After two years of unrelenting decline and $6M in losses, the owners of Styrotek, a packaging manufacturer for table grapes decided they needed to bring in outside help to turn things around.
Styrotek was founded in 1973 by a group of grape growers who came together to produce boxes for their farming operations in the central valley of California. While manufacturing was not originally in the company DNA, the business got to the point of creating a consistent product and quickly grew along with the grape industry.
That was until 2014 when things started to go sideways. “The company was somewhat in disarray,” Chris Caratan, one of the owner’s of Styrotek said. “Our management team at the time was not working up to par and there were some surprises in year-end numbers.”
Many private equity funds hear the words “interim executive” and think the only application is turnaround or short-term fill-in. But for PE funds seeking a great return, they look to interims for their unique abilities to build and transform companies.
Here are six major use cases for interim executives in PE-owned portfolio companies:
Interim Executives in Diligence
Most funds hope to spread their wings – work beyond industries where they’ve already had success, by looking at new industries where acquisitions may cost less and produce higher returns. The further afield they go, the more they need expert leadership removed from prior operating teams.
“Action and feeling go together, and by regulating the action, which is under the more direct control of the will, we can indirectly regulate the feeling.”
– William James
One of the biggest benefits business owners report when they take on fresh leadership, whether an interim or fractional executive is a sense of relief. Of having done the right thing. They report the feeling that someone else shouldered a burden that was becoming impossible. Just too large to handle alone, or with the current resources on hand.
The real reason behind this for all of us business owners is that the challenge is just too painful to deal with on our own. Whether it’s family dynamics, lack of future planning, or declining business, we get embroiled in the inertia of our organizations. Sometimes the pain is so vast, the only solution is to sell the company.
When InterimExecs sent in RED Team member and Interim CEO, Michelle Barnes, into the Tourette Association of America, the organization was in a state of flux. The CEO had exited, staff was demoralized, the office was in a bit of chaos, and everyone was questioning what the future would look like.
First-year Change Agent members have access to the Interim Institute’s 4 hour audio program on the Fundamentals of Interim Management, and a one-hour strategy session to help jumpstart their interim career.
*$200 additional charge for Accelerator Program only applies for first-year members. After the first year, membership renews at $485/year.