The Turnaround Ace

Negotiate Payments to Stay in Business


Editor's note: This is the latest in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.

Problem: Cashless and Clueless

In good economic times, a business with a solid relationship with its bank can just about survive at breakeven and make do on loan after loan with zero cash flow. But over the long haul, no business owner can afford to operate like that, recession or no recession. It takes just one crisis to send the business into a tailspin. Before you know it, your bank wants its money back, your sales have tanked, and there's no way to pay the piper short of a miracle. With no monetary cushion to absorb the shock, your business will fall so hard the impact could break it into a million pieces.

That's exactly the situation a client of ours from Oklahoma found himself in last fall when sales from his trucking and storage company—Move 'N Store—plummeted from $40 million to $31 million. The impact of the recession in 2009 pushed it to the brink of bankruptcy. Its debt ballooned. The owner, Eddie, who'd founded the business 20 years ago, found himself in a position where he couldn't meet payroll. He was forced to lay off at least six of his 20 employees, even though they'd been with him since the beginning. The decision was gut-wrenching, but these were desperate times.

Or were they? Eddie was so distracted by his dire financial situation that he failed to notice some details on the books that could have helped him out and given him the breathing space to turn the business around. But after a look through his accounts receivable—and payable—we figured a way out of this mess.

Solution: Collect Early and Stretch Out Your Payables

Stretch out those payments as far as you possibly can. I caught hell in this column last year for advising readers "never to pay your vendors on time," and my remarks and intent were taken out of context. But here is yet another example of why we need to learn from companies such as Amazon (AMZN), which pushed up its cash flow by more than 100% by delaying payments to its suppliers. It wasn't a big difference—just a few days, but it gave the company what it needed most at the time: cash.

Cash is key for any business, but it's make or break for smaller companies without the same margins for failure. You have to seek out every opportunity to drive in cash without putting the business at risk. Month by month, you need to make sure the cash you collect is greater than the cash you pay out. It's critical to the sustainability of your business, particularly in an era when it's next to impossible to get credit from banks.

Move 'N Store was taking far too long to collect, yet it was quick to pay its vendors and landlords, so there was always more cash going out than coming in. But the company had several facilities it was renting in cities throughout the Midwest for storing and shipping purposes, and monthly payments were in excess of $900,000. By negotiating with the various landlords involved, we were able to obtain a one-month forgiveness and an additional three-month deferment added to the back end of each lease, which added up to $3.6 million in interest-free cash.

It wasn't easy. It involved hours of heated conversations with a mob of angry landlords. But it bought Eddie the extra months he needed to turn his business around.

Enter a Savior

Then a miracle did happen: A new storage client signed up who would generate approximately $6 million in sales for the first year. We asked them for an up-front, three-month prepayment in order to retrofit the facilities and accommodate their business. They agreed and fronted almost $1.4 million. Within a couple of months, the business went from a zero cash position to having $5 million to play with.

Six months later, Move 'N Store has maintained its healthy cash flow. Sales are steadily creeping back up and will likely hit $33 million. We expect the business to break even this year and start turning a small profit in 2011.

Instead of relying on bank loans to keep him afloat, Eddie is trimming operating costs as he slowly and carefully expands his payables. It beats paying high interest, and his landlords have grudgingly agreed to the terms, because they know that, at the end of the day, they will get paid.

It sure beats having one of their largest tenants go bankrupt.

—With Samantha Marshall

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Cloutier is the founder and CEO of American Management Services, a management firm that specializes in financial turnarounds and profit development for small and midsize businesses.

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