Editor's note: This is the third in a new series of case studies about business turnarounds. Names and identifying details of the company used as the example have been changed.
Problem: Asset Rich; Cash Poor
For the past three months, we've been working with a stone quarry business in rural Montana. We'll call it "Rock Solid Inc.," although it is anything but. This company quarries multiple types of stone for the construction industry. If you have a summer house on the Jersey Shore and want nice big red stones around your shrubbery, for example, there's a good chance your rocks will come from this company.
Every couple of years, to determine the lifespan of the quarries, geologists conduct tests. You can't dig in the ground ad infinitum and expect to get the same quality of stone. Rock Solid was just tested, and in terms of its breadth, depth, and the quality of what's being pulled out of the ground, it's still in good shape. The value of the two quarries Rock Solid owns is in excess of $11 million. But dirt and rocks won't keep the business running. Because there is so little discretionary spending these days on landscaping or home improvement, no one's buying these stones, and quarry excavation is down to bupkus. So is cash flow.
Of course, the two owners of Rock Solid have mortgaged their homes, tapped out their 401(k)s, and maxed out their line of credit. They owe the bank about $10 million, which is being collateralized by the value of their commercial real estate. As things stand now, they won't survive another year. Their only hope is to sell one of the quarries while they are still viable, but in this market it won't be easy.
Solution: Dig Deep
We've been fighting with the owners to get them to cut costs. They've got to mine for cash wherever they can. They are so deep in the debt hole, they need to get creative before they're buried alive.
We've advised them to reduce work weeks from five days to four to save on payroll. Thousands of small cuts in their overhead costs will soon add up. Rock Solid also has to get aggressive on receivables. It has taken us weeks to persuade one of the owners to get in his car and confront his largest client, who owes him $350,000 in unpaid invoices. Another customer, a contractor on the verge of financial collapse himself, owes Rock Solid $2 million. The money is floating around in a bond, so it's there to be had, but Rock Solid still needs to get paid. The owners must leave no stone unturned to get their hands on this cash. Liquidity is key.
This influx of capital will give them the precious time they need to find a lifesaving buyer for one of their quarries. The company was already offered $5 million, but in the form of a promissory note and a check for $200,000. Another deal fell apart because the would-be buyer's bank stopped lending in the middle of the transaction. Rock Solid must accelerate the selling process and focus on financially solvent businesses as potential buyers.
The owners need the cold hard cash in their pockets to pay off a mountain of debt and restructure their hefty bank loan. Their bank, seeing these effort to improve cash flow and the potential of a quarry sale, has just granted them a $600,000 loan extension. The company also won a new client, who's ordering $250,000 of red stones per month. Rock Solid is also meeting with a potential quarry buyer this week. If a sale can take place in the next one to two months, it will buy the company another two years—enough time to ride out this recession and rebuild the business with granite-strength fiscal discipline. If it can survive long enough to realize the quarry sale, Rock Solid will finally live up to its name.
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