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Case #431
$13 million specialty equipment
manufacturer
This small Midwestern manufacturer specialized
in steel-cutting, magnetic-mount drills and drill bits used
widely in bridge and skyscraper construction. Selling on a
worldwide basis and maintaining U.K. operations to service
the Common Market and Near East, the company also imported
related products to sell through their distribution channel.
Sales slumped 35-40% in 2002, due to a variety
of factors, including the tough economy, foreign competition
with lower-cost product, loss of key people who became competitors,
loss of some key resale product lines that the company had
pioneered but not locked up, lack of effective communication
with its 1,300-dealer network, launch of a defective new product,
and market rumors of financial weakness at the company. On
top of all else, quibbling between the two owners had forced
out good people and traumatized decision-making. One partner
had been bought out, but the debt incurred had become a burden
for the business; also, the current owner was in ill health,
embittered by the bank, at war with his former partner, and
his son was serving as President with less-than-stellar results.
Annual revenue stabilized at $13 million, with debt hovering
at $11 million. The bank, one of the major national banks,
wanted an exit strategy, an intermediary to negotiate peace
and reopen channels of communication, and a realistic assessment
of the situation for the Board and itself.
The Morris-Anderson & Associates crew developed
a comprehensive analysis of the situation for the bank, presented
3 weeks into the engagement. Included were a full situational
analysis, virtual plant tour, detailed performance review,
analysis of the sales slump and working capital positions.
We presented 6 alternative outcomes for the business and conducted
a full review of strategic alternatives with the bank. Based
on our findings, we encouraged the ex-partner to step back
in, convert his personal guarantees (liquid assets that could
have been swept up by the bank) into an equity investment,
and take control. The bank's report was re-presented to management,
the Board of Directors, and the ex-partner and his attorney.
As a result, the ex- and current partners converted
their side guarantees into recapitalization of the business.
The ex-partner assumed control; the current partner was left
with a minority position and some upside. The incompetent
son was sidelined. The bank's risk exposure was reduced to
acceptable levels.
Overall, this was a small business situation
packed with intrigue, competing factions and bitter feelings.
The bank brought us into the situation not only to provide
clarity and a shared understanding of the business's current
situation and strategic alternatives, but to act as the catalyst
to diffuse tensions and bring the parties to the table. We
took a strong role in moving the parties toward an acceptable
deal and remained on-call when rough spots developed.
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