Robert Katz, managing director at EisnerAmper, has spent nearly three decades in turnaround management. You could say it’s in his blood.
“My father, Marty Katz, founded Executive Sounding Board Associates in 1978. He was really one of the forerunners and pioneers of the restructuring community,” Katz says.
Katz spent four years in public accounting followed by an additional four years in private industry before finishing his MBA and moving into the management practice with his father. He subsequently worked with a variety of companies and organizations ranging from manufacturing to distribution to not-for-profit.
“I’ve touched on just about everything in my years in the industry,” he says with a laugh.
Two and half years ago, Executive Sounding Board Associates merged its practice with EisnerAmper, opening up access to a bigger platform and more clients. The move has paid dividends, with Katz winning the M&A Advisor “Distressed M&A Dealmaker of the Year” award in March 2018.
Katz received the award because of several successful turnarounds he and his team structured in 2017. He shared details of three cases with ABF Journal in a recent interview.
Katz and his team are usually called in after a company has tripped a covenant, missed a payment or generally slipped in performance. While many cases begin the same way, the devil soon appears in the details.
When Katz began working with a Virginia-based furniture manufacturer seven years ago, the company had issues with its capital structure and needed to file for Chapter 11. The company also faced some specific challenges as a partner in an overseas facility in China.
“Their business had a seasonal over advance need, because if you manufacture in China, you have the Chinese New Year,” Katz says. “So, in January and February, a good number of the operations shut down for the New Year.”
Bringing a new lender into the process after the company’s initial lender exited added some uncertainty, as there was no past relationship history for either party to build on.
“When we went with the new lender, we told them on day one, we were going to have an over advance need each year for the first couple of years,” Katz says. “But by giving them projections and delivering on what we promised, we modeled out almost exactly what the need was and how long we would need it for. And so, by them saying, ‘We’re good with that,’ it allowed the company to grow.”
The lender’s flexibility, combined with the detailed financial plan Katz helped his client map out, worked.
After three years, the company had enough cash to no longer need the over advance, and in 2017, the owners sold the majority interest in the company for more than $90 million, a far cry from its days in bankruptcy.
The Food Processor
In some cases, a client may be more domestically-focused but have simply spread itself too thin. A food processor Katz has worked with for the last five years initially came to him with a $2 million loss and no availability remaining on its line of credit. Much of the problem lay in the company’s retail business and real estate holdings, which acted as a drag on its processing and distribution.
“Their retail operations were losing money, and they had a large building that had been in the family [and] with the company for decades. We convinced them to sell the building and move into a much better, much more effective facility,” Katz recalls. “We brought in a new lender to provide some flexibility and patience and it really enabled the owner — who was just a terrific operator — to focus on the manufacturing process, something he’s able to do very, very well.”
Katz also helped close the retail operation and reoriented the company back to its core business. By concentrating its focus and cutting out what Katz refers to as “ancillary noises,” the company found its gross margins growing, which translated into a gain of about $2 million annually. By the time its fiscal year ended in the summer of 2017, the company had $6 million available on its line of credit and another $4 million in the bank for a nearly $12 million turnaround.
“When you get rid of all the ancillary things that are tugging at you, and you can focus on what you do well and what you like to do, you can regain your success,” Katz says. “As much as it seems obvious, you just don’t realize that until you really see it happen.”
Katz is passionate about his work in the non-profit world. “It’s very different when the No. 1 goal of an organization is the mission versus profitability. It adds an interesting and cool dynamic,” he says.
But he’s quick to point out that “not-for-profit” doesn’t mean “not-for-cash,” and non-profit organizations can fall victim to the same sort of financial troubles as for-profit companies, requiring the same kind of outside assistance.
A large, Mid-Atlantic non-profit experienced just such a circumstance a few years ago. Like the food processor, it owned more real estate than it needed. There were also external circumstances outside its control.
“The organization bid on a project but didn’t bid on it correctly. Then their CFO passed away unexpectedly. The project cost them a lot more than expected,” Katz explains
These upsets, combined with the organization’s real estate holdings, made its lender nervous, leading Katz to look for ways to keep the lender on board. “We helped them reposition future projects to make sure the bidding process had all the right components to it. So the lender, who originally wanted to get out of the loan, was now in a receivable and inventory presence that they liked. They renewed the loan and actually just increased the credit facility to help with the company’s growth.”
The Right People for the Right Job
Katz emphasizes the importance of good communication, not only between clients and consultants, but between the companies and their lenders.
“It’s one of the most critical things to have good communication — good and constant,” he says. “If people are informed, whether it’s good or bad, they’re prepared to make decisions.”
Having the right people for the job becomes especially important when the unexpected happens, such as when the food processor’s oven broke down two months into its relationship with a new lender or when a government shutdown delayed payments to Katz’s non-profit client.
“It’s important, if you’re an entrepreneur, to have the right lenders and the right people on your team,” Katz says. “You want to make sure that you have somebody who has experience and won’t panic. If they make a decision, they’re not worried about losing their job.”
Both of Katz’s clients were fortunate to have lenders willing to work with them. The processor staved off worries about reliability by contacting the lender the same day the oven broke, and the lender agreed to work with them through the repairs. For the non-profit, Katz gave the lender an early warning regarding the government budget, so both the lender and organization were already prepared when the shutdown occurred. Good communication and flexible lenders led to optimal outcomes.
Organizations in a turnaround are not the only ones that benefit from a good lending relationship. Lenders leave money on the table when they ignore the opportunity underperforming companies can present. “If you’re creative, there’s a lot of money to be made,” Katz says.
Katz prefers not to see companies reach a point where they’re already in trouble and have to find a new lender when others withdraw.
“The best time to begin the restructuring process or a performance improvement is when you still have availability on your line of credit or your revolver, when you still have a good relationship with your vendors, your customers and your lenders,” he says. “It takes a strong person to reach out on their own rather than be forced to.”
And if the situation is not nearly as bad as the company thinks? “Rarely, if ever, does somebody charge for a proposal or the initial visit, so really the only thing a company is investing is time. What’s the downside?”
This is what makes turnaround managers like Katz the right people as well.