The costs of consultants, investment bankers and lawyers are viewed by some businesses as a hit to the bottom line, and perhaps they are if they are called in the aftermath of a train wreck to assist in the cleanup.
But had they been called earlier, these professionals might have prevented the train wreck. The following are two woeful realities in hypothetical situations, as well as what might have been had professionals been used appropriately.
A lose-lose situation
National Suspension & Gear Co., facing competition from China, asked its 42 principal suppliers to accept across-the-board price reductions of 20 percent so that it could reduce the price on its truck suspensions.
Twenty-two of these vendors terminated their relationships with National, which soon began its predicable death spiral, with delays in shipments and vendor payments, objections from customers, tighter scrutiny from National’s bank lenders and dwindling cash flow. The situation ultimately provided gainful employment for two work-out specialists and 14 bankruptcy lawyers.
A consultant might have suggested a creative approach.
* National could have asked for bids from its suppliers, advising them that it was seeking to create greater efficiencies by eliminating duplicative sources of parts. The threat would also have been a carrot — the successful bidder could double or triple its sales volume.
* National could have offered incentives to its suppliers for improving efficiencies in the manufacturing process, which also would have fostered a partnering relationship.
* National could have suggested that the parts shipped to it would be held on consignment. As parts were needed, they would be drawn from the parts bin, and bar codes on the items would be scanned to create invoices.
The suppliers might have benefited from a consultant’s advice as well.
* A supplier could have suggested design changes to make National’s manufacturing process more efficient and its products more competitive, resulting in even greater sales by the supplier to National.
* The consignment arrangement could limit the supplier’s exposure in a bankruptcy by National, so long as it had properly documented the arrangement, filed its UCC financing statements and notified any senior secured lenders of the arrangement.
By prearrangement
Tiffany Rybiecki, CEO of Acme Holding Co., a public company, met Adam Schlock, a fund manager, at a trade conference. They established a rapport during a follow-up lunch, for which Schlock was gracious enough to pick up the tab.
In high spirits, Rybiecki held forth on solutions to repair Acme’s balance sheet, which she outlined on (of course) a cocktail napkin; someone (such as Schlock’s fund) could buy BankAir’s loan to Acme for 18 cents on the dollar, and this prescient investor could (by prearrangement) agree to discharge the loan for 30 percent of Acme’s equity, plus get a seat on Acme’s board.
It went true to plan until Schlock accelerated the BankAir loan his fund had just purchased at such a fabulous discount. Nonetheless, to avoid unpleasantness, he agreed to honor the original oral agreement with Rybiecki, except that his fund got 70 percent of Acme’s stock and his nominees got five of Acme’s seven board seats.
Rybiecki had ample time in her early retirement to consider the binding nature of the handshake deal and the concept of the free lunch.
If she had conducted the most cursory investigation of Schlock, she would have discovered that he had entered into a consent order with the SEC not to serve as an officer or director of any public company.
Would that have signaled Acme’s counsel, had she been engaged in this process, to advise caution on the character question? Would counsel have insisted that the prearranged deal be papered? I think yes, on both questions.
Should the SEC have been contacted after the note was accelerated? That question should have been explored, but the broader disclosure questions should have been addressed even earlier. Rewinding even further back, an investment banker might have suggested that Acme pare its debt through an exchange offer for convertible preferred, or that it consider other structures that would have better served the shareholders than the back alley deal.
There is a moral to these stories. Far from being a cost, professionals, properly engaged, can prove invaluable to the success of a business.
David G. Edwards is a partner in the Chicago office of Barnes & Thornburg LLP and a member of the Business, Tax & Real Estate Department. He practices primarily in the securities law and general corporate areas. Reach him at (312) 214-8306 or [email protected].
