Larta University

March 6: How to Avoid Common Pitfalls And Stay in the Black
This seminar will examine how entrepreneurs can avoid trouble and stay in the black despite the unpredictable economy. You will learn effective solutions for building a successful company and avoiding financial disasters. Learn ways to monitor cash flow and assets, extend runway, and reduce cash burn. Study companies that have failed and learn from their mistakes, as well as successful companies and learn from their successes. Speaker: Martin D. Pichinson, Principal, Sherwood Partners
more information >

---

Weathering the Perfect Storm

by Martin D. Pichinson, Principal, Sherwood Partners, Larta University speaker

In today's current economic downturn, or the perfect storm, as I like to call it, companies are facing down some of the toughest decisions they've had to make in decades. Not since Holland in the 1630's or in the 1835 British Rail fiasco has such unprecedented prosperity been followed by such incredible fallout. There were of course smaller incidents of financial craziness, but the recent technology splurge ranks with the best.

To find our best comparison, we go back in time to Europe nearly four hundred years ago. At that time a speculative investment bubble around the Dutch Tulip bulb market created such a mania that people traded their houses, everything they owned, for a single desirable tulip bulb. The crash came quickly for those in this speculative market, and despite warnings from the government and conservative influencers, tulip mania came to an end on April 27th 1637 the Dutch government issued a decree that tulip bulbs were products and not investments, and thus had to be bought and sold on that basis. The speculative market was over, and fortunes were lost. The analogies to the recent dot-com marketplace and other segments of the technology industry are innumerable.

The entire corporate field will change over the next five to eight years. While recently we've seen many of the dot-coms that came out of nowhere fold, in this next wave the shakeout is affecting the telecommunication industry and we'll see many of the household names that were once believed to be invincible disappear. Not only will these corporations disappear, the way we as a society and the way companies do business will change, much as they had to in Holland almost four hundred years ago.

In other words, we won't see that kind of ride again in our lifetimes, and many companies are now faced with the dilemma of decreased cash flow and dissatisfied boards, coupled with diminishing returns that will force them to make the most difficult choices they've ever faced. As the perfect storm sets in, VCs, investors and creditors must be aware of the warning signs and take proactive action. If not they'll be faced with a mess to which only the last-ditch money saving tactics outlined here can be applied.

A storm is brewing

What I hear most often from VCs and financial institutions in the technology sector that turn to Sherwood Partners is "I wish we had been able to see earlier on the problems that we are faced with today." Often simply by applying a historical, or even a practical perspective, to the problems companies are facing much can be accomplished and millions of dollars can be saved.

The greatest problem that most companies face is accepting when the time is right to have an outside consultant or advisory firm come in and make the necessary adjustments to save their businesses. Most CEOs are not prepared to handle this kind of situation, and don't want to accept the harsh realities that stand before them. Furthermore, it is sometimes difficult for management and the board to re-focus the concept that in technology there is a special type of management team in place that is quite different then the past. That is why many will settle for a consultancy that offers advice, rather than a team of objective advisors who can actually implement change. For many, this choice can have dramatic repercussions.

For our purposes here, I'll focus on the technology marketplace. Technology is a fairly new focus in our society. It is an offshoot and extension of the industrial revolution, which then passed into the information age. In the technology sector we are creating solutions and platforms through software and hardware additives that will make our lives much easier and decisions happen much quicker.

Management teams in the technology sector must focus on the continuing selling and innovative process. This takes a certain skill set for the CEO and his or her management team. It takes the ability to see through time and understand how their product and/or solution will dramatically change a past process or solution. Often individuals with this sort of vision and foresight lack the business acumen necessary to make their ideas a moneymaking reality. Therefore third party service providers are more important then ever before in this sector.

It is critical at this stage to find a firm that has been heavily involved in this sector. This ensures that your team knows the players and can focus towards results. This is very important, as "checkability" is key. These are not the times to learn the ropes. The simple fact is that it is best to have the management focus on building the business and a third party professional service firm do the "heavy lifting" and reengineering of the company. With so many millions at stake, there is not a lot of logic in having the management team refocus their efforts.

The existence of the technology company does not follow the same rules as "old economy" companies. Usually, there is not a warehouse of widgets which means that in times of trouble, the onset of the perfect storm, there is not an inventory of goods that can be sold. Usually the asset is Intellectual property (IP) and the deterioration in value of this IP happens quickly. The two main assets in a technology company are first the people and then the IP. We can somewhat say we are entering an era of the intellect, and following we have described some ways companies can salvage this intellect, even in the most perfect storm.

Finding the right umbrella

Fortunately, when handled early enough, companies can avoid disaster. Using the tactics listed below, companies can be salvaged and VC's investments can be protected most effectively. However, it should be noted that with the proper third party provider even in good times, there is value in assisting the company take proactive steps to stay clear of disaster while management continues to focus and build their customer base. Understanding this new era and adapting the available tools with the help of experts who stays on to implement their changes is certainly another insurance towards one's success. Who better knows and can guide a company to success, then one that has assisted hundreds of companies steer clear of disasters?

Proactive Tactics

As noted earlier, proactive actions can, and should be taken at any time to avert disaster later on. Constantly maintaining open communications with investors and objectively assessing corporate strategy is integral to how successful a company will be at a later stage. As with any endeavor, planning and understanding are keys to success in this new economy. Reacting and planning for the constant changes within the economy, the sector and even the company is the key.

Simply put, think of all those that tried to find the new world, or the problems we have had landing on Mars. There is a learning curve in exploring new worlds. Those who enjoy success bring in experienced professionals and experts early on. Many are waking up now and realize that there are so many areas of expertise that are required in steering through this new economy, just as there is navigating space or uncharted oceans. They key is get all the assistance and help that you can to muster up a strong focus and direction through "new territory".

Corporate Restructuring

Sherwood Partners looks at companies' balance sheets, direction and assets and establishes a long-term survival plan. We will handle all areas of implementation and augmentation to assure a smooth scenario. The team focus of Sherwood's Corporate Restructuring is not only the "plan", but the implementation that focuses on lease negotiations, cost reduction, monetization of assets, sales and of course product and corporate sales, branding and corporate strategy.

Corporate Due Diligence

Whether a company is hoping to sell, buy or merge, or the new investors or board desire a better look into the corporation, the fundamental issues and concerns are the same. In a sale, there is often an ongoing relationship of some nature that needs protection and stability. In a purchase or merger, there is a multitude of factors to consider when combining two or more businesses. The more surprises that occur after closing the transaction, the greater risk there is to all parties involved. Specifically, the integration plan is immediately placed in jeopardy, not to mention the ultimate success of your investment objectives. It is critical that this be done proactively, with the help of a third-party that has extensive experience and understanding to the subjects of due diligence and integration. To maximize your chances of success, it is critical to:
· Collect and analyze data and documents on target's operations
· Evaluate and report on target's entire business including marketing strategy, sales plan and budget, operations, systems, infrastructure and management team
· Examine and report on target's financial statements and status
· Assess scope and plan for integration and identify critical priorities

Management Reviews

Company-prepared reports, advisory boards and Board of Directors meetings all serve useful functions. However, these tools are usually limited in focus and often review the past instead of planning the future. Moreover, management's purpose is to present the corporate picture in the best possible light. A reality check from a third-party allows you to make well-informed decisions and ultimately clarifies the proper strategy. You can't be certain of the facts unless an independent hands-on investigation occurs. This is especially true today, as there is a better understanding of "fiduciary obligations"..
For this process, it is critical to:
· Evaluate the company's current situation, seeking to discern and understand the key issues below the surface;
· Analyze the existing business plan and level of applicability to the present environment;
· Review corporate financial projections in light of management's view, product acceptance, sales mix, production process, infrastructure support, key personnel and other critical variables;
Identify controls, procedures and policies appropriate to the business;
· Recommend new strategies and tactical changes to strengthen existing business and improve future prospects.
· If requested, this service can be continued regularly to "benchmark" the progress of the company for both management and the board.
A corporate review gives you the road map of a company's future. It can be invaluable in a time of uncertainty. It helps to keep a business on-track, whether you are an investor or a lender.

Reactive Tactics

Despite the best intentions, in this new frontier not everyone will succeed. Certainly, no investment is made and no business is started with the intention of failure. Alas, each investment is not always going to be a success. Sometimes the model is wrong, the management team missed an opportunity or plan, a competitor released the product earlier and gained market share, or any other reasons. In these cases, when facing the brunt of the perfect storm, it is critical to bring on experts who can provide a polite and proper closure to a situation that could become a disaster.

Assignment for the Benefit of Creditors (ABC)

Unlike bankruptcy, ABCs offer a non-judicial way to close a company. This process is and can be used for both insolvent and solvent companies that are being shut down. All assets, such as intellectual property, office furniture, equipment and even promotional items are sold to third parties for the benefit of the creditors. This is a "polite" way to close an insolvent company.

Managed Wind-downs or Liquidations

There are some cases, in the flurry of the perfect storm, when a managed liquidation is a more appropriate route to take when winding down a business operation. One such instance occurs in the few states where an Assignment For Benefit Of Creditors (ABC) is not accepted. Another instance is when assets exceed liabilities. A managed liquidation is appropriate when corporate operations are relatively straight-forward and the balance sheet is not overly burdened with complicated debt arrangements. If these situations occur, a managed liquidation may be more attractive than a formal bankruptcy filing. The concept of managed liquidations is similar to ABC's, with the exception that it is not a legally outlined process. Therefore, there is not the same protection from creditors. However, in the proper circumstances and when handled by experienced professionals who methodically and quickly handle the key stress points (strained creditor relationships, unhappy customers, overwhelmed management and employees) these liquidations are the optimal solution.

Bankruptcy Preparation

Should bankruptcy be the only solution, one must properly prepare. Without a proper financial war chest, DIP (Debtor in Possession) financing and proper communication the successful outcome of a bankruptcy is doubtful. So many corporations "dream" that bankruptcy is the answer to insolvency and by itself will create the desired results and change. The statistics show otherwise. Without a successful team representing the debtor the chances of coming out of a bankruptcy proceeding are greatly reduced.

Hibernation

This has become a popular option for promising startups that can't make it in the current environment i.e. companies stuck in the predicament of having the right product in the wrong market. Sherwood works with the company to virtually close the business, but a handful of employees, usually engineers and at times the founder(s), remain to develop the technology and prepare for a more opportune time to introduce the product. Sherwood uses its experience and expertise to make this process as seamless as possible for those involved.

Lost in the flood

Sadly, sometimes companies are left no choice but to file for bankruptcy protection. When this happens there are some critical decisions that need to be made quickly in order to maximize the companies chances at returning to prosperity. Understanding that bankruptcy is designed to keep corporations and their assets viable and not to close companies for good is critical to getting through the storm.

Futhermore, many times the premier advisory/consulting firms at times can assist a company avoid bankruptcy. We, at Sherwood call this an informal bankruptcy. But, in reality it is a form of corporate restructuring. What many companies do not know is that the loss of "credibility" is usually the beginning of the end. It is critical for an outside party to institute a period of calm for all parties to re-evaluate the situation and alternatives.

Some companies, however, go bankrupt with no intention of returning. In these cases, it is best to obtain the best counsel available, bringing in the right legal and business professionals. Martindale-Hubbell (www.lawyers.com) can provide a quick overview of many of the finest bankruptcy firms available, but, as always, a reference is the best tool to find the right attorney.

There usually is more than one solution to "any situation". Everyone usually tries to go into a situation somewhat understanding what the outcome may be. The sad part is that looking back, the outcome is usually not what was expected.

Lessons learned

As we enter the "eye" of this perfect storm, we realize that this is only the beginning and there will be many new lessons to learn along the way. While understanding the corporate changes that society will demand, there are ever new demands that will be made on corporations, their executives and their boards by not only society at large but more specifically their customers. Concerns regarding morals and ethics must be viewed in the context of history. While not all corporations fail due to misdeeds, taking note of our world today will provide the best guidance for companies coming out of this era, and being built in the future. All of the best experience and tactics such as those outlined in this article are no replacement for common sense and good judgment. There is more at stake here than just financial gains.

Society not only will demand morals and ethics within the corporation, but morals and ethics to protect our natural resources. As society is being challenged in so many ways, not just the credibility of the US corporate world is at risk, but survival of the environment, and many other major issues come into play, and a demand for truth needs to be the focus of the future.

Corruption of the moral and ethic corporate fiber and corruption of our precious environment in itself will have tremendous pressure on the bottom line. Those corporations that cannot be trusted will lose the support of their valued customers as will the relentless pollution to save a few dollars in the manufacturing process. We must keep an eye on the historical perspective, lest we'll have gained nothing from these most incredible times in which we live, and we'll all suffer the effects of the perfect storm.

Return to this week's issue of LA VOX >