What should you do when your business is in a free fall?
It can start slowly enough. The numbers still look good and lenders are plentiful, but growth hasn't come cheap. Debt is getting high and financial controls could be a lot stronger. Suddenly, your business is going into a tailspin.
Turbulence occurs when a company's financial and/or operational problems become so serious that they compound on one another and continue to get worse. Unless major and immediate action is taken, these businesses usually fail.
Aftermarket businesses in a death spiral frequently believe their problems can be solved with an infusion of additional capital, but that is not usually the case. Rather, avoiding the death spiral is best accomplished by owners who take a proactive approach to managing and marketing their companies early on, instead of making reactive attempts.
After reviewing several case studies of auto parts distributors and manufacturers who went into a death spiral, here are some red flags they failed to heed:
Do your homework before hiring a consultant. With too much debt piled up as a result of too rapid growth, overbuilding inventory and acquiring an expensive new facility, one business owner fired the CFO and outsourced decisions about the company's future to the wrong consultants — twice.
Both consultants knew nothing about the aftermarket industry. One told the owner he had too many lenders, which is akin to worrying about how many credit cards you carry in your wallet instead of worrying about the amount of debt you're carrying on each of the cards.
The owner relied on advice and referrals from his lawyer and accountant, neither of whom knew what the business needed to do. Consultants or business brokers who hold themselves out as turnaround experts may be working on referrals from banks, which can pose a potential conflict of interest. They may advise an owner to quickly liquidate his assets and get as much money as he can for the business.
Frequently, an owner relies on the first suitor at the door. This can be a big mistake because, on paper, you're still making money. But there's a difference between a business being profitable and having value.
Stick to what you are good at... If you already have too much debt, don't use some of it for ventures outside your core business. Just because someone is willing to lend you money doesn't always mean you should take it. Good debt is used to fund proprietary products and to build growth in your core competency. Debt used to finance too many expeditions at once or an owner's whim is usually destined to become bad debt.
...But don't be afraid to branch out. Businesses with a highly specialized product niche run the risk of losing favor with consumers. When this happens, managers who refuse to change directions to bring in new products for different segments of the aftermarket face a losing proposition.
Keep financial control. Often, a business grows too quickly for its owner to keep up.
A successful owner may be hesitant to change the way things are done. "That's the way we've always handled it" is an often-cited justification for not bringing in the appropriate software, consultants or CFO to demonstrate how to streamline the company's books and keep track of every financial aspect of the business.
Assets, cash flow, profitability vs. expenses, lending relationships — all these must be accessible, analyzed and understood. Prospective investors will want to review several years' worth of financial statements; be prepared to explain them in excruciating detail.
After seeing the warning signs, here's a list of 10 things aftermarket owners and managers should keep in mind:
- Be proactive about finding advisers with comparable experience to help you man the controls and manage growth.
- Don't ask your real estate lawyer or accountant for advice about the value of your business.
- Look for an investment banker with industry-specific and deal-specific experience to guide you. Don't wait until you're forced to react under pressure. Ask for advice before you need it.
- Let advisers guide you in the planning processes early on, whether you're setting up a succession plan or looking to acquire another company. Let them lay out all the options and what-ifs. Discuss a strategy for your business' future.
- Know your competitors.
- Be familiar with all the distribution channels, including the Internet.
- Know the mood of the marketplace and what drives change.
- Protect your proprietary products.
- Get out of denial. Stop the foot-dragging and take action.
- Avoid irrational optimism. If it sounds too good to be true, it probably is. Keep in mind that any business' true worth is what a buyer is willing to pay.
Jon Taylor is vice president of the investment bank Capstone Financial Group, based in Hilton Head, S.C. Its Detroit division, Capstone Automotive Consulting, works exclusively with aftermarket companies.
