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Red ink recovery: hard times are here but there are survival tactics to keep afloat.

Hard times are here but there are survival tactics to keep afloat. A receiver can make a difference. A big difference Hard times mean failure for many small businesses whose weak point is a lack of survival capital to weather economic storms. Generally, small businesses haven't the credibility to raise fresh capital through sales of shares, bonds or unsecured debt. When the money runs out for a small firm, there are no more chances. Money is definitely getting scarce in the present climate of high interest rates with bankers afraid to be caught with a file full of bad loans.

Hard times are undeniably here. According to the federal Superintendent of Bankruptcy, as of July, Manitoba has had 1,213 bankruptcies, 25 per cent more than the 969 that occurred in the first seven months of 1989. That is just the tip of the iceberg.

The real story of business closings can't be seen in statistics. It is in the personal stories of the men and women who have to shut down the work of their lives.

Brock Cordes knows. He is president of Seabrook Industries Ltd., a Winnipeg-based holding company that saw a group of 15 Country Kitchen Restaurants shrink to seven. Finally, to reduce debt, Cordes had to sell the chain. He also sold a major Winnipeg printing company, Web Graphics, when larger firms moved into his market. Seabrook still owns a drywall wholesale company and a travel agency, but it is a far smaller and much less ambitious company than it was in the mid-1980s.

Explains Cordes: "There is a business implosion going on. Official figures don't show the layoffs, the quiet shutdowns and the numbers of national firms closing their Manitoba operations and servicing their customers from Toronto."

There is a cost squeeze underway, believes Cordes, and Manitoba business is often just squeezed out. He says, "The national firms in our businesses have entered the local markets with so much capital and clout that local mom-and-pop operations, which some of our firms were, just have to close their doors. We decided to quit while we were ahead and avoid the ruin of being shut down by others."

The risk of viable businesses being closed down by temporary slowdowns and by unbelieving creditors faces every small firm. Unserviceable debt is usually the immediate cause of small firm failure.

Receivers, appointed by creditors or courts when a business cannot pay its bills, go into an office or store changing locks, even appointing guards at the doors. Receivers become the grim reapers of countless stories of collapse. But knowing how receivers work and how firms can survive temporary adversity can be the key to survival in hard times.

Receivers, typically acting for chartered banks, wind up with the problem loans. A receiver who knows how it's done is Michael Evans. He has 25 years of insolvency work under his belt and is now in charge of the Winnipeg receivership unit of Ernst & Young.

"The problem is that in a crunch, owner/operators tend to continue to do what they like to do best," says Evans. "Most entrepreneurs cannot manage in a crisis."

When a business does falter and a receiver takes it over, a vast difference in values becomes apparent. The receiver's obligation is to pay creditors as soon as possible. He becomes in most cases the undertaker of the company, selling off its assets, even at fire sale prices. On the contrary, the owner in almost every case would have preferred to keep the business alive and growing. Between chartered accountant Evans and the typical small businessman is a wide gulf of philosophy.

The small businessman, who knows his firm intimately and may treat it with the care usually bestowed on a child, has a more organic view of it as a living thing. But, in truth, the accountants will prevail. Behind them stand the banks and other businesses. Faith is fine, but it's the numbers that count, as the cliche goes, on the bottom line.

Winnipeg computer software publisher Sid Bursten knows what a weak bottom line can mean. Bursten has created a handful of businesses, including the weekly newspaper The Downtowner. Each has had its cash flow problems.

The Downtowner, born in 1979, grossed over $500,000 a year in ad sales, a hefty sum for a Manitoba weekly, but suffered a deadly delay in cash flow during the 1981 postal strike. Recalls Bursten, "My bank limited our operating loan just at the moment we needed it most. We never recovered from that and I had to walk away from the paper in 1983."

Bursten saw a potentially valuable business closed down by an unbelieving banker who relied on conventional accounting to value the business. As Bursten, a victim of that accounting remembers, a business can be quite valuable and yet be seen by an accountant as mortally ill. "Accounting does not reflect the real value of a business," he explains. "Assets never appreciate according to accountants, but we know they can. Goodwill is kept on the books indefinitely, and it can be a lot. But the value of goodwill is never converted to cash until a firm is sold."

A firm can monetize its goodwill in seeking additional financinaps by bringing in new investors willing to exchange their money for equity in that goodwill. As receiver Michael Evans acknowledges, "The firm in trouble may need an equity partner to carry on." Getting that partner may involve ceding some control and rights to future earnings to someone else. It will also be life insurance, a guarantee to anxious creditors that there is more to the ailing firm than the owner's hopes.

Fresh cash solves the immediate problem of a sick business. Beyond that is the fundamental problem of how a troubled firm can be managed for survival.

Moe Levy, manager of the Business Resource Centre of the Manitoba Department of Industry, Trade and Tourism, believes that there are fundamentals any firm has to obey if it is to stay alive. His short list reads like a set of business commandments: "Keep your revenue stable and have several suppliers for critical inputs," he says. "Have timely information. Get as much cash as you can for hard times to come. It is essential to know your assets and liabilities and to ensure that you do not finance short term assets with long term loans. And always be honest with the bank."

Sometimes, despite the best of efforts, the best of plans don't work out. Bob Stevens owns Suzy Q's, a trendy, 1950s-style hamburger emporium that, in the midst of its initial success, spun off a clone that swiftly failed. "I took back the franchise, then had to close down the store and eat a $100,000 loss," he says. "It was better to take the hit and keep going than to operate to generate losses that would only have grown larger."

Stevens faced potential disaster with courage and opted for financial amputation. Other owner/operators of sick firms have to do the same thing, that is, eliminate centres of losses while keeping parts of the business that are profitable. Easily said, of course, but within the trees it can be hard to know the forest.

Beyond the many rules for aiding ailing firms there is a valuable strategic option: hire the receiver before your creditors hire him. That is the advice of receiver Jeff Johnson, vice, president in charge of insolvency for a major receiver, Arthur Anderson Inc. of Winnipeg.

It would be better for a small firm in trouble to come to see us before the secured creditors call us in," says johnson. At the very least, hiring a receiver is protection against others. At best, he can anticipate what other receivers would do and protect the firm.

Receiver Bob Wener is in charge of the Winnipeg office of one of Canada's largest receivers, Peat Marwick Thorne Inc. "We get into consulting prior to breakup when firms that know they are in difficulty call us in," he says. "What we can do, apart from specific recommendations, is to bring credibility to a client. I have the liberty to tell a bank what I believe. And they do listen."

One of Wener's success stories shows how receivers can help keep a firm alive. As he recalls, the firm, Wear Wolf Apparel Inc., approached him for advice in 1987, concerned that it was drowning in disappointingly low profit sales and high costs. "When the firm, a jeans manufacturer, found itself with its operating line of credit used to the full and fully extended with creditors, it called us in. The company had finished design and development for a new product line, but discovered there was no ready demand for it."

Wear Wolf's financial crisis was close to shutting it down. Today, looking back, firm president Earl Shibou understands what hard times can do to the best of well-planned new firms.

"1987 was our first year of operation of our new blue jeans business," explains Shibou. "It turned out to be the worst year for the garment business in Canadian history. Retail sales were down. Free Trade expectations kept our customers shopping. We had expected to lose a little money in our first year, but we would up losing a small fortune."

The losses, says Shibou, were $500,000, five times over the allowance in the company's financial plan. Fearing that the lender, the Bank of Montreal, would pull the plug on the firm's line of credit, Shibou did the unexpected - he went to a receiver, Wener, for advice. Wener would give him credibility when he confronted the bank with bad news.

"If the bank had gone to a receiver, they would have closed us down," recalls Shibou. "But with the receiver acting as a financial advisor, we worked out a survival plan by which I cut 15 salesmen and 350 accounts that had been opened all over Canada and the United States. A new marketing plan let us concentrate on 10 big accounts. We were already in such a bind that our fabric suppliers were reluctant to ship. We really had to focus on our survival."

Bob Wener, for his part, invested what he remembers with accountant's precision as 220 hours and billed Wear Wolf 20,000 for the effort. The new business plan gave Wear Wolf a perspective that, Wener says, was beyond Shibou's own expertise in marketing. The bank accepted it.

Profits responded. They were small but profits nonetheless. The bank was paid and all suppliers were paid or settled with, though some had to wait. "Ninety per cent of the suppliers went along with the plan," says Shibou. "It took a year to pay everybody. Those that would not wait were paid immediately. We do not deal with them anymore."

Wear Wolf has now been profitable every month for 24 months. No bills are more than 60 days old and current sales are $2.5 million, up from $1.7 million in 1987. The firm turns out 4,000 pairs of jeans a week, keeping Shibou and his 85 employees happy. It's not bad for a firm that was once a stretcher case.

There are many cases like Wear Wolf's. Current business conditions seem likely to worsen in the beginning of 1991. High real interest rates, the GST and slumping consumer confidence will tip many well-planned and basically well-managed firms into negative cash flow.

In the present economic environment, what survival takes can be stated as a logical proposition:

If you have healthy earnings, reduce your debt. If you don't have good earnings, get as much cash on hand as possible. And d you have neither earnings nor cash, get allies - fresh partners or a consulting receiver as your needs dictate.

It is better to be alive in a lifeboat with less than ideal company than drowning in debt. On that, both victims and survivors agree.
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Title Annotation:Manitoba
Author:Allentuck, Andrew
Publication:Manitoba Business
Date:Nov 1, 1990
Words:1990
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