Value Recovery Through Restructuring

Restructuring and reorganization are two different things. However, in some cases, if you don’t do the former, you may have to succumb to the latter (reorganization) through bankruptcy. If your business is stagnant, showing little or no signs of growth with no obvious way forward, restructuring may be just what the doctor ordered.  Dan Tamkin is the managing director at Resurgent Ventures, as well as the chief technology officer at Transdev, with a depth of experience as a corporate developer and venture capitalist. Dan returns for his second visit on “Deal Talk.” On this visit, he talks about what restructuring really is and how it can help to revitalize a company looking to heighten its value.

Questions Answered For You

  • What is the difference between restructuring and reorganization?
  • Can the value of the company alone determine whether that business could benefit from restructuring internally?
  • How will a buyer know if the business it intends to acquire is in need of restructuring?
  • Will the information from the due diligence researcher indicate that the company it wants to acquire is in need of restructuring?
  • Which areas of business should a company look at in making improvements?
  • How frequently do wholesale changes ocur in corporate restructuring?
  • What is the best way for ownership to know what’s going on in their companies and to start investigating what changes could be done to turn their companies around?

Sales cures all. It's the best problem to have -- too many sales.

- Dan Tamkin

Key Takeaways

  • Restructuring and reorganization are sometimes used interchangeably, but here’s how they differ:
  • Restructuring can be financial and operational. It is an attempt of the management or the board to improve the company through making changes.
  • Reorganization, on the other hand, refers to making changes in the company’s capital structure to improve business situation. This involves oversight from court officials, creditors and stakeholders.
  • As a buyer, you will know whether the business that you intend to acquire is in need of restructuring by looking at the company’s financial health and operational viewpoint.
  • On the operational standpoint, you may not easily find out through the due diligence process whether a business is in need of restructuring, and it’s because:
  1. The diligence researcher usually has no significant interaction with most members of the management team who are often quiet about selling the business.
  2. The interaction between the business process and the things that can really drive transformational change usually happens at mid-management level, which the diligence researcher may not have direct access to.
  • Restructuring changes depend on the capital structure and the size of the company.
  • Optimizing due diligence could be done in two levels: Level-one optimization involves finding out the company’s big problems that you need to solve. Level two requires finding the transformative or the resurgent opportunity.
  • Business owners need to be aware of the trends not only in their own, but also in other industries. For example, what technologies are changing not only the core business, but also their adjacent businesses?

Read Full Interview

 

Jeff: Restructuring, why and when your company may need it and how it can help you reestablish or improve your business' value. If you're a business owner looking for answers, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is Deal Talk, brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Welcome to the web's number one content source for small business owners committed to building a business for eventual sale. It's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

Joining me today from Los Angeles is Mr. Dan Tamkin, corporate development and chief technology officer at Transdev, and also the founder and managing director of Resurgent Ventures. This is his second appearance on the program. Dan Tamkin, welcome back to Deal Talk, sir. Good to have you.

Dan: Thanks for having me back. I'm excited to be here.

“The numbers are the end result of all the work you do as a business owner.”

Jeff: There seems to be I think some confusion among some business owners about two terms, restructuring and reorganization. And in fact if you look these terms up online, the definitions don't necessarily work real well to help clarify the differences between the two because they can sometimes be used interchangeably. What is the difference between restructuring and reorganization?

Dan: Yeah. In general restructuring can be financial, can be operationally oriented. I think the key to restructuring and reorganization is that restructuring is really overseen by the company management or the board in an attempt to make a company better off by making some changes. Reorganization-- the difference there is that it's really more about the company's capital structure and how that business needs to be altered to put the business situation... succeed going forward. Typically, it's in concert or with a bankruptcy filing. And so this is done with oversight from court officials, and with creditors, shareholders being balanced. So, one way to think about it is restructuring is the first way you're looking at going about fixing the business and that's really the internal management working on that. But over time unsuccessful restructuring may lead to reorganization where you actually have a bankruptcy filing and you have a court-appointed person who's making sure that debts are paid down and all parties are being considered in the go forward entity.

 

Jeff: Can the value of the company alone determine whether or not that business could benefit from restructuring internally?

Dan: I think if you're looking at a company and you benchmark it against its peers, and its value is less, and that could be each value on a multiple basis. So, like trades that let's say all its competitors traded three times sales and this company is trading one time sales, or obviously you could apply those same multiples to earnings. That immediately tells you that the market is discounting that company for some very specific reason. And if its competitors are trading at those higher valuations, usually it's something  related to operational problems. There could be some issues related to capital structure, but usually it's related to an operational problem.

 

Jeff: How does a company in your view, Dan, how can it get out in front of that? How can it, like you talked about, use benchmarks of other like companies, or the competition out there to help and see where maybe it could make those improvements?

Dan: When you're talking about public companies, there's a variety of benchmarks that are easily available out there. So, that's one set of things where you can look at your competitors' filings and figure out what you should be doing. Or at least look at what their ratios are and honestly what they're doing is right, but you can see where they're spending their money, or what their capital structure looks like, or what their sales growth, or whatever may be the things that plague the company from having the same valuation as its competitor. So, it's a lot  easier in a public setting.  In a private setting, in which there are certainly some benchmarking services you can try to find. But usually it's very touch to use information on private companies, and that's where you need to really, as a business owner, use your read of the market to understand where you are with all the peer competitors, and why somebody's growing, and why somebody's not. In private company, especially a company that's been around for a while, a lot of it comes down to “are you still innovating and pushing on your core model?” or if you stopped pushing and you're really just more running the business.

“The numbers are the language that the buyer and seller, and the business talks back and forth with. But how those numbers are arrived and interpreted are very different.”

Jeff: Let's talk about some areas where a company will take a look to make those improvements. Typically speaking Dan, where are the first places to look where certain changes are often frequently made, at least to begin with, to get those changes underway?

Dan: If you really want to look from more a numbers out basis because one of the simplest things to do is look at your sales and marketing spend relative to your sales output versus your competitors’. So, most of businesses that I come across, every business that's for sale says, "If you put more energy in the sales and marketing, you'll have a better result." Is that really true or not? I hardly know. But those kinds of benchmark ratios would let you know. If I put more money in the sales, will I get more sales, which will be worth the money? Or maybe I have a sales process problem, or maybe I'm selling the product the wrong way, or what have you. From the top line perspective, I kind of live with the model that sales cures all. It's the best problem to have -- too many sales. From the operation spend side, those ratios are more rationalized. You can actually use even more general benchmarks in the industry when it comes to things like G&A.

Probably the trickiest one is R&D spend. If you're dealing with anything especially in the software side, it's pretty easy to ramp down that R&D spend for a couple of years and slow the product trajectory to boost your earnings as you head towards the sales. So, savvy buyers are going to look for those types of things. There's not necessarily one thing to look at, but what you're looking at is... Here's the way I've thought of it. I think this is a good heuristic for the listeners. The numbers are the end result of all the work you do as a business owner. So, you're going to do all this work, and you did something three or six months ago, and then three or six months later the numbers look better because of what you did three or six months ago. As the buyer, I'm looking at the numbers now which is the output of your effort, and then I'm trying to figure out what new inputs will positively change the numbers. So the numbers are the language that the buyer and seller, and the business talks back and forth with. But how those numbers are arrived and interpreted are very different.

I think that's the key message for anybody-- to think about, in terms of driving valuation, “How do I explain what I did to drive numbers and what are the best ways to drive positive results?” And it's not necessarily that I did something in this quarter but I probably did something two or three quarters ago that's making a big impact.

 

Jeff: Dan Tamkin is a corporate development and chief technology officer at Transdev, and also the founder and managing director of Resurgent Ventures. He's joining us for the second time here on Deal Talk. We're talking about restructuring as a way or a place to start thinking about how a company can work toward improving its value when things may not be quite right, when things have fallen off, whether it be sales, cash flow, whatever the case may be. Let's go ahead and we'll kind of ease back into the conversation here. Let's talk about an acquiring business, a buyer out there conducting due diligence of a company it's looking to acquire. Will that researcher due diligence that it does provide enough information to indicate that restructuring of the company that it wants to bring on may in fact be necessary? Or will companies just say, "Forget it. If it needs restructuring, we're not interested."

Dan: That's definitely going to be based on the buyer. There are several buyers that feel comfortable in those situations and there are a lot of buyers that don't feel comfortable in situations, be it turnarounds, whether it be restructuring; however, they need it to get the business on its feet. I think knowing whether a business needs that restructuring or not really can come from the... You can see it at the financial viewpoint where you have significant dead overhang relative to the cash flow proceeds from the business, and that's one tip.

But from the operational viewpoint, one of the challenges is all businesses need a little bit of restructuring in the sense that not every business is perfect. It doesn't have the right business processes. Maybe it could be doing things better to get moving forward. But it's very hard to see that through the outside of due diligence because in most cases in diligence you're not significantly interacting with most of the management team if you're buying the smaller-sized businesses because usually the sellers are keeping it quiet that they're selling.

The other thing, too, is most of the interaction in the business really happens... the interaction of the business process and things that can really drive transformational change usually happens below the sea level. Especially as it gets 30, 40, 50 people, the day-to-day business process, the big things that might yield changes especially if a business owner has owned it for a long time they're not really apparent to them. Or those business process may not be something they're able to involve. A lot of times you have to sit in the operator's seat for a little bit to feel like what kind of big changes are you going to make.

“All businesses need a little bit of restructuring in the sense that not every business s perfect.”

Jeff: It sounds like you have to get the team involved too obviously. Below the sea level, you're talking about mid-level managers and then maybe even some of the non-supervisory people that are in the higher levels of operations that work on the floor for example.

Dan: Yeah. And I think that's... I would say there's level one optimization and level two optimization. You have to do enough research to level one optimize, which is, “What are the big problems you are going to solve in the business? How are you going to do it differently when you buy it?” But then once you buy it, there's a whole bunch of things that you find out at level two, which is with team, what needs to be different, what needs to change, what may not have kind of diligence that we're not doing right? Where might this unit have to report to that unit, or these groups be consolidated, or these groups split apart to make the business better function? That's not always intuitive unless you're buying one type of business where you really understand each function very well.

 

Jeff: Time now for a short break here on Deal Talk. But when we come back, I'm going to resume my conversation with Dan Tamkin. And we're going to continue our discussion on restructuring. And I may call upon Dan to kind of talk about his experience in working with a software company that he has had some experience with in the past and how he kind of helped lead that turnaround, some of the things that he needed to do, and some of the things that were accomplished in that turnaround effort to make it profitable and allow them to operate at a higher value and a higher level altogether when Deal Talk presumes after this.

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Jeff: I'm Jeff with my guest Dam Tamkin, corporate development and chief technology officer at Transdev, also the founder and managing director of Resurgent Ventures. Dan, what I wanted to do was, first of all, I think we've introduced this a little bit but I'm going to go back and I'm just going to once again re-mention, this is something anybody can find on your LinkedIn profile by searching for it. It's the fact that you restructured, grew, and sold the software company to a multibillion-dollar organization. And I know software is one of your passions. This is something that you are very, very interested in. What I'd like to ask you about is using this background, this experience that you had and communicating that back to our listeners today, we're talking about restructuring. And I'd like you to share if you would, to illustrate how you are able to go in and make necessary changes to this company to get it where it needed to be in order for it to be sold. And just tell us a little bit about this company, what was wrong, when you went in, what were the challenges, what were the things that you had to first overcome and then how did you overcome those issues?

Dan: I think there were two things, one was the company was doing too many things relative to the amount of money it had. And two was the company had been in existence for quite a while and hadn't grown to the expectations of its ownership. And so they were feeling like it was not really going to be a successful business. And then those two things coalesced to kind of come back to restructuring. They had a financial situation where they had a million-dollar debt that they needed to figure out what they were going to do with. And so the holder of the debt, the note holders were pressing to figure out a solution to ultimately know what happened with the business.

So, you have a couple of things, a business not operationally performing. And what's nice from the buyer's side is you had a capital structure that forced the decision to be made. One of the things that's important about restructuring situation that's nice for buyers who are willing to enter into that is financial restructuring creates a situation where a deal has to happen. And I'm sure any buyer can relate to, if there's not a forcing function in a deal, it's really up to how committed is the seller to moving on. And everybody including myself has had some seller's remorse, so it's not a nefarious thing, it's a natural thing. But in situations where a company is upside down on its capital structure, companies have to do something. And if you're willing to entertain those situations, they can be nice outcomes.

That's kind of setting the table. The first thing we did is the company was really focused on being a call center provider. So basically renting and selling bodies and had built some technology. What had happened is the core idea around that didn't work. So, what we did is we immediately took it from the call center provider and took the technology they had built and started selling the technology to other people. Immediately, we switched from a low margin, high startup cost business, people renting business into higher margin like software licensing and all that using the same intellectual property.  We really didn't have to take much of a lead towards reinvesting. All we needed to do was license out the technology. And the initial days we didn't even build a sales force, I did the initial sales. And from there we're able to immediately create cash flow. One of the nice things about the software business is you're creating high margin cash.  If you go out and sell a software product at that time or a license product for a quarter million dollars with a 20% support and maintenance, you’ve got 250 coming in the bank at a very high margin. You've got $50,000 a year. You can bet on it for at least five years. That business finances itself much better than the call center business, which is, again, trying to make small margin on a lot of people, and then all that management overhead to manage those people.

From there once we got the business sales going of the software we started looking to basically how do we create a network out of this software. And that was really key.  There's what I recall again that level one optimization of "let's get the business stable, let's move forward." And then level two is, "Okay, we're stable and everything is good." What's the transformational opportunity? What are we going to do next?  We knew over time what was interesting about our business was really we had relationships in the industry that nobody ever had before, in the sense that we were integrating to all the scheduling and dispatch packages that were in the industry and so we could create new solutions where we bring these pieces of software together in different transportation operators together.

We started down the road of connecting government transportation fleets with private transportation fleets. And Transdev, which is an $8 billion global transport leader, was very interested in what we were doing because they had a private fleet but they also had government-run fleets. In fact, most of the business was government-run, but they were one of the few that had private fleets as well and we're rapidly acquiring them. They saw that we were really creating a way to take a low margin business, which is the government business which runs at low single-digit margins and move that revenue into higher-margin business, which was the private fleet which runs more like 10%-15% margins. And then you say, "What's the benefit for the customer?” Actually at the end of the day, it reduces the cost of operations for the government operator as well. So, it's a nice solution where you're saving money for your customer and you're also making more money by moving it into a more flexible transportation mode. So that got them very excited and brought them in.

We found the option value in the business or what I call the level two optimization. The level one was getting the business set, understanding what we needed to do to make sure everyone gets paid. We had a nice business that worked. The level two optimization was finding that transformative opportunity, that resurgent opportunity.

 

Jeff: Talk about the time frame. How long from the time that you were introduced into the operation and you went in and made your assessment, had an understanding of what needed to be done. Were you able to take and turn around and get to the point where the company was acquired by I think it's Transdev, correct?

Dan: Yeah. The level one optimization, which is really just getting cash flow break even, that was done... Frankly we're cash flow break even in I think after our month one. But finding the big upside, the option value, that took probably about four years. 

The big thing about that is when I look at these companies, I kind of look of them again as... I'm talking about level one, level two optimization. But level one optimization is a little bit like being a surfer in the water. You can't be standing on the beach and watching the wave break and go, "I'm going to go learn to surf and go in there and go into that market and capture that opportunity.” You've already got to be in the water. So the level one optimization gets me in the water, seeing what's going on, you should be making money on level one optimization, you shouldn't buy the business on the level two. The level two is the option value where you take a business that is cash flowing and what might be considered a lifestyle business and now you're turning it into something that's transformative and strategically valuable to somebody else.

 

Jeff: Dan, how often do you think... I'm asking you, this is just kind of a general question. I'm just kind of throwing it out there. How frequently do wholesale changes occur in corporate restructuring? I know that you have just kind of a very finite background experience in this. But is it possible to work with the human capital that you have or do restructures more often than not require leadership, managerial changes all across the board really to be effective? You talked about for example this particular illustration that you just discussed. You said it was kind of a call center operation. So that part had to really be dealt with. There was a tremendous loss there. So there were a number of people that probably those positions had to be eliminated. But how often do these wholesale types of changes actually occur when you're talking about restructuring?

Dan: I think it's a great question. Restructuring changes... I would say a lot of it depends on the size of the company. The smaller, more closely held the company, more likely it is the existing management team is just going to try to keep figuring it out. A bigger company that's less closely held or maybe it's owned by a private equity firm or what have you, there's going to be demands on it for outside opinions whether it be restructuring consultants, management consultants, all those types. You're going to find some kind of consultant involved, maybe a new CEO eventually or maybe a new CEO right off the bat.

Again, your capital structure and size is really going to dictate it. A family-owned and family-run firm is probably low to let their own CEO go, but maybe they're willing to bring in a consultant. Whereas private equity firm will let the CEO go and hire a new manager if they need to.

 

Jeff: Final question Dan, if a company suspects that they're no longer performing at the level that they're used to, and maybe they've been around for a few years and they actually had market leadership at some point and things have fallen off. Maybe there have been new developments or innovations in the marketplace that have caused them to fall back in the group. Or just quite frankly they're not exactly sure. What is the best way for ownership to get their arms around what's going on in their companies and to start to investigate exactly what changes might have to take place in order for them to bring their companies back around?

Dan: I think it comes back to what you talked a little bit about earlier, the working in versus working on the business. You can't stop learning.That's the number one thing. You need to make sure you're exposing yourself to what's going on in your marketplace. But not only would I say your marketplace but also figure out what's going on in other marketplaces and what's the trends. Not every trend is applicable to every other industry but there are reasons that trends are happening and they're increasingly, at least in my world, they're around enabling technology, usually whether it be the internet, mobile, or what have you, you need to see what's going on in other industries could apply to you if you don't feel you're getting enough just out of your own industry. Part of this is just keeping that love and passion for the business, and that excitement to keep learning. I think when you stop learning is exactly when you make your business vulnerable to these third-party threats.

And I think increasingly businesses that were considered not Internet business or not technology business that's going to change if it isn't complete already. We don't really have a technology sector anymore. All businesses have to be conversing in technology, and over time will be highly involved in technology, and will have to be very comfortable with it. So, to me, that's really the big thing to make sure if I was a business owner. I want to stay on top of is what are the technologies that are changing not only in my businesses but also my adjacent businesses.

 

Jeff: Dan, I know as a consultant yourself with Resurgent Ventures are always available to chat with people about the possibility of helping them with their own businesses and their own particular situations, and coming in and talking with them about ways that your firm can assist them in once again regaining value and finding that lost value wherever that may have fallen by the wayside. And whether they found something that they could use in this conversation or not. If they would like to reach out to you and talk about their specific situation how can they connect with you?

Dan: The best way is go to Resurgent Ventures website. Or you just reach me at   dan.tamkin@resurgentventures.com.

 

Jeff: dan.tamkin@resurgentventures.com. Dan, we appreciate the time once again in this show that you've taken and having you back on again for the second time has really been great. We hope that we can have you back on again in a future edition of Deal Talk. Once again, thank you so much.

Dan: Thank you Jeff, I appreciate your time.

 

Jeff: Dan Tamkin, corporate development and chief technology officer at Transdev has been my guest. We hope you enjoyed the discussion. Let us know won't you? We're interested to know your thoughts about this program and about Deal Talk in general, what you like and your suggestions for how we can make this show even better. We wouldn't be here if it weren't for you so send us an email to dealtalkmorganandwestfield.com.

Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks much for listening. We'll talk to you again.

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