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Turnaround Investing in a Crisis

I wasn’t happy about my company being sold, but as CEO, it was my job to see that our shareholders got the best deal possible. We did that, so it was time to find a new career. It appears my timing was impeccable.”

Dave (not his real name) is a close friend from business school. We were in each other’s weddings, and although we live in different states, we stay in touch via Facebook (a great way to share pictures of our grandchildren). 

We also talk every few months. When we last spoke he told me the company he ran was sold in November, and for the past few months he had been looking for his next opportunity. In February, he accepted a position with an international consulting firm that focuses on corporate restructuring. Dave said his first project is a rubber manufacturing plant in Brazil. 

In a recent conversation, I asked Dave how the pandemic would affect the restructuring business. “Many companies were in trouble before this thing hit,” he said. “A number of businesses my firm was involved with were good businesses that just had too much debt. But now, we’re going from capital structure problems to business model problems. I’m going to be very busy for a long time.”

Everyone understands when a business gets in trouble because it’s carrying too much debt. Oddly enough, this is an especially acute problem in a low-interest environment because it’s easy to get debt! Real estate companies are especially prone to this kind of problem. You load up an office building with a lot of debt, then a key tenant vacates and it’s not long before the debt service can’t be paid. 

But Dave explained to me the new problem he’s seeing emerge from the COVID pandemic. “We see failures of businesses that don’t have debt problems but have a weak link in their business model.” He gave me a few examples. A business is overly reliant on a key employee who got sick. Maybe the business had a key supplier that had to shut down deliveries. Maybe the business had a key customer that had to scale back their buying patterns because they ran low on cash. I liked the way Dave summarized it, “You’ve heard the saying, ‘a chain is only as strong as its weakest link.’ That’s what the failure of the business model is all about.”

While not trying to be a Pollyanna about this pandemic, nothing about it is good. But this crisis has sharpened my thinking on how to isolate problems in a business. When analyzing investment opportunities with distressed businesses, you need to first understand what caused the distress, a bad capital structure or a weak business model? Isolating the problem is the first step toward finding turnaround value.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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