Ever wondered what it's like to be an ER doctor, but in the business world? Witness the high-stakes, high-pressure arena of corporate turnarounds in our latest episode with Jeff Sands, the founding partner of Dorset Partners. Jeff illuminates the unique challenges faced and the speed and creativity required to execute successful turnarounds. He draws a compelling comparison between turnaround specialists and ER doctors - both dealing with urgent, existential situations that demand swift and effective action.
In the midst of financial turmoil, understanding the tools at your disposal is crucial. Jeff expertly guides us through how the cash cycle can be employed in different types of turnarounds. We debunk misconceptions around financial restructuring and delve into the nitty-gritty of collecting receivables in a business under financial strain.
This episode goes beyond just surviving a crisis— it's about thriving through adversity. We reiterate the significance of a clear mission and a sense of urgency, whatever be your business context. The lessons and strategies shared by Jeff not only serve as a potential lifeline during financial dire straits but also as a roadmap for sustained growth and success. As always, we encourage you to subscribe, rate, review, and share our podcast. For those eager to learn more, Jeff provides his contact details - jeff@dorsetpartners.com - and he'll be happy to share his cashflow forecast tool to any TGO listener, free of charge. Brace yourself for practical tips in this enlightening episode.
Ever wondered what it's like to be an ER doctor, but in the business world? Witness the high-stakes, high-pressure arena of corporate turnarounds in our latest episode with Jeff Sands, the founding partner of Dorset Partners. Jeff illuminates the unique challenges faced and the speed and creativity required to execute successful turnarounds. He draws a compelling comparison between turnaround specialists and ER doctors - both dealing with urgent, existential situations that demand swift and effective action.
In the midst of financial turmoil, understanding the tools at your disposal is crucial. Jeff expertly guides us through how the cash cycle can be employed in different types of turnarounds. We debunk misconceptions around financial restructuring and delve into the nitty-gritty of collecting receivables in a business under financial strain.
This episode goes beyond just surviving a crisis— it's about thriving through adversity. We reiterate the significance of a clear mission and a sense of urgency, whatever be your business context. The lessons and strategies shared by Jeff not only serve as a potential lifeline during financial dire straits but also as a roadmap for sustained growth and success. As always, we encourage you to subscribe, rate, review, and share our podcast. For those eager to learn more, Jeff provides his contact details - jeff@dorsetpartners.com - and he'll be happy to share his cashflow forecast tool to any TGO listener, free of charge. Brace yourself for practical tips in this enlightening episode.
Welcome to the third growth option podcast, where we talk with business leaders and innovators hungry to drive growth that can be faster than internal organic growth and less risky than acquisition. Your moderator is Bernal Dunkespuller, chief Sherpa and CEO at Realign, who has led private equity owned distributors through turnarounds and growth. With battle proven leaders from all frontiers, we want to provoke thinking about business growth beyond conventional wisdom and binary choices.
Speaker 2:Hey, I'm Bernal Johoth talking today with Jeff Sands, founding partner of Dorset Partners corporate turn around debt restructuring firm for the last 16 or so years. And Jeff is also an entrepreneur and investor. Was a business operator for 10 years as president of Toland Manufacturing Company in the late 90s until 2006. Author of a book Corporate Turn Around Artistry fix any business in 100 days and also guest lecturer at Syracuse University on corporate turnarounds, I'm pretty excited to have you here today, jeff. Welcome to the third growth option podcast.
Speaker 3:Thank you, Beno. It's great to be here and I really appreciate the invite to join you.
Speaker 2:We're going to cover some ground here. I want to learn a little bit about why you love turnarounds. I want to talk a little bit about the sort of the analogy between the ER doctor and the family doctor corporate turnarounds versus sort of general business. And then have you share some turn around basics. That may be basic to you, but people that have never been in a turn around maybe not so basic. And maybe the most important part is the last one is sort of lessons for the everyday business that you have learned in the turn around world that, applied, that will make all of us better business people. So let me start with a comment that you made to me last time we spoke. You said I used to think of myself as a growth guy, but now you're like, hey, turnarounds are really my thing. Why do you love turn around so much?
Speaker 3:I love turnarounds, the challenge and, if I try to, the challenge, the speed. You know, but that sounds a lot like startups. I remember reading years ago from another turn around person who said startups, everybody's expectations are really really high and your odds of success are really low, Whereas a turnaround, people's expectations of success are really low and the odds are actually quite high. That's interesting, it's not. I would say it's not the difference, it's turnarounds are just the speed, the complexity. You know startups you're in a startup for a year and then it's like a normal business, whereas turnarounds are. My assignments are generally three to nine months, they're always different, they always have their own unique set of problems and the clock is always ticking, which means the cash is running out and you have to make very quick actions to be able to fund payroll going forward. I like that creative, that forcing mechanism of time and unknown circumstances and trying to sort it all out. It's just a fabulous mental challenge.
Speaker 2:Forcing mechanism of time constraint. That's interesting.
Speaker 3:Yeah, if you're going to run out of pay, you know you're not going to be able to fund payroll in a month. You've got to get a lot of stuff done really quickly. I often use the analogy, you know, like collecting receivables. If you're collecting receivables for a big company, it's because the CFO wants to put more cash on your balance sheet for their quarterly statements. If they collect more quickly, you know it saves them a point or two of interest. But when you're collecting in a turnaround, it might literally mean funding payroll or funding the utility bill. Failure is existential and that helps people focus. Collecting when the AR doesn't really matter that much you know it's like a ho-hum job. Collecting when it's a totally binary decision of whether or not the business survives for a couple more weeks really helps people focus in and pay attention and that, I believe, helps create a real rowing call. You know a spree decor sense where everybody knows the mission, it's crystal clear and folks charge.
Speaker 2:I mean, the reason you and I bantered about this emergency room ER doctor analogy is because somebody that goes to med school and decides whether they decide to become a medic, an ER doctor, or they decide to become a general practitioner or a surgeon or a cardiologist, they went to the same med school. They both know the body. But the ER doctor, his or her job is they may have to amputate my leg to save my life. So corporate turnarounds are about survival. The way ER doctors you know it's not pretty but it's, as you say, binary Whereas the family doctor is sort of prescribing exercise or medicine. Maybe you'll live longer, you'll get healthier, you'll stay healthier, which is more what business managers be that finance or marketing or sales or CEOs they act more like family doctors or surgeons or cardiologists. How do you see that comparison?
Speaker 3:I do. I think even you could paint it more extreme. If you're a business owner, it's like being the family doctor, but you marry the patient and you're with them forever and you know like as far as the eye can see, whereas the ER it's just. They hit your room, you deal with them as fast as you can. There's a lot of goofy analogies, but you know, if you're in a horrible car wreck, the last thing you remember is you know impacting that truck that was coming at you, and you wake up and you don't have your arm and everybody tells you how lucky you are to be alive. I think that you know the arm's like a pretty fair trade off for you at that moment, whereas you know if we met in my office with great leisure and I talked about taking your arm off, you'd run out of my office.
Speaker 2:Who is this crazy guy, Jeff, talking about taking my arm off?
Speaker 3:Yeah, and in tough turnarounds, you know. I'll give you an example. One time I was brought in, the company had sunk in revenues from $46 million to $6 million and the one remaining customer with the $6 million said we're out of here, we can't, we hate you guys. And the FBI came in and announced that they had everybody in their crosshairs on three felonies. Then the CEO committed suicide behind the building on I think it was Monday morning. Wife, son, brother and sister were all working inside and I was in running the business the next day On a Tuesday, didn't have money for payroll, on Friday didn't have money for utilities and I had to figure it out from there. And it's that sort of you know, here's a big Gordian knot and you have very little time to sort it out. For some reason really fits my personality, probably because I have a somewhat disruptive personality and actually, with disruptive circumstances, there's a fit there.
Speaker 2:Your book describes, you know, in great detail sort of the structure and the ins and outs of corporate turnarounds. Well, us sort of understand turnaround basics that people that are involved in healthier business are not going to be familiar with. So let's just start with the easiest sort of bifurcation of two turnaround types income statement turnarounds, balance sheet turnarounds. Just talk a little bit about both of them and then which one is more prevalent maybe and more likely to land you in hot water.
Speaker 3:Actually, let me step back, if I can. In just frames I told you you know, an extreme scenario. A less, far, far less extreme scenario is one time a bank called me and said we love this company, we love the owners, they're great people, but they never have any cash. We have to over advance them about once a month. You know I have to go get permission from my boss. It causes headaches in the bank. Can you just go see if you can figure it out? So I went in, met these wonderful people. We just explained that you know that you're running out of cash once a month, which you know. We look at it. You run about three days short. We're just going to go get an extra week out of cash out of your payables, so we're going to pay people a week slower. Then we're going to get an extra week out of cash of your receivables. We're going to get people to pay you a week faster, generate basically 14 days of free cash flow and that gives you a 10 day cushion compared to where you are currently. That worked, everything was great. There's none of this big drama and you know ticking time, clock and all that sort of thing. So some of them are more gentle and, you know, not as exciting.
Speaker 3:The other way to frame it is lots of people say did you turn around? You know, if you're a salesman, vp of sales, your turnaround is increasing revenue. If you're a president of a company, your turnaround is increasing the bottom line profitability. If you're a CEO, your turnaround is improving the balance sheet dramatically. It also goes in a little bit. It's sort of like organizational change that you study in. You know business school. But organizational change you study in business school takes like three to five years and they can't fathom of abrupt change because it freak everybody out. So it's interesting. It really the study of turnarounds really does sort of fly underneath the radar. In academia I think there is a total of like five schools and the whole MBA programs in the whole country that teach it. Syracuse has one course, babson has one course, virginia, columbia, northeastern, northwestern there's six and I think that's about it.
Speaker 3:So once you sort of step in, start diagnosing the income statement, turn around the balance sheet, turn around income statements. What were more familiar with. It's a unprofitable business. It's showing up its retained earnings on losses. You're basically funding losses with your cash and at some point the cash runs out and that creates the crisis of how do we fund payroll?
Speaker 3:A balance sheet turn around is might be a healthy company, but it just has way too much debt and it just can't possibly service its debt. I'm dealing with one right now healthy, profitable company but their debt services 70% of their annual revenue. So If they make a million a month, which is about where they are, about a million a month in revenues 700,000 a month in debt service, which when they can't pay. You know, in that situation you have to restructure the debt and essentially make it match the income potential of the business. Where is on an income statement turn around? It's basically attack the gross profit margin and your cost structure and you you know this all sounds very simple you just get your cost to be less than your gross profit margins by low cell higher right yeah, just like that just like that.
Speaker 2:That's easy, anybody can do it.
Speaker 3:I always say it's the simplest yet hardest thing in the whole world.
Speaker 2:Which of the two income statement versus balance sheet problems do you do you think is the more prevalent, that people need to watch out for more? Is that an answerable question?
Speaker 3:Well, probably 70% of my clients are both and I think income statement for somebody who's not been through it, income statements more obvious because you, if your business operator, you understand everything on your P&L can be changed. All those little expense categories can be modified and obviously your sales and your gross profit margins can be modified. When people think about the balance sheet and I didn't I didn't understand the balance sheet when I showed up when I was running a business, and I think most CEOs don't and then when you do, you largely think it's a moveable objects. You know there's a debt line, you know the bank term note. You think, well, that's not really moveable. And then you could go ask the bank and they'll say, you know, beat it. And you'll think, well, it's definitely not moveable. So here's a way to think about it.
Speaker 3:If you step back, banking has been around for 7000 years. Clearly people are lending money. Prior to that, people have been restructuring debt and finding ways to restructure debt for 10000 years. So really, the balance sheet, that is one of the most moveable things there is. But where Is your business school? Were raised to think that is pretty static and through life or raise the thing, that's pretty static. But when the chips are down, everything's movable. And if you want proof, you just look at the bankruptcy process. In the bankruptcy process, every single debt moves. It gets reduced to get stretch, to get reformatted. So then, if you know how that works, you can do it outside of bankruptcy just through the negotiations in agreement. Why do it in court and make a bunch of lawyers rich when we can do it out of court and you get the money instead of the attorneys, and most people think that makes sense. Imer.
Speaker 2:It's interesting. On the balance sheet comments you talk about people's perception of it being immovable versus far more bendable and flexible. In your chapter around the cash conversion cycle you have a table, a side-by-side table of civil moves and non-civil moves to collect receivables more and faster. I kind of smirked, as you just did, when I brought it up, sort of putting the civil versus the non-civil ways of collecting side-by-side. But it does provide clarity in a gunfight. I'm sure you pulled that slide out from time to time in conversations you have with operators or presidents in turnarounds, right.
Speaker 3:Yeah, absolutely Some of the uncivil ones which we've done. You call your customers and you say I know we have 30-day terms and you're paying in about 45 to 60, but I'm bringing all payments payable immediately. So you've got to pay every outstanding invoice today and you're really not going to like this. But we've got to add 10% to each of the invoices because we need the money. And they say forget it, that's not how we work. And I say well, that's really unfortunate, because I'm not going to be able to ship you any more product. And if they're a retail store, they say we don't care, we've got a store full of stuff. The last thing we need is yours. But if you're Ford and I'm making door handles and you realize I'm not going to ship any more door handles for a while, your whole assembly line is facing being shut down and you'll find ways to work with us. You'll find ways to help solve our mutual problems and there's a lot of industries like that. Consumer products is not one of them.
Speaker 3:I heard a famous story about. It was ladders. Maybe it's an urban legend, maybe it's true. Some guy was in Home Depot really trying to put the screws to the buyer at Home Depot. He was selling ladders and basically the buyer at some point said the answer is no and the follow-up is I want all your ladders out of my store by the end of the week. Good luck on getting us to pay your final bills. You know, with that, how are you going to negotiate against that kind of leverage or not, which is why people who sell the Home Depot are really humble and go with their hat in hand, because they never have the kind of leverage that a supplier of auto parts or airplane parts or boat parts that will Right.
Speaker 2:You also gave an example where you had I think it was in your book or in one of the materials you sent me before today you gave me an example where you had a company in a turn around. They had two choices either liquidate or rescue. In the ER doctor analogy, I guess it's amputate or surgery and depending on who gets to make the decision, you know if the bank might want to liquidate, the president's CEO might want to rescue, and that's where you really where it really matters how you play your role. You know working with the management team, working with the bank, working with the various stakeholders, and you talk about your role as a guide, not hero. Mr Miyagi, not Daniel, talk about that guide, not hero role and how you think about that.
Speaker 3:So I used to. My first two turnarounds were my own business and they were horrible, horrible experiences and I don't think anybody has fun with their own turnaround. And then I started doing other people's and I realized, when I don't have the personal guarantee and I'm not looking at losing my house, it's really a lot of fun because there's all the challenge and complexity without the, you know, real honest to God fear. And I sort of enjoyed the heroic. You know. Think back to that one, the scenario where the gentleman killed himself and I was in running the business. You know that was very much. You know, I was sort of the hero of that story. As I've gotten older, what I realized is, you know, when the CEO is there, when the owner or the board are there, everybody's the hero of their own story. So it's their story, they're the hero, and I'm Gandalf or I'm Mr Miyagi or I'm Yoda, as we know. You know all sort of the hero's journey stories follow that. The hero goes out, has some tough times, gets knocked down. An unknown figure steps in with advice, kind of builds them back up, the hero back up, prepares them and pushes them, you know, back on your journey. I've realized that that's my role. I need to be Gandalf or Yoda, who shows up for part of the movie, plays a role, gets Luke strong and then and then steps out of the picture because it's Luke's story and he's the hero. It doesn't always work that well.
Speaker 3:I helped two brothers with a big trucking business and fix it. We swung it for millions and losses and millions in profits in like nine months and I said you know it's time for me to go. You guys are going to completely screw this up, and you know you are. And I said so here's the deal. I'll make sure you guys get paid in full first and there's extra profits, I get paid. If there's not, I'm working for free, but that's my incentive is to make sure you guys fill your pockets every year and then and then I'm last and that way you'll do well, and it's a cheap insurance policy and there's lots of positive ways to look at this.
Speaker 3:And they said, yeah, forget it, have a nice day, Sent me on my way and a couple years later they lost the business, 600 people were out of work and they were both just devastated financially. You know, that's the other thing. Old habits are hard to break and some of my clients turn out to be fantastic students One who's joined me in the construction business and now he's our lead construction guy fixing other people's businesses. Others pretend I'm an unwanted house guest, tolerate me as long as they can and then go right back to what they're doing as soon as I leave. That's just human nature.
Speaker 2:So the book title is Corporate Turnaround Artist Street Fix Any Business in 100 Days. So it's both about turnarounds and it's also about rescuing and strengthening. I don't know where in the book you talk about what is required. I think in one or both parts. You need 50% finance skills, 50% operation skills and 50% psychology. That is true both in the survive and the thrive mode, right?
Speaker 3:It is. I was commenting to a friend yesterday about how you know come on, eric, you know this game is 100% psychological with a little bit of finance, and he laughed and he's right. I think he catch people at their best. There's a lot of psychology involved, but we catch people at their worst when distress, and then they bring distress home and, yeah, it's just an incredible amount. I mean, I'm thinking of one right now. I talk to the gentleman frequently at night because he just needs to sort of vent and process verbally.
Speaker 3:Another one I'm dealing with a completely stubborn 78-year-old gentleman who won't rationalize a single thing other than this is what I want, and just give it to me. And you know, his choice is it doesn't have to do with the numbers and it doesn't have to do with the operations, it just has to do with what's in his head and what he thinks he deserves in life. And I guess that, well, I was about to say that's what makes it fun. That's also what makes it frustrating as hell at times. Here's a good one. I had a guy called me on a Friday and said these horrible, horrible bankers are ruining my business. They're just awful. And I said, okay, send me all your information. I'll clear my schedule. I'll come down and see you Monday. So I studied the information over the weekend. I drive down to see him and all he can complain about is these rotten bankers who run a lot of money and they're charging 15% interest. Okay, 15 is high, so I go through it in midday. I don't get it. This doesn't make sense.
Speaker 3:They gave you $3 million, like four months ago. It's all gone. Where'd the money go? And it just like it doesn't line up with your financial reports. And then, basically, he admitted that they made up all the historical financials. He and the Sun set that and made up 36 months worth of financials. Good enough that it sailed right through a quality of earnings report with a well-known regional CPA firm, went through all the bank underwriting. It was actually a private lender and I said hold on. So you defrauded the lenders. You took $3 million. If $3 million is gone, you haven't paid a single penny in interest and you're complaining about the interest rate. And he said yes.
Speaker 2:Those damn bankers.
Speaker 3:But you know we actually extracted him from both the businesses, sold the businesses back to their prior owners and kind of saved everybody else. Saved the customers, the jobs, the vendors, the whole stakeholder community. But he was clearly on the outside after that admission.
Speaker 2:The first question I asked you is why do you love turnaround so much? And in the book you describe different things that you've got to look at, and I love the term. You got to attack the biggest flames first. You got to find the holes in the bottom of the boat. And the holes in the bottom of the boat reminds me of Isaacson biography of Steve Jobs, and which Steve Jobs, who then ended up getting fired by John Scully, the guy that he brought in.
Speaker 2:John Scully was talking about, you know, writing the direction of the ship. And Steve Jobs looks at him and goes you're such an idiot Talking about writing the direction of the ship, you can't find the holes in the bottom of the boat. And John Scully, you know, ended up getting fired because he was blissfully uninterested in the holes in the bottom of the boat and therefore unable to fix the leaks. So I think there are lots of John Scullys out there fixing the wrong problem. I bet your sort of heightened focus, rallying call of a turnaround, the sort of ER doctor perspective, probably helps you explain to the Scullys of the world that they're fixing the wrong problem.
Speaker 3:And the Scullies might just have to leave quickly. You know, everybody gets a chance there's. What's interesting is in this certified turnaround professional certification you have to take a whole bunch of stuff. You take three tasks management, finance and the law and a bunch of other stuff. But in that test they talk about the sacrificial lamb and you have to study for it and you have to answer questions on the sacrificial lamb Because it's such an important part of changing the direction of the business. You know, if I come in into some big organization I tell you to work harder, you'll sort of roll your eyes and you're not going to work harder. If I fire your boss and half your coworkers and tell you to work harder, you're probably going to work harder.
Speaker 2:You'll at least think about it.
Speaker 3:It gets the attention and you know. So there generally has to be a sacrificial lamb. It doesn't always have to be a firing. One time a guy Like I mandated that there's no more overtime without approval. All the operators ran two machines.
Speaker 3:Some bone had decided he was only going to run one of his machines that day in protest, if not getting overtime. So his manager didn't know what to do. Or supervisor Supervisors manager didn't know what to do. They came in and saw me and all I'm thinking about is like trying to keep payroll funded and I don't have time for this. And I said just bring him in here so I can fire him in front of everybody, so I can make a statement that I don't have time for this bullshit.
Speaker 3:They went out and told him. They said Sands wants you to go in there so he can fire you in front of everybody and make an example of you. And he said I think I'll just turn on my second machine. But that story went ripping through the factory and I had the benefit of sacrificial lamb without any firing or heavy handedness. But there has to be the shock to the system. There has to be a shock to the system. People have to understand that immediately. We're in a completely different track and we're not doing a lot of the stuff we used to do.
Speaker 2:I love the clarity of focus that your turnaround experience, your turnaround stories are all about clarity of focus or all about questioning whether immovable objects are actually quite movable. You talk about bending versus breaking a stick, and that sticks are actually far more bendable before they break or far more resilient than most of us think. To me, that's my takeaway and everything that you've shared here that growth is. There's so many different phases to growth, and turnaround mentality is a phase of growth as well. Even if a turnaround fails, that sort of the forest was cleared and new seeds can grow as a result of that. Jeff, thank you so much for spending time with me on how you think about turnarounds and sort of the lessons that they bring to everyday healthy businesses or somewhat or healthier businesses. If folks wanted to reach out to you one-on-one, where might they find you?
Speaker 3:So the easiest is my website, dorsetpartnerscom. D-o-r-s-e-t. Partnerscom, and my email is jeffatdorsetpartnerscom.
Speaker 2:And there you have it awesome. Thank you so much, jeff.
Speaker 3:Oh, my pleasure. Thank you, benno.
Speaker 2:Hey, if folks wanted to explore other growth topics, you can find me on our website, realignforresultscom, or just email Benno B-E-N-N-O at realignforresultscom. Thank you and keep growing.
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