growing toward distress
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Growing Toward Distress Speaker: David Johnson
November 19, 2012
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ACM Partners Overview
• ACM Partners is a boutique financial firm focused on navigating the increasingly complex and dynamic U.S. and global economy.
• We have deep engagement experience working with financial sponsors, lenders and management teams. Our service offerings include:
Restructuring and Turnaround Performance Improvement Due Diligence Real Estate
• ACM Partners provides the assistance needed for management teams as well as all stakeholders to adjust to a changed environment while minimizing disruption to a company’s core operations.
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David Johnson, Partner David Johnson is a founding partner of ACM Partners, a boutique financial advisory firm focusing on turnaround and restructuring. His advisory experience spans North America and ranges from pre- revenue start-ups to advisory roles with Fortune 500 companies.
An active member of the turnaround community, David currently serves as Director of the Chicago/Midwest chapter of the Turnaround Management Association. He has numerous publications to his credit and has completed all qualifying exams for the CIRA and CTP.
David earned his MBA from the University of Chicago. His undergraduate studies were completed at Fairleigh Dickinson University.
David can be reached at [email protected] or 312-505-7238.
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Company Overview
• In April 2012, Galaxie Home Remodeling (“Galaxie”) was a Chicago-area company providing home improvement throughout the Chicago metro area.
• Since the company’s founding in 1984, Galaxie had established itself as the trusted name in the Chicago home improvement market (the 3rd largest in the U.S.).
• Through a strong network of trusted subcontractors, Galaxie offered interiors (bathrooms, bedrooms and rec rooms), exteriors (masonry, porches & decks, roofing, siding and windows) and additions (attics & dormers and room additions).
• Since its founding, the company had completed more than 25,000 remodeling projects.
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Company Overview Cont.
• Over the past few years, Galaxie had evolved into a leader in the Chicago metro area home remodeling market.
• Due to the highly fragmented nature of the home improvement industry, the benefits of a strong brand and a sophisticated marketing infrastructure are significant.
• By developing and implementing a sophisticated and industry-leading marketing and sales infrastructure, Galaxie was well-positioned to generate compelling profitability due to its highly-strategic positioning.
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Galaxie’s multi-channel marketing strategy, initiated in 2009, successfully drove strong growth, with a CAGR of 33.8%.
Sales Growth
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$7,168,348
$11,890,678
$17,189,883
Sales
Liquidity
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• Galaxie Home Remodeling enjoyed a negative cash conversion cycle, which permitted the company to grow faster than would normally be possible.
• The combination of very attractive collection trends and attractive terms with suppliers was both powerful and fragile. Galaxie’s ability to fund its operations was heavily reliant on maintaining supplier relationships.
Days Sales Outstanding 19.0Days Inventory Outstanding 0.0Days Payable Outstanding 40.0Cash Conversion Cycle -21.0
Innovative Business Model
• The driver of Galaxie’s growth was an innovative approach to marketing. Essentially, Galaxie had transformed itself from a construction company to a sales and marketing organization.
• Galaxie spent heavily on marketing through a number of channels, with leads processed at an inbound call center. Management had achieved a 90% sit rate (i.e. 90% of calls led to an in-person sales call) and a 20% sell rate (i.e. 20% of in-person sales calls led to sales).
• The benefit of this model was that it led to rapid growth. The downside was a need for careful controls to ensure that costs were managed and that maximum value was derived from the leads generated.
• During the 2009 – 2011 period, Galaxie profitability fell from a profit of over $1MM in 2009 to a loss of nearly $350,000.
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Marketing Channels
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Inbound Call Center Newspaper
Website
SEO Radio
Television
Purchased Leads
Sponsorships
Execution Issues
• The impressive growth of Galaxie temporarily masked severe deficiencies:
1. Financial Controls: Lacking both a CFO and an accountant, Galaxie was unable to forecast liquidity and identify, much less correct, issues of over-spending or declining margins. As a result, all financial challenges were seen to be problems that could be cured through additional sales.
2. Strained Sales Force: As Galaxie’s multi-channel marketing strategy drove a growing number of leads, the company struggled with a close rate that hovered at 20%, despite management’s projections that a 25% rate should be achievable.
3. Disparate Systems: Galaxie ran three separate systems (Paradox for tracking jobs, QuickBooks for accounting and Sugar CRM for lead tracking). None of these three systems was integrated, and reporting capabilities for all were dangerously limited.
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A failure to prioritize spending or implement an ROI analysis of marketing channels led to explosive growth in marketing spending, both in nominal terms (up nearly $2.8MM) and as a percentage of sales (up 12.1 percentage points).
Lack of Spending Discipline
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0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
Marketing Spending
A Developing Crisis
• Galaxie faced a severe liquidity squeeze starting in December 2011. – A real estate backed line of credit was called, resulting in a short-sale of the property and
the loss of the company’s credit line – Relations with key suppliers were becoming strained, as Galaxie struggled to pay bills in
a timely manner – Tax liabilities were growing in severity
• The company owner provided $500,000 to fund operating expenses during this period, with key partners and employees providing additional support of approximately $200,000.
• Management did not seek outside assistance until the personal resources of the owner had been exhausted. By this time, cash balances at the company were regularly negative.
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Restructuring Advisor
• In April 2012 management retained David Johnson of ACM Partners to serve as Chief Restructuring Officer in order to develop and execute a turnaround and restructuring plan.
• Immediately a comprehensive analysis of the company was undertaken, and a pitchbook was developed for prospective capital providers. Initially outreach to capital providers was managed by an investment banking firm, but later ACM Partners assumed that role.
• Accounts Payable was carefully analyzed and high priority trade creditors were contacted in an effort to improve relations.
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Distressed M&A
• It was determined that Galaxie would need to be sold through an assignment for the benefit of creditors, a process similar to bankruptcy.
• Three interested parties were identified: – Two separate private equity firms, both with portfolio companies operating in adjacent
niches – One of Galaxie’s largest suppliers
• The major point of contention with each of the prospective buyers was persistent owner demands for a rich guaranteed compensation employment contract.
• Due to the highly distressed nature of Galaxie, and an inability of prospective buyers to get comfortable with the risk, the company was not able to complete a transaction in the limited time available.
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Chapter 7 and Next Steps
• On July 21, 2012 Galaxie Home Remodeling filed a chapter 7 bankruptcy.
• A company that had repeatedly been honored by industry publications and had successfully increased sales in a very challenging market was undone by a spiraling cash crisis and an inability for ownership to come to terms with prospective buyers.
• The former management team of Galaxie is currently in talks with an investor who is interested in purchasing the intellectual property (website, customer database, etc.) of Galaxie from the chapter 7 trustee. They are hopeful that they will in operation by the spring of 2013.
• Additionally, the chapter 7 trustee is pursuing a fraudulent conveyance claim against Galaxie’s largest supplier.
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Lessons Learned
1. Undisciplined Growth is Dangerous: From 2009 – 2011, Galaxie increased sales by approximately $10 million, while profitability declined by approximately $1.4 million.
2. Systems Matter: Galaxie outgrew its systems, but management did not invest the time and money necessary to upgrade. The result was that management was often forced to act on incomplete or incorrect information.
3. Egos Kill Deals: Galaxie had interested buyers, but management was not interested in the terms of a distressed transaction and sought to press demands despite a lack of any leverage.
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About ACM Partners
• ACM Partners is a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.
• David Johnson can be contacted at: – Email: [email protected] – Ph: 312-505-7238
• For more information visit: www.acm-partners.com.
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