REPORTER'S NOTEBOOK: Nonprofits tap turnaround pros | Crain's Detroit Business

REPORTER'S NOTEBOOK: Nonprofits tap turnaround pros | Crain's Detroit Business

November 09, 2008 8:00 PM

REPORTER'S NOTEBOOK: Nonprofits tap turnaround pros

By Sherri Begin Welch

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Using a turnaround expert in a for-profit business, especially among automotive companies, is nothing new.

But nonprofits also are beginning to tap them in the face of continual declines in funding and ever-rising demand for services.

Local firms that provide operational consulting for nonprofits include UHY Advisors MI Inc., Plante & Moran P.L.L.C. and Fred Leeb & Associates L.L.C./Nonprofit Management Group L.L.C. under managing director Fred Leeb.

“This is going to be happening more and more as a result of the pie getting smaller,” because of declines in government, private and individual support, Leeb said.

Leeb and his partner, Geni Giannotti, originally worked as consultants at Southfield-based turnaround firm Alex Partners.

The Starfish Family Services board of directors contacted them after operating in the red for several years.

“Starfish was facing some cash flow issues, and the board wasn't getting the timely and accurate reporting we would have liked two to three years ago,” said Chairman Bill Mitchell, retired founder of MB Associates in Southfield.

“Through all of that, Starfish continued to do a terrific job for all of its clients,” Mitchell said.

“They just put mission in front of margin for a while.”

Leeb and his team worked with Founder and CEO Ouida Cash, who'd planned to retire but became increasingly ill as she battled leukemia.

Cash was 100 percent behind the idea of working with a turnaround consultant, Mitchell said. Eventually, she stepped aside and Leeb became interim CEO of the agency.

With assistance from Leeb and his team, Starfish increased its level of government reimbursement through more detailed accounting, implemented tighter controls over expenditures and was able to secure more favorable credit terms with its lenders.

Starfish and Property Link for Nonprofits Inc., which holds its property, expects to post excess funds of more than $600,000 for fiscal 2008 ended Sept. 30, said CFO Anne-Marie Smith.

That's up from reported losses of $417,607 in 2005 and $1.5 million in 2004, according to its 990 tax forms.

For their work at Starfish, Leeb and Giannotti recently won the Turnaround of the Year award from the Turnaround Management Association, Michigan (Detroit-Grand Rapids) Chapter. Mitchell also was awarded for his leadership from the Association of Fundraising Professionals .

“Very often, nonprofit executives don't have experience with times like these,” Leeb said.

“They've been fighting the battle of having lower revenue, but now I think they are going to have to do something differently.”

Press Release

$8 Million Financing Completed for High-growth Manufacturing Company

The Woodward Company, Fred Leeb & Associates and The Acumen Group Team Up to Provide $8 Million in Debt and Equity to Finance the Rapid Growth of a Medical Equipment Manufacturer    July 15, 2008, Detroit, MI-- An $8 million financing has been completed to help a successful manufacturing company.  The company had significant opportunities for growth but previously was unable to attain the needed traditional financing because of their already leveraged balance sheet.   Teamwork among our partners allowed us to quickly assess the situation, develop alternatives and refinance the existing debt.  We also were able to provide a major cash infusion that allowed the company to acquire new product lines, patents and inventory along with funding the marketing programs that are now bringing both distributors and customers to the company's door.   The Woodward Company (contact Dan Smale DTSmale@TheWoodwardCo.com or call 313-850-7500) specializes in mergers, acquisitions and private equity placement.  The Company's Private Equity Source database is a proprietary tool that is used to match client needs with over 1,400 private equity funds around the country.  This searchable database includes their strategies, investment criteria, dollar ranges, funding stage and industry specialization.     Fred Leeb & Associates (contact Fred Leeb at FredLeeb@FLAALLC.com or 248-683-5295) provides financial and management assistance to companies that need to surmount a chronic/fundamental problem and improve cash flow.  The Company is organized to bring innovative and practical solutions learned from numerous multi-billion dollar successful companies as well as many small and medium-sized local businesses in a wide range of industries.

Pontiac hopes to make Silverdome deal | MLive.com

Pontiac hopes to make Silverdome deal | MLive.com

Published: Thursday, May 08, 2008, 9:00 AM     Updated: Thursday, May 08, 2008, 9:06 AM

Posted By Margarita L. Barry; by  By Carol Marshall.

During the city's first request for proposals in 2006, the site drew bid offers from Schostak Bros. and from Etkin Equities. The value of the offers were said to be some $20-30 million. But both developers walked away while city leaders squabbled over the details of the developments.

While they delayed the process, the state economy took a dramatic downturn, and the project was no longer viable.

Last year, the city decided to take another run at selling the property and hired CB Richard Ellis to solicit proposals. The brokerage sent out information to some 11,000 possible buyers, and ultimately late last year received seven bids.

Pontiac has been negotiating only with Parker since late February.

There was some discussion about that site being more marketable if it was clean, but so far the city has not been enthusiastic about pursuing possible federal funding for the demolition.

New Year's Resolutions 

 

Will they be different this year?

 

By Fred Leeb   This year, will you be changing your business or just trying to be as good as last year?    How will you: Expand your share of a tougher, smaller market, Cause employees to pull in the same direction instead of competing with each other, Cut losing businesses, product lines, and negative vested interests Reinvest in employees and equipment (no more deferrals), or Improve quality despite pricing pressure?  Time and cash will be even more scarce in 2008.  Now is the time to take action rather than make promises that are based more on hope than reality.      We look forward to continuing our relationship with you in the coming year.

All the best to you and your family

 

Fred Leeb

 

(248) 683-5295

 

The Top 30 Indicators of 
Future Financial Problems

 

By Fred Leeb

 

Many organizations today are facing extremely tough financial and operating conditions that are only likely to get more difficult.  In this kind of environment, it can become too easy to fall victim to denial--just buy time, make do, cut corners, rely on the business cycle to improve eventually or count on the big deal to finally come through.  The difficulty in achieving success may cause leaders to ignore reality or bury themselves in day-to-day minutia so they can remain in their comfort zone and continue to whittle away at familiar issues in their own way.  Sometimes, however, these practices may actually cause executives to continue using the wrong tools and go on the wrong path without even knowing that the situation is getting worse.  They may not realize that other solutions may be much more effective or that they are not even working on the true underlying problem. 

The purpose of this article is to serve as a periodic reminder for CEO's and CFO's (much like a pilot's pre-flight checklist) to help them foresee financial problems looming on the horizon before they take the plane up in the air.  Even the most experienced pilots recognize they need to:

• Use their checklist so as not to take anything for granted-they know that the passengers are relying on them and that the smallest problem eventually may cause a disaster if left unchecked. 
• Take the checklist process seriously because the it is the culmination of lessons learned--serious errors made by other pilots, experience on the likely causes of failure and the potential benefits of fixing/maintaining key elements before takeoff. 

The Checklist-The Top 30 Indicators of Future Financial Problems
Strategic Issues

    1.            Existing strategies are not taken seriously and they are not even widely-known by employees.

    2.            Management has not collected any data to prepare thorough analyses to prove and test its view of the future.  Management believes that the organization's strengths and weaknesses today and for the future are the same as those that existed five years ago.

    3.            No serious efforts are being made to identify the strategies being pursued by the major competitors or to foresee the impact of their strategies-there is no definitive understanding of how the playing field will change in 3-5 years.  

    4.            Reinvestment has been cut to the bone or eliminated even though this will make it even more difficult to compete in the future (e.g., IT upgrades, new production equipment, or a move to a more desirable location are considered to be out of the question).

    5.            Nothing is being done to attract and retain excellent employees (e.g., no promotions, raises, training, opportunities for greater responsibility, recognition, appreciation).

    6.            No thoughtful contingency plans have been prepared.

Organizational/Morale Issues

    7.            The CEO believes that he/she must carry the entire organization on his/her own shoulders because the CEO believes that other employees do not care as much or can not be relied upon in difficult situations.  The CEO is the only remaining after 5 o'clock.

    8.            In the last few years, employees have not offered any new ideas or suggested new ways to expand the business significantly.

    9.            No money is budgeted to enable significant change.  Success is considered to be just achieving last year's results and no real growth has occurred for years.

10.            Most of the employees believe that they do not need to be concerned about success and have no sense of urgency because management has not given them information as to whether performance has been good or bad.

11.            No obvious actions have been taken to renegotiate purchase agreements, sales contracts, loan agreements or leases and nothing has been done to cut unnecessary overtime or employees that everyone knows to be dead wood.

12.            Wages have been frozen repeatedly merely because that is the largest controllable expense item.  

13.            There is relatively high turnover in important positions because people are frustrated by family members and friends filling many key slots; family members are well-paid even though their achievements have been mediocre and they have little expertise or relevant experience.

14.            Employee morale and pride are low.  Even the green plants inside the office are scarce and unhealthy, offices are not clean and the landscaping outside is overgrown and full of weeds.

Financial Issues

15.            The strategic plan does not incorporate this year's annual budget and the strategic plan does not include financial projections.  Financial data is not used for decision-making.  It is comprised primarily of historical rather than projected results, is often available only long after the period is over and it is not tied to the budget in a meaningful way.

16.            Operating personnel believe the budget and financial plans are not for their benefit and they are neither familiar with nor responsible for projected results.  Operating people have their own means of measuring success but these are often unreported and informal.

17.            The financial personnel are not working as team members with other functional departments to identify and resolve key issues.

18.            Financial information consists primarily of the income statement and little or no serious consideration is given to understanding the impact of the balance sheet or cash flow statements.

19.            The cash flow presentation uses the indirect method based primarily on changes in balance sheet accounts such as accounts receivable and inventory rather than cash inflows from collections of accounts receivable and outflows for payroll, benefits, taxes, materials, rent, etc.

20.            Typical collection periods for accounts receivable have been getting longer and a large chunk has remained uncollected for a long time.

21.            The proportion of accounts payable over 90 days has increased over time and a major portion has not been paid for a long time.

22.            The company is borrowing from the government by not paying withholding taxes, property taxes, or income taxes.  Paying penalties and interest to vendors have become a normal cost of doing business.

23.            Required reports are not being provided to the bank on a timely basis. 

24.            The credit line is constantly at its maximum and is viewed by management to be perpetually inadequate.

Outside Stakeholders

25.            The board is comprised primarily of close friends and family members of the CEO.  Prominent businesspeople do not want to be associated with the organization and it is extremely difficult to recruit them for board or advisory positions.

26.            The CEO does not take seriously the auditor's findings and management letters.  The auditors, therefore, work to be done and out of the organization as quickly as possible, minimizing their added value.

27.            Outside attorneys have been chastised by the CEO for offering any suggestions based on their knowledge of the business. Attorneys must wait until they are asked a specific question because they believe that the CEO's top priority is for them to minimize their fee on the crisis at hand.  It makes no difference that the problem could have been avoided completely if addressed earlier.

28.            Vendors are constantly screaming for payment because they have been trained to do so-management has not been able to articulate a reasonable plan to help them understand how much or when they will be paid.

29.            Other vendors and employees have given up on informal negotiation processes and believe they must litigate.  Cases do not get resolved even though legal fees have been ramping up.

30.            No other organizations have been offering to form alliances or joint ventures with the subject company-they do not see strengths that will be advantageous to them.

The Bottom Line

The first and most difficult step towards true success is recognizing that there may be problems lurking below the surface that are not obvious without an experienced guide and a checklist.  Sometimes other points of view and analyses may be extremely worthwhile even if it means a slight delay in getting the plane airborne.  Generally, CEO's are highly capable, successful people who already are doing their best to do well.  With a guide and a checklist, however, they can step outside of themselves periodically to rise to the next level of success.     

  

An experienced consultant can provide:

• Valuable perspectives to help make a prudent decision,
• Manpower to get the job done with a sense of urgency at a critical juncture ,
• New ideas and creativity from understanding how other organizations have faced similar issues,
• Objectivity needed to get past roadblocks and vested interests and gain the most value for the organization as a whole, and the
• Confidentiality for your employees so they can be forthcoming with many new ideas and procedures without fear of criticism or retribution.

The best leaders are those constantly looking for good ideas everywhere and constantly learning from others.

Brokers, Pontiac work to overcome Silverdome's losing record | MLive.com

Brokers, Pontiac work to overcome Silverdome's losing record | MLive.com
 Published: Thursday, May 24, 2007, 8:38 AM     Updated: Thursday, May 24, 2007, 10:47 AM
By Tim Agne 
 
"...But bringing a buyer to the table may be the easiest part of trying to sell the former home of the Detroit Lions. The seller, the City of Pontiac, is notorious for slowing, stalling or killing deals. Just two years ago - before the property was formally transferred from a stadium authority to the city - Etkin Equities and Schostak Brothers/Danou Enterprises made $20 million offers, but the developers walked away as city leaders squabbled."

Nonetheless, the brokers are optimistic - and ready to go.

"We're taking all offers to the city. Our feeling is they are open to anything," says Myrna Burroughs of CB Richard Ellis. "Anything but a casino."

More potential than Lions?
CB Richard Ellis has sent fliers to some 11,000 potential land buyers, Burroughs says, and is expecting city approval soon for its marketing website and the final version of the request for proposals.

Are GM and Ford Playing High-Stakes Poker Disguised as Delphi and Visteon?

By Fred Leeb

 

Have GM and Ford developed a grand strategy designed to flush out their high union cost structures so they can be competitive again in North America?   Are GM and Ford, disguised as Delphi and Visteon, sitting at the poker table with the unions to accomplish this?  Or, are many pundits correct who see Delphi and Visteon merely as independent companies suffering from the continuing pressures of the extremely competitive automotive industry? 

The purpose of this article is to begin to provide an alternate view on the following issues:

1.      Do GM and Ford want to resolve their own labor cost issues by working them out first at Delphi and Visteon?

2.      Do GM and Ford want to protect their own images as caring members of the community from the screaming and finger-pointing they expect to occur prior to a labor settlement with the unions (by keeping the media spotlights at Delphi and Visteon)?

3.      Will manipulating Delphi and Visteon to do their bidding enable GM and Ford to protect their own cash hordes and other assets from the union negotiators? 

4.      Are GM and Ford using Delphi and Visteon to bring employee costs to a crisis now so that they can replicate the newly competitive cost structures in their own companies before it is too late?

In other words, is this really a game of high-stakes poker where GM and Ford are sitting at the table dressed up as Delphi and Visteon betting with the stockholders money of their “independent” suppliers rather than their own? 

The facts indicate that both GM and Ford (at roughly the same time in the 1990’s) saw that they were losing market share in North America and that their labor costs (current wages, benefits, pensions and retiree health care) were significantly higher than their competitors.  In addition, the UAW had conducted work stoppages in June/July 1998 in Flint that had an unfavorable after-tax impact on GM of about $2.0 billion.  In the 1990’s, GM and Ford’s own parts operations were clearly the most obvious targets for both cost-cutting and for out-sourcing to other low-cost manufacturers.  In addition, these parts operations were perfect candidates for a “grand strategy” because they had large numbers of union employees.

It is quite possible that GM and Ford’s turnaround experts not only identified the critical need for labor cost reductions but they also developed a process as to how it could be accomplished.  They could have realized that they needed a dramatic and fundamental change in their cost structure to again approach future profitability.  It is likely that they knew that the more fundamental the change, the greater is the opportunity for improvement.  With fundamental change, however, comes great risk.  They could well have thought that they could accomplish almost as much (and insulate themselves from most of the risk) by taking bold action to initiate and manage the process elsewhere first (Delphi and Visteon), the grand strategy. 

By using Delphi and Visteon, GM and Ford also could develop a clear-cut economic case where there would be only one solution—cutting union costs dramatically.  They would not want to negotiate with the union using their own complex financial situations to justify their maneuvers.  GM and Ford, in this manner, also could protect their huge cash hordes.  As of September 30, 2005, GM had cash and short term investments of $35.1 billion and Ford had $36.8 billion. 

GM and Ford established separate corporate entities (Delphi and Visteon) by spin-offs of these companies to their stockholders.  Delphi was spun off from GM in 1999; Visteon was spun off from Ford in 2000.  GM and Ford, thereby, not only could accomplish the goals discussed above but also immediately became free to buy parts from other lower cost global suppliers and reduce their own exposure to the union’s counterattacks.  For example, a “joint Ford-Visteon competitive pricing study intended to make Visteon’s prices competitive with third party competitors” enabled Ford to cut by 5% the prices it paid to Visteon for almost all parts just prior to Visteon’s spin off. 

Because of the spin-offs, however, GM and Ford could no longer control the stock of either Delphi or Visteon. But GM and Ford still had their own former executives running these new companies.  For example, at December 31, 2000, five of the top seven Visteon executives were previously top Ford executives.  In addition, GM and Ford still could control Delphi and Visteon’s profitability through their purchasing power.  This is because the majority of the parts produced by Delphi and Visteon are sold to GM and Ford.   For example, GM’s Supply Agreement with Delphi provided that GM has the right to move its business with Delphi to other suppliers in the event that Delphi is not competitive.

Therefore, by working through the process using Delphi and Visteon, GM and Ford could distance themselves and still bring labor cost issues to a boil.  The impact on Delphi and Visteon has been severe.  Since mid-2001, Delphi’s stock price has dropped by over 90% and Visteon’s has dropped by about 50%.   Delphi has lost about $3.4 billion since it was spun off from GM in 1999 through June 2005.  Delphi also filed for bankruptcy on October 8, 2005.  From October 8, 2005 to November 30, 2005, Delphi lost $127 million and incurred $23 million in professional fees.  Visteon has lost about $4.1 billion since it was spun off from Ford in 2000 through September 2005.  These losses have impacted Delphi and Visteon’s shareholders, not GM and Ford.  In fact, a case probably could be made that GM and Ford benefited from Delphi and Visteon’s poor financial results.  GM and Ford paid lower prices and reduced the volume of business that they previously had with Delphi and Visteon, as they increased their sourcing to other cheaper global suppliers.  Both Delphi and Visteon had been profitable prior to the spin-offs.

In the meantime, GM and Ford have continued to say that they are good negotiating partners with their unions.  GM and Ford also have agreed to maintain many of the benefits for employees transferred to Delphi and Visteon.  If this is put into perspective, however, these costs could be a very small price to pay.  If Delphi and Visteon reach an agreement with their unions and set a precedent of dramatically lower employee costs, there will be a working model for both GM and Ford to copy in the future (with much larger numbers of union employees and much greater potential savings).  Delphi worldwide employment at December 31, 1998 was approximately 198,000 (33,000 salaried and 165,000 hourly), 33% of GM’s total worldwide employment.  In 2005, Delphi claimed that it paid its workers about $65/hour including benefits, more than double the amount paid by the competition.  Delphi has taken advantage of its position in bankruptcy to act very aggressively.  For example, Delphi proposed cutting hourly base wages from $27 to $12.50 (the original demand was $9.50) but is now seeking a negotiated settlement, with GM’s assistance. 

Is there a grand strategy to dramatically reduce union costs not only for Delphi and Visteon but more importantly, for GM and Ford too?  Have GM and Ford set processes in place causing Delphi and Visteon to do their bidding?  Did GM and Ford turn the screws on Delphi and Visteon through tough purchasing tactics to force the issue because they knew they couldn’t wait any longer?  Did GM and Ford have to precipitate crises with Delphi and Visteon now so that they could move on to breaking the union at their own companies before it is too late? 

We are not sure yet of the answers to these and many other questions.  We can only analyze the facts and speculate on managements’ strategies.  We will wait and see how the hands play out.

Highlights of the events leading up to today’s poker game:

GM/Delphi

• GM reported that Delphi’s net income had dropped from a profit of $853 million in 1996 to a loss of $93 million in 1998 (the year before the spin-off). 
• The UAW conducted work stoppages in June/July 1998 in Flint that had an unfavorable after-tax impact on GM of about $2.0 billion.
• GM’s “competitiveness studies” caused GM to record pre-tax charges against income for Delphi of $310 million in 1998 and $1.4 billion in 1997.  GM’s Supply Agreement with Delphi provided that GM has the right to move its business with Delphi to other suppliers in the event that Delphi is not competitive.
• Delphi worldwide employment at December 31, 1998 was approximately 198,000 (33,000 salaried and 165,000 hourly), 33% of GM’s total worldwide employment.  About 93% of the hourly employees were represented by unions (43,000 of these were in the US and represented by the UAW).
• Delphi management personnel were predominantly long-term GM executives.
• Delphi (conveniently for GM) embraced the strategy of reducing its reliance on GM business because, now that it was independent, it must have a more diverse customer portfolio.  GM was pleased to source parts from other suppliers.

Ford/Visteon

• In 1998, Visteon was almost totally reliant on Ford since 88% of Visteon revenue came from Ford; 81% of Visteon’s business was in North America.
• A “joint Ford-Visteon competitive pricing study intended to make Visteon’s prices competitive with third party competitors” caused Ford to cut by 5% the prices it paid to Visteon for almost all parts just prior to Visteon’s spin off.  In 2000, Visteon net income fell to $270 million (partially due to this pricing adjustment). 
• This price decrease in 2000 dramatically changed the Ford/Visteon relationship.  Previously, in 1999, Visteon’s net income had increased to $735 million from $511 million in 1997.  Visteon estimated that, had the 5% price reduction effective January 1, 2000 been in effect for 1999, sales [and presumably profits] in 1999 would have decreased by $690 million.
• Ford retained liability for all product liability, warranty or recall claims that involve parts made or sold by Ford for 1996 or earlier model year Ford vehicles.  Visteon became responsible for these types of claims relating to 1997 or later model year Ford vehicles.
• At December 31, 2000, Visteon had approximately 18,000 salaried and 64,000 hourly workers.  Of the hourly workforce, approximately 24,000 were Ford employees in the US covered under the Ford UAW Master Agreement.  At December 31, 1999 (prior to the spin off of Visteon), Ford had a total of 364,550 employees.
• At December 31, 2000, five of the top seven Visteon executives were previously top Ford executives.