bob tormey - san fran - glgigetting the last million out of your portfolio company's budget -...

Getting the Last Million Out of Your

Portfolio Company’s Budget

December 12, 2007

San Francisco

Robert TormeyPartner, Tatum LLC

© 2007 Gerson Lehrman Group Inc., All Rights Reserved

7,000+ experts help clients analyze financial statements, dissect complex accounting,

finance or tax situations, and identify accounting irregularities


Council Member Biography

Robert B. Tormey is a Partner at Tatum LLC, a GA-based

professional services provider of financial and information

technology leadership. His practice focuses on restructuring

assignments within portfolio companies of private equity groups

and associated stakeholders. Mr. Tormey has supported

numerous portfolio companies of private equity groups. He has

experience managing turn-around, leveraged buyouts,

recapitalization efforts, and acquisitions. Mr. Tormey has over

twenty-five years of accounting and finance experience across

various industries. He holds an MBA from Cornell University and

Bachelors in Arts from Loyola University. Mr. Tormey is a

Member of the Association of Certified Turn-Around

Professionals (ACTP) and a Member of the California Society of

Certified Public Accountants (CALCPA).


Topics

► Anticipating the turn in credit markets

► Importance of maximizing opportunities in the budget process

► Risks of consultant advice and avoiding missed opportunities

► Advantages and disadvantages of controls vs. initiatives

► Pros and cons of rolling forecasts vs. the annual budget process


About GLG Institute

GLG Institute (GLGiSM) is a professional organization focused on educating business and investment professionals through in-person meetings. It is designed to revolutionize the professional education market by putting the power of programming into the hands of the GLG community.

GLGi hosts hundreds of Seminars worldwide each year.

GLGi clients receive two seats to all Seminars in all Practice Areas.

GLGi’s website enables clients to:

► Propose Seminar topics, agenda items and locations

► View and RSVP to scheduled and proposed Seminars

► Receive a daily briefing with new posts on your favorite tickers, subject areas and from trusted Council Members

► Share Seminar details with colleagues or friends


Gerson Lehrman Group Contacts

Debbie Liston, CPA

Senior Research Manager, Accounting & Financial Analysis (AFA)

Gerson Lehrman Group

850 Third Avenue, 9th Floor

New York, NY 10022

212-880-6527

[email protected]

Aaron Liberman

Managing Director, Sales and Marketing



New York, NY 10022

212-984-3684

[email protected]

Carly Pisarri

Process Manager



New York, NY 10022

212-750-1435

[email protected]

mailto:[email protected]




IMPORTANT GLG INSTITUTE DISCLAIMER – By making contact with this/these Council Members and participating in this event, you specifically acknowledge, understand and agree that you must not seek out material non-public or confidential information from Council Members. You understand and agree that the information and material provided by Council Members is provided for your own insight and educational purposes and may not be redistributed or displayed in any form without the prior written consent of Gerson Lehrman Group. You agree to keep the material provided by Council Members for this event and the business information of Gerson Lehrman Group, including information about Council Members, confidential until such information becomes known to the public generally and except to the extent that disclosure may be required by law, regulation or legal process. You must respect any agreements they may have and understand the Council Members may be constrained by obligations or agreements in their ability to consult on certain topics and answer certain questions. Please note that Council Members do not provide investment advice, nor do they provide professional opinions. Council Members who are lawyers do not provide legal advice and no attorney-client relationship is established from their participation in this project.

You acknowledge and agree that Gerson Lehrman Group does not screen and is not responsible for the content of materials produced by Council Members. You understand and agree that you will not hold Council Members or Gerson Lehrman Group liable for the accuracy or completeness of the information provided to you by the Council Members. You acknowledge and agree that Gerson Lehrman Group shall have no liability whatsoever arising from your attendance at the event or the actions or omissions of Council Members including, but not limited to claims by third parties relating to the actions or omissions of Council Members, and you agree to release Gerson Lehrman Group from any and all claims for lost profits and liabilities that result from your participation in this event or the information provided by Council Members, regardless of whether or not such liability arises is based in tort, contract, strict liability or otherwise. You acknowledge and agree that Gerson Lehrman Group shall not be liable for any incidental, consequential, punitive or special damages, or any other indirect damages, even if advised of the possibility of such damages arising from your attendance at the event or use of the information provided at this event.

© 2006 Tatum, LLC All rights reserved.

Maximizing Opportunities

in the Budget Process

Robert TormeyTatum, LLC

December 12, 2007

9© 2006 Tatum, LLC All rights reserved.

Why Maximize Opportunities?

Success in leveraged investing has relied in part on:

Declining interest rates (since early 1980‟s overall and since 2000)

Accommodative Monetary Conditions affecting advance rates

Expanding multiples of enterprise value

Expanding pool of private equity sponsors

These trends may be reversing themselves in 2008

Credit environment growing more severe

Advance Rates may decline in 2008

Interest Rates remain quite low by historical standards

Earnings multiples are already quite high

Improving Earnings Opportunities critically important


These Stories Have Much in Common

All are portfolio companies of private equity (PE) sponsors

Companies needed earnings or working capital opportunities

PE Sponsor hired expert advisors to find them

Circumstances led to my involvement

Opportunities were available the advisors had not found

Gerson Lehrman felt this might be of interest to you!


Maximizing Opportunities in the Budget Process

Profit and LossStrategic Spend Optimization vs. Common Sense

Expense Reduction

Shared Services Centers

Unprofitable Customers

Balance Sheet and Working CapitalEstimated Tax Filings and Form 4466

Receivables

Credit Insurance

Vendor Initiatives

Legerdemain - Understanding InsuranceWorkers Compensation – LDF vs. Case Method

Plant Consolidation and Workers Compensation

The Rolling Forecast vs. The Budget Process

Conclusion


Profit and Loss

PE Sponsor pursuing „Roll-Up‟ strategy acquires 12 companies

domestic and international over 24 months

Strategic consulting firm to implement Strategic Spend

Optimization Program (SSOP).

SSOP costs $4,000,000 in professional fees & 2 years

EBITDA declines from $30,000,000 to $10,000,000

“Out of the Money” management team resigns

PE Sponsor commits additional „equity‟ to appease lenders


Expense Reduction and Controls

CFO implements Thompson PPC „checklist‟ called “Guide to

Management Letter Comments and Expense Reduction

Recommendations”

CFO/Controller and Department heads implement programs to

reduce under-managed „spend‟

Savings results of program are $2,000,000

Cost of Thompson PPC „checklists‟ - $176.00

Website for Thompson is http://ppc.thomson.com/

http://ppc.thomson.com/


IT Rationalization and Shared Services Centers

CFO notices 12 acquisitions using:

10 General Ledger environments

10 Software platforms

3 Transaction accounting environments

CFO asks CIO to migrate to single G/L and Software Platform

CFO/CIO Consolidate 3 Transaction Accounting environments

to 1 Shared Services Center (SSC)

Software license fees reduction and personnel reduction

savings total $1.4MM


Unprofitable Customers & SKUs

CFO hires financial analyst to review „Customer Profitability‟,

Customer Sales Agreements and SKU profitability

Analyst recommends „firing‟ unprofitable customers & skus

Losing Unprofitable Customers frees up capacity

Sales Declines but EBITDA increases by $6,000,000

Production Capacity, Scheduling, Overtime, Line-Fill all improve

Working Capital improves due to decreased receivables

Cost of analyst - $100k/year

Don‟t ask or expect transaction accountants to be Analysts

Revenue is Vanity – Income is Sanity


Profit and Loss and Enterprise Value

PPC Expense Reduction $2,000,000

Software Rationalization $1,400,000

Unprofitable Customers $6,000,000

Total Cost Reductions $9,400,000

Enterprise Multiple (?) 10

Enterprise Value Impact $94,000,000

A penny saved is a penny earned – Ben Franklin

A penny saved is a dime in enterprise value! – Bob Tormey


Balance Sheet and Working Capital

Professional fees and Default interest- liquidity under pressure

Fourth quarter earnings surprise lowered taxable income

Company paid estimated taxes in quarters one, two and three

CPA neglected to file Form 4466 for refund of ES Payments

Advisors unaware of taxpayer advocates‟ within IRS and FTB

CFO files form 4466 through taxpayer‟s advocate

Company receives $2.5MM in cash within 60 days!

Lenders agree to forbearance

Cost of idea – Form 4466 download + first class postage

http://www.irs.gov/pub/irs-pdf/f4466.pdf



$18,000,000 in Outstanding Receivables – 60 DSO

Receivables staff consists of 6 A/R clerks – no incentives

CFO implements collections „incentive‟ initiative with „cash

bonuses‟ of up to $300/month, awards and monthly lunch

Receivables declines by 10 DSO or about $2,500,000

Company maintains „Senior Leverage Ratio‟ and avoids default

Cost of initiative for 6 clerks, $3,600@for one year - $21,600

Interest Expense Savings $2,500,000 at Libor + 2 = $166,500

EBITDA „bought‟ at 4 times leverage ratio - $600,000!

Cost of avoiding Senior Leverage Ratio Default – Priceless!



Company has Accounts Receivable of $15,000,000

Company doesn‟t insure receivables because:

“We know our customers”

“We‟ve never had any losses”

Distribution channel suffers severe competition that year.

$900,000 in Credit Losses – Company Defaults

CFO (New) implements Credit Insurance to assuage lenders

„Foreign Receivables‟ insured under Policy

Bank includes „insured foreign receivables‟ in collateral base

Price of insurance $200,000 – Cash Collateral - $1,000,000



Company is privately held

Company does not want anyone to know anything about it

Dun & Bradstreet information on company is incomplete

D&B BIR has low Paydex score and R4 Risk Rating

New CFO contacts D&B – rewrites D&B BIR as company press

release – includes link to PE Sponsor Website

New CFO uses BIR to promote Vendor Marketing Initiative

Requests Purchasing push for increased terms

Vendors Credit Officers turn to new BIR for their decision

Improved DPO raises $10,000,000 in vendor support


Managing Cash

PEG Sponsor pursuing consolidation strategy

Completes many acquisitions over several years

PEG Sponsor retains Big 4 Accounting firm to do cash

management and controls study

Cost of study $1,500,000

Result – Company runs out of Cash and Sponsor puts in

$10,000,000 „Equity Relief line‟ to support working capital needs


Managing Cash

Big 4 firm failed to recommend consolidation of 57 company

bank accounts and 3 merchant services centers

CFO reduces 57 bank accounts across multiple banks to 17 at

one institution and single merchant services relationship

Cash management on-line environment managed by 1 clerk

Tracks Cash in EXCEL – Maintains 13 week cash visibility

Interest and bank charges savings $300,000/annually


Legerdemain - Understanding Insurance

Insurer says workers compensation under-funded $1,000,000

Earnings charge puts company in default

SNC Lender freezes credit facilities

Sponsor retains financial advisor to examine company

Lenders retain investment banking firm/restructuring advisor

Company retains outside CPA to assist company

Company spending $200K per month on „advisors‟

Months go by . . . . . .


Company appoints new CFO (myself)

Insurance company using Loss Development Factor (LDF)

method to determine reserves

Insurer/agent unaware of alternative GAAP methods

„Case Method‟ of testing reserves differs from LDF method by

$1,000,000 in companies favor

Accountant agrees to accept „change of estimate‟ for GAAP

method of presenting reserves

Income improved by $1,000,000

Cost of Idea – subscription to accounting research bulletins


Legerdemain (2) Workers Compensation

Sponsor retained consultant to find cost reduction opportunities

Consultant proposed two year plant consolidation plan, requiring millions of dollars in working capital to produce annual savings of $2.5 Million dollars

Private Equity group had company on a „first dollar‟ policy

Large cap deductible policy reduced costs by $1,000,000 annually and could be implemented immediately

Cost of idea – 1% fee for standby Letter of Credit

No impact on senior leverage - standby LC‟s are „unfunded‟

Increase in EBITDA - $1,000,000

Increase in Enterprise Value - $10,000,000


Rolling Forecast v. Budget Process

Budget Process is too often an „annual event‟People don‟t get good or creative at something they do once a year

Too many things change during a year

Substitute Year Round Rolling Forecast Discipline

Build a Model (in Excel) that reflects the business in detailUpdate Org Chart and Payroll Masters

Get to Customer Profitability and SKU Rationalization

Analyze the Balance Sheet – your earnings surprises are there!

Demand Bridge Studies on major initiatives or changes

Document the Budget Process with MD&AAsk for „Word Documents! – don‟t accept PPT!

Get to How and Who and more than just „What‟

Task for more than P&L – Task for Working Capital Initiatives

Look for Process and Operational Excellence Opportunities

Rolling Forecast is updated Monthly with comprehensive MD&A Quarterly


Getting the Last Million Out of Your Budget

Lessons you can take home and use tomorrow

Avoid complexity – Be cautious with experts

Simple Ideas are good

Cheap ideas are very good

Controls are safer than initiatives

Incentivize cost conscious behavior at staff levels

Experts often sell what they know – Be a ‘generalist’

There is low hanging fruit – use PPC checklists and

encourage your CFOs and Controllers to do same

Don’t budget annually – Roll your forecast