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Sweet aftertaste Featured

5:36am EDT March 23, 2005
When Jim Ross knocks on your door, odds are it's bad news. But people still answer the knock, and Ross is always invited in to prowl the halls and peruse the books.

That's because Ross, a principal with Morris-Anderson & Associates, is a turnaround specialist, and he's called in to right the corporate ship, if possible, or manage the sale of assets so an enterprise can cease operations.

"Generally speaking, we're introduced to the company by a bank that has seen its customer go into default on a loan," Ross says. "Most of our business comes from referrals from the workout groups of banks. By the time a (bank) customer (is) in default of their loan, ends up in a workout group with their lender and that workout group determines they need the services of a turnaround consultant, many times it's too late to find a nice, easy, nonintrusive solution."

Such was the case with the Archibald Candy Co. Ross was named chief restructuring officer and CEO of Archibald in May 2003. Fifteen months later, he stepped away from the helm after engineering the sale of assets that exceeded $80 million. Not bad considering that pre-sale estimates valued Archibald's assets at as little as $35 million.

"When we come in the door, there is a crisis of liquidity," Ross says. "Oftentimes, companies are at a point where they are about to run out of cash."

In the case of Archibald, its problems began in the 1990s with a flawed roll-up strategy that involved Fannie May, Fannie Farmer, Laura Secord and the Sweet Factory.

"They probably overpaid for most of the brands they acquired," Ross says. "And there was a fairly significant flaw in some of their thinking when they moved all of their chocolate manufacturing into the one plant here in Chicago."

Subsequent price increases and a drop in production led to a vicious cycle that threw the company into further financial trouble. Ross says Archibald's previous management team didn't recognize or couldn't deal with the problems.

"We're generally looking at a situation where the company doesn't have the ability to invest in the future," Ross says. "In fact, the future is in question if they don't make certain changes or maybe even divestitures. So our view is, 'Where is the value of the company?'"

Smart Business spoke with Ross about the art of the turnaround and how to find value for bondholders in a failing venture.

How does a turnaround specialist view a company differently than the CEO?

You have to be able to look very critically at everything that goes on in an organization. You have to not accept that what has been the mainstay of a company for years is necessarily the right thing to do going forward.

It takes the ability to think outside the box, be very critical of everything that they see in order to find where the opportunities are and to make a true objective evaluation of the situation.

How do you find value in a failed business?

You have to look at the company in terms of its pieces and how to optimize the value of each of the pieces. Adding up the individual pieces, it's often greater than the company would be in total. Basically, that's what we did at Archibald.

We looked at the different asset groups and developed an approach to each of those asset groups whereby we determined how we could get the maximum value for those particular assets in a group. Then (we) developed a strategy to implement that approach and ultimately dispose of the assets.

Where was the value in Archibald Candy?

It became clear to us that the assets -- particularly the brands -- were going to be the most attractive and get the highest price if the bidder was a company that was already in the industry as opposed to a financial buyer. We were able to find a stalking horse, a company that was looking to acquire brands to continue to fill up the capacity they had at their plant and was looking to expand their product line.

We did offer the real estate separately, and there were a number of developers and other businessmen in Chicago very interested in acquiring the real estate. At the end of the day, the bidding drove up the price for those assets significantly and we ended up getting what we thought was a very good ending value for intellectual property and real estate for the U.S. entity.

We had several other asset groups that we sold as well. Fannie Farmer had a very large manufacturing plant located just west of the Loop, in an area that was going through a significant renovation.

How did you measure success in the turnaround?

We were trying to get the creditors of Archibald Candy paid the maximum amount of value against the amount that they were owed. How we judged the success was that we were able to achieve in excess of what anyone initially projected could be generated in value.

At the end of the day, our benchmark was that we went from an original projection of valued assets as low as maybe $35 million to generating, through the restructuring, an actual return in value in excess of $80 million. That was the benchmark for us.

What happens if there is dissent from the owners regarding the turnaround approach?

Turnaround consultants work in different ways. At Archibald Candy, I was hired by the board of directors and appointed to be the chief restructuring officer/CEO to help guide the company through restructuring. We had a significant amount of input to the board. We participated in decisions and certainly had a lot of influence in terms of how the restructuring process would take place.

Turnaround consultants often are not in that position. Many times, we're there as a consultant to management. We give advice and suggestions, but are not in a position to actually control decisions or to deploy resources in specific activities and so forth, but only to suggest. Management always has the ability to say, 'No, we don't agree with you. We don't think that's the right restructuring set.'

A restructuring activity can sometimes be one where we try to guide the management team through the decision process and implement the restructuring as best we can, but it isn't always something we can control the outcome of.

Is it ever too late to call in a turnaround specialist?

The longer you wait and the deeper the crisis is, then the options available start to become very limited. But remember, in almost all these instances, there is a lender or a bondholder or someone who has a secured interest of one sort or another in the company.

So even though it is too late to save a company from the standpoint of its continuation as a going concern business, people who have lent money to that company and who have a secured interest in whatever the remaining assets are, there's still a duty to try to gain as much value out of those assets to repay as much indebtedness as you can. Whether it's the management of the company or a turnaround specialist -- in essence, when a company goes into default, a company is insolvent.

You still have a responsibility to your creditors to try to repay them to the extent possible from the value of the assets of the company. HOW TO REACH: Morris-Anderson (847) 768-4400 or www.morris-anderson.com