TURNAROUND MANAGEMENT: IS IT IN YOUR FUTURE?

By SAM BOYER

 With the tremendous number of mergers and acquisitions taking place over the last few years in the beer distribution industry, there are problems on the horizon.  Far too many of these recent consolidations are a result of a “more is better attitude” and were acquired at too high a cost.  So often these consolidations were not thought out for the long-term and shortly begin to impact profitability and cash flow.  Turnaround management becomes the only way out.

The acquisitions involving the purchase of adjoining territory are the most dangerous.  Not only is a great deal of cash necessary to make the purchase but they are an ongoing cash drain as well.  In adjoining area acquisitions, the economies of scale needed to justify the added expense usually do not exist.  The salaries of the previous owners may be eliminated but little else.  The acquiring distributor now has more accounts, more territory to service, and more employees on the payroll. 

The adjoining area acquisition increased sales; however, the servicing costs per account have not declined and interest expense has risen.  It is only a matter of time until the cash flow goes negative and lenders begin to pressure the distributor to cut costs and inventories.

Pressure from the breweries is driving many adjoining area acquisitions.  Their drive to have fewer and larger distributors is causing consolidations to take place at any cost.  Unfortunately, these costs are the responsibility of the acquiring distributors, and many times are the result of unnecessary service and staffing requirements by the breweries.

When acquisitions are made the management staff of the acquiring distributorship is suddenly responsible for managing a larger operation, with more employees, crowded warehouses, routes, and brands, in an arena strewn with the potholes of failure.  Managing a more complex business has been the temporary downfall of many acquiring distributors.  Acquiring distributors must make sure they and their managers are ready to take on the tasks that will greatly challenge their abilities. 

Declining brands are many times the target of acquisitions.  Paying too much for these brands is apparent in many transactions.  It is apparent when cash flow, inventory turns, and heavy discounting problems creep into the previous highly profitable operations.  With the preponderance of declining brands available through acquisitions, all acquirers must factor in an expectation of lower and lower sales (and less and less cash flow) into the purchase price.  Most brands of the second tier brewers now have no value.  They cannot generate a positive substantial cash flow and no cash flow equates to no value.

Poor post merger integration is also a primary cause of problems for the acquiring distributors.  Lack of planning for warehousing, delivery routes, sales routes, and support staff are the primary causes for missed goals, employee turnover, and lost sales and profits.  A turnaround management situation is created every time a distributor does not adequately plan for post merger integration.

Over estimated cash flows/sales and under estimated expenses are also culprits in the difficulties surfacing after an acquisition or merger.  Distributors must assemble accurate and realistic proforma income and cash flow statements long before the closing.  Acquirers must plan for unexpected sales declines and rising expenses.

Inactive principals control many distributors available for acquisition.  This leaves non-family managers responsible for the day-to-day operations.  So many times these management individuals do not stay with the new owner(s).  This loss of key personnel is highly detrimental to the long-term stability, sales growth, and cash flow.  Every effort must be made to retain the qualified key managers of an acquired distributorship.  They know the business, have contacts within the market, and have an experience track the acquirer does not have.  Work to keep the qualified key personnel.

The acquisition or merger process does not end at the closing table; it's only beginning.  In a significant number of acquisitions or mergers, there is little forethought to how to make the two entities into one seamless operation.  After the closing operational problems take center stage, sales lag, and customer service suffers: all due to the lack of planning by the buyer.

Planning must start even before the initial negotiations with the seller.  You must work with your managers and advisers to solidify a plan of how the acquisition will be integrated into your organization.  Without a plan early in the process, you will make changes repeatedly...frustrating employees and customers.... and not accomplishing your goal of a single profitable organization.

Communications is of primary importance in the integration process.  From the beginning, you must involve the individuals responsible for the day-to-day operation of the new organization.  Without their involvement, they will not "buy into" your plan.  Then your acquisition is doomed.  Not only do you need to involve your key managers and professional advisers you must also involve the key managers of the acquired company.

Work together as a team.  Review all aspects of both companies and identify every point to be addressed in the integration process.  Whatever you do....  don’t go it alone.  Too much secrecy will limit your ability to manage a smooth integration process and increase the fear of change.  Fear of change is not limited to the employees of the acquired company.  Many of the customers will also need to have their fears reduced and be assured they will receive the product and merchandising support they need.

So often, the result of an acquisition has either the purchaser cutting too many employees from the payroll or retaining all of them.  Neither is correct.  The post-merger integration plan must identify the role of each position.  Make sure you have the right number of positions to service your market.

No acquisition makes sense if it does not achieve an economic size that is able to compete for and gain market share.  This rules out many single brewery adjoining markets acquisitions unless the single brewery’s products have at least a 30 share.  Economic size is the all-determining factor; the resulting organization from a merger or acquisition must be of similar size to it competitors.  If not, sales gains will be difficult, and cash flow will be negative….and turnaround management the only way out.  

Turnaround management is a fast moving and gut wrenching process requiring you to:

1.      Identify the problems that are severely impacting your new organization.  Work with your key personnel and outside professionals to solve or minimize them.

2.      Cut costs smartly; make sure you can service the market because no service equals no sales and that means no cash.

3.      Stop the bleeding; get rid of the expensive cars, extra vehicles, administrative staff, etc.

4.      Involve the breweries; they approved (probably even promoted) the merger/acquisition.  If you need and deserve higher margins, more days of credit, or other assistance demand it.

5.      Many times acquisitions/mergers create non-uniform market areas.  Sell them for cash.  Not only will you have an infusion of cash; you also reduce your operating expenses in marginal areas.

6.      No matter how difficult the cash flow or operational difficulties become always protect your brands, margins, retailers, markets, and especially your key personnel.

7.      Don’t go it alone; ask for advice from your banker, attorney, accountant, and yes even a consultant.

Strong management systems after an acquisition are an absolute necessity.  The days of shooting from the hip and hoping for the best are thankfully gone forever.  If you do not manage a post acquisition/merged operation in an organized and professional manner, you will never achieve professional and profitable results.

Articles providing additional information on mergers, acquisitions, and post merger integration are available at www.samboyer.com