Chapter 4
When Banks Attack

When a business's results slip and the bank has that first tough conversation with the owner, emotions often surge. The owner's mind swirls into a sea of thoughts which usually follow this arc:

What the heck, these guys are my buddies, they just recently invited me to their annual golf event last summer – and I even met the local president who was very complimentary of me and my business. There must be a mistake; I've been borrowing money from this bank for 10 years and the people there have always told me I was one of their valued clients. By the way, have you seen the amount of interest I'm paying to those greedy bums annually? They're in the business of lending money; why would they want to limit my ability to borrow now? They knew the risks, etc.

I know, I've been there. One day you're the bank's best friend and the next day you're not. Over the years I've realized that banks really only have two departments: lending and collections, finders and grinders. That guy with the nice suit, expense account, and low golf handicap (your buddy) – he's the finder/lender. The rumpled troll with a sour disposition, no expense account, and no golf game – he's the grinder/collector. Banks develop pleasant euphemisms for the collection department like workout, special assets, and specialized finance, but the jobs are is all the same – to get the bank's money back from you.

During my first turnaround, our banker (Kenny – strong handshake, winning smile, great tan) came in hard and really surprised us. Our rotten CFO was hiding losses with inventory accounting games. In 24 hours, I went through the stages of grief, which included thoughts like: Hey, I thought we were all in this together, they knew the risk they were taking, and so on. Late at night I thought about the loan agreement we had signed, which of course I had never read. I read it that night and realized that banks have been lending money for over 7,000 years and I'd been borrowing for about four at that point. Clearly, I was outgunned. Heck, I'd even signed away my right to a jury trial because big mean banks don't win in front of juries. The next step in my aggressive denial was to contemplate bankruptcy. I got online, looked at the schedules, and realized that in Louisiana (the state where my business and I resided) we would get to keep something like my wife's wedding band, a mattress, one cow, and a handful of chickens. Resolved that I had no good options, I committed myself to learning the turnaround game and fighting my way out of this hole.

While my mind was spinning through that emotional roller coaster, here's what the bank was thinking:

As a federally insured bank, regulators make us measure and rate all loans with special attention to the poor performers. We don't like the poor performers, nor do we charge enough to absorb the risk of poor performers. We have a fiduciary obligation to our shareholders and depositors to either get these poorly performing credits healthy or move them out of our bank. In the past we've loaned money to deceitful people, and therefore we need to treat all troubled borrowers with the jaundiced eye of suspicion that they might be the next morally deficient borrower we deal with. We need to be firm but pleasant and slowly liquidate this business out from under the entrepreneur.

Yikes!

You're now a topic in credit committee on Monday mornings, and you probably have been for several weeks or months now. The tough conversation you just had with the bank had been coming at you for quite some time, you just didn't realize it. The credit committee wants to know one thing from you: Do you understand the situation and are you committed to the solution? Oh, there are a hundred things on their checklist but first they need to know where your head is. They want to meet in one week and they are going to be looking deep into your eyes to understand your clarity and your commitment. How you respond will be discussed in credit committee next week and your response will determine your future treatment. These relationships can quickly spiral downward if things start off on the wrong foot, like for several of my former clients:

Steve – had a fast‐growing and very profitable business that then went into decline. He generally ignored the bank and thought their demands were petty and they didn't appreciate his brilliance. He stopped paying contractors, had trouble shipping orders, but every weekend he still valet‐parked his Rolls Royce at the local yacht club (where the top regional bankers were all members). Eventually the bank took a $10 million loss on Steve, while other creditors lost another $6 million.

Floyd – called me to complain about the horrible private equity investors who were ruining his business and doing all sorts of mean‐spirited things to him. This, only three months after they had invested $2 million into his business. He and I talked through the weekend and I drove to see him on Monday. After a quick review of his financial statements, I said they just didn't make sense to me, things were not lining up and something was amiss. Common‐sense formulas were out of balance. He gave me some weak answers first and then admitted that the numbers were completely made up. Wholly fabricated. Seriously, he said he just made them up, every single one based on an idea of how he thinks the business should look or could look, or something. He must have done a good job because the financials sailed right through a $40,000 quality of earnings review by a well‐known regional CPA firm.

Worse yet, he was really upset about the interest rate they were charging him. Our conversation went like this:

Him:	Well yeah, I made it all up but they're charging me 15% interest and that's ridiculous.
Me:	But you took the $2 million from them and it's all gone now?
Him:	Yes, but 15% is usurious.
Me:	But you're not paying the interest. You took $2 million in cash, it's all gone, you haven't made a single payment – and you're complaining about the interest rate?
Him:	Yes.

Serge – maxed out his revolving line of credit and with no additional ability to borrow, so he began creating phony invoices, submitted those to the bank and borrowed real money against phony (fraudulent, illegal) invoices. The bank never caught on and he “borrowed” an additional $1 million more than his collateral would support. It wasn't until Serge did something even dumber that an employee contacted the FBI and mentioned the felony bank fraud as an ancillary issue.

Ralph – like Steve but with a Corvette. Ralph had no interest in scaling back his lifestyle. He'd roll into the bank to meet with some midcareer lender making $80,000 a year working long hours to raise a family and Ralph would spend the whole meeting bragging about his sailboat. Before running out of money, Ralph had burned through his last $1 million launching his Asian division – living in Bangkok, without his wife, for a year. (Lots of start‐up expense, you know.)

Steve, Floyd, Serge, and Ralph each lost his business. Meanwhile, other entrepreneurs I've worked with each embraced salvation and today each still owns his business.

Want Leverage? Don't Pay the Bank!

There's an old saying: when I owe the bank $1 million, I have a problem. But when I owe the bank $10 million, the bank has a problem. It's counterintuitive, but the bank is less likely to negotiate with you if you're making all your payments in full and on time. No matter what you say, they just want you to keep making payments and improving their position, not yours. Once you stop paying, there is something to talk about and you're likely to be transferred to workout who will work with you.

As much as banks want the CEO to change, they don't want to force progress. And, secretly, they're really afraid of lender liability laws. Yes, lender liability, such as if they take control of your company, make poor decisions, and your business fails. You can sue them for damages, probably a multiple of your prior business's revenue. A few lenders push the envelope with control, but most (99%) are very conservative in their actions. They speak in confusing ways and twist your arm until you give in – “Okay, okay, tell me what to do. I'll do anything to have you fund my payroll on Friday.” “Oh, we can't really tell you what to do but you better do something,” and they twist your arm further. Sweat is beading on your brow (I know, I've experienced this) and they ask if you've looked at cost reductions? “Yes,” you scream and they twist your arm harder. All you can think of is funding payroll and all they can think of is squeezing cash out of you. “Have you considered hiring a turnaround professional?” they ask. You give them a blank stare (like I did) and they hand you my business card.

As in an old western movie, the bank kicks you out the front door back onto the street. You dust yourself off and wander back to the factory, head spinning. The people at the bank gave you my card because you will meet with them again in one week, and they expect you to have complete control of the situation and the business. This very moment separates success from failure more than any other moment in the turnaround cycle. Psychologically your primate brain is considering two options: compliance or defiance. You're rattled, but when you imagine it, compliance looks weak and you're not ready for that. You're a proud entrepreneur and not about to kowtow to anyone. Defiance has an emotional appeal, especially for an entrepreneur up against a bunch of bankers. But if you've read this far, you know it's the road to ruin. Compliance is the best solution because it requires the courage and conviction of an entrepreneur along with the clear‐eyed commitment of the reformed. Plus, it's the most fun because, if you hit the gas right now, in the right direction, you can pull out of this quickly with very little scar tissue. The beauty of insolvency and distress is that, with ratlike cunning, leverage can be turned quickly.

Think about it, you're up against a bank and the court system. If you take control right now, you can come up with a solid turnaround plan and begin executing it immediately. It's a bank, and people there don't move quickly, so they'll never catch up with you – as long as you're going in the right direction. But if you just sit there, you will get run over. While the bankers are focused elsewhere, you can come up with an idea at 8:00 a.m., cash forecast it by 9:00, start implementing it by noon, and tell your bank the initial results in your weekly recap, which they'll read later. By then you've made 10 other changes and you control momentum.

The next meeting is scheduled in one week and they expect great things from you.

A bank lends money based on certain criteria known as the 5 Cs of credit: character, capacity, capital, collateral, and conditions. They collect on slightly different criteria:

1. Communication – If they brought the problem to you, then you have failed this test. They cannot yet rely on you to manage your business and be forthcoming with important information about their money, and this is the foundation of trust. You can rebuild this trust over time.
2. Character – Your next move will reveal your character. When they first loaned you the money, they considered your character and asked around the community about your reputation. Do you pay your bills, have you been sued, how often and for what, are you litigious? And they want to know about you, the borrower, as a businessperson; are you someone who's going nowhere with his business or maybe you've just gotten lucky early in your career, or are you a grizzled veteran with plenty of scar tissue? If so, what's your reputation in dealing with banks? Right now they want a CEO who is competent, trustworthy, and ready to suffer through a turnaround.
3. Collateral – The bank has already performed a forced liquidation valuation (FLV) on your business, so they know what the bottom line is. Lenders repeat the old axiom: “Our first loss is our best loss” like a mantra. It is better to pull the plug today and suffer the consequences of liquidation than to risk more capital on a turnaround. That's what you're up against and it takes a stunning level of salesmanship and credibility to persuade the lender to reach deeper into his pocket for your business. If the lender initiated the conversation, then you have lost that credibility, which is why the bank gave you my card.

   The bank likely asked you to update your personal financial statement (PFS) for the next meeting. Be careful when filling this out, lenders compare it to your tax returns and if the documents don't agree, then the question is which party you're lying to; the Internal Revenue Service (IRS) or a federally insured bank – both are felonies. Your lender buddies will want to bring dominion over your assets, so expect to re‐sign‐away your rights and to transfer control of your investment accounts. I recently saw a bank demand the borrower fill out and sign a 40‐page Affidavit of Personal Financial Condition, which I suspect was more of a psychological weapon since it already had an updated PFS.

4. Controls – How tightly do you run your ship? Are your financial reports accurate and timely? What does your controller's desk look like? A cluttered desk reveals a cluttered mind and is untrustworthy in accounting. If you run your business like a commune and trust employees to always do the right thing, then you're more likely to have environmental, tax, and labor issues. If you run your business like a Navy ship, you're less likely to have these hidden liabilities.
5. Capital, aka, Skin in the Game – The bank wants you fully invested and in a position where you absolutely cannot afford to fail. Whereas the bank can afford to take a loss, you cannot. If given the chance, you will find a way to survive. They want you up late worrying about their money.

Although I recommend a strategy of compliance and becoming an A‐student when in trouble with the bank, every so often you may have to fight them to save the company. On one of my first turnarounds, I had taken control of a company on Monday, fired the CFO for bank fraud on Tuesday, and had the bank sweep all remaining cash out of our account Tuesday night. Wednesday morning we needed to fund payroll and didn't have a dime to do it. It was day 3 and they had me, checkmate. One hundred people were going to lose their jobs that week. In a panic I called the bank, with nothing but desperation and some trumped up courage. They were ready for me, the two bankers had me on speaker phone so they could giggle at their own snarky replies while I floundered. I led with charm and reason and got nowhere. I could hear their chests puffing as they talked about rights of setoff, blah, blah, blah. They had every single legal right on their side, all I had on my side was 100 families. The conversation dragged on and the odds stacked up against me.

I had nothing left, it was oblivion or I go full commando. I'm not sure what that means, but in my mind, it's the complete and resolute willingness to cause utter chaos and destruction to achieve my goal. If I go down, you're all coming with me. I think that's the level of dedication the employees deserve. I separated who the boss was on our phone call and told her that she needed to make a very clear and very definite decision: would they fund payroll or not? She said, “No.” “Let me restate,” I said, “you are making one very singular decision that you will own completely, you either keep our money or you fund payroll.” Blah, blah, blah was her reply, some explanation about the rights of the bank.

I had one card left; “Your choice, I either tell the employees you supported them or I call the chairman of your bank.” “We're not funding payroll,” she said. “I'll give you one more chance …” she cut me off with a snarky, “No.”

I hung up and dialed. For the next 5 hours I called every number and emailed every email I could find for this very large bank – a bank that covered about half the United States and was headquartered 1,200 miles from me. With every single call, I politely asked for the Chairman, by name, and then left the following message: “Unless I get a call back today we are laying off 100 people, shutting the business, and suing your bank for all the damages under lender liability law.” If you ever wanted people to both hate you, and return your call, this is the tactic. The next morning I was with a local bank executive who funded payroll. The snarky lender was demoted, then fired, and we got the company turned around. Final tally: the bank was paid 100% in full, every job preserved, and a few feathers ruffled.

Receivership

When trust is lost and the borrower is seen to be destroying value, lenders can have the sheriff remove the owner from his own business. This is called receivership, which dates back to the English Chancery courts where occasionally a judge would assign a receiver to protect and manage the assets of an insolvent entity. This makes sense if a gentleman of questionable ethics has unpaid debts and a valuable painting is his only asset. The court feels more secure having that painting under lock and key and not having its location and care unaccounted for by the debtor. Modern‐day receivership in bank workouts is sought when a CEO is acting irresponsibly with the creditors' collateral. This can mean that the CEO is overpaying himself or family members, not collecting from friends, shipping on reckless credit terms, liquidating assets without bank consent, and so on.

The toughest receivership story I've heard was from a colleague who literally sat at the founding CEO's desk after he'd been removed from the business. The sheriff showed up on December 22 with an order to receive and secure the assets of the business. The owners and staff were made to exit the building while a locksmith changed the locks. A receiver, my colleague, was brought in to run the business. The CEO's family had been wrapping and storing family Christmas gifts in a spare office and were forced to leave them all behind – the court order clearly said “all property.” The family celebrated the holidays without jobs, a business, or even gifts.

Receivership is incredibly difficult to attain by creditors in the United States and is principally governed by state law. I've been involved in a few situations in which the CEO was destructive, and receivership was appropriate, but in each case the bank's lawyers said that receivership was not regularly practiced in their jurisdiction and would be too hard to attain.

An interesting contrast is how Germany deals with insolvency. Germany has a much higher percentage of family‐owned manufacturing businesses than the United States, and Germans take great national pride in their Mittelstand. But despite that, the German Insolvency Code was clearly written for the benefit of creditors. Although owners/operators have personal financial incentives to extend the life of the business, even if it's a slow glide toward liquidation, creditors have significant incentive to seize control of the business early and quickly sell it off as a going concern to a better operator. German creditors have the upper hand in these situations and can quickly force a change in ownership of a privately held business. If any of these three (low‐threshold) criteria are met in a business, German creditors can force the business into an insolvency sale:

1. Unable to make payments. This means any cash crunch, even if seasonal.
2. Forecasted inability to make payments. I think that 90% of all U.S. companies have faced this situation at least once in their history.
3. An upside‐down balance sheet.

The ideal is probably somewhere between the U.S. and German systems. The U.S. system is overly forgiving and tolerates the loss of jobs and community wealth, because employees and the community have no voice in insolvency. Reckless owners in the United States can destroy their business and they do it all the time for a myriad of reasons including ego, greed, stupidity, and laziness. Just because the lender and owner can take the hit doesn't mean the employees and community should have to. Too often, I'm dealing with “the county's largest employer” but the county and state have no say in proceedings. One drive through America's industrial rust belt and you know something is wrong with our system.

As I write this, we're currently bidding on an Italian auto parts business that is going through their bankruptcy procedure (in Italy, Extraordinary Administration). A very simplified explanation of how many European countries work is that they have accepted the social burden of the employees. This auto parts factory has 200 employees, but sales have declined so much that they only need 50 workers (2,000 hours per week) to produce the orders. So, 200 workers cycle through the factory in greatly reduced shifts, providing those 2,000 hours of weekly labor. The government picks up the tab for the other 6,000 hours of idle time through social payments. It keeps people “employed,” takes immediate cash pressure off the business, maintains an assembled workforce, and holds the community together. We can bid for the business assets, but what's most important to the government is how many jobs we will guarantee for the next two years. It can seem more like an adoption than an acquisition.

Benefits of Bank Debt

Yes, things may be looking ugly in your business, but here's the good news: You now have a group of wise and experienced professionals committed to helping you save your business. Years ago, I was helping a friend whose business was imploding while he was in dangerous denial. His wife, business partners, and I tried many ways to get through to him, but none were successful. Watching the flames grow and frustrated by his staunch denial, I said, “You should have bank debt. A bank would be torturing you now to do the right thing, but instead you have private investor money with no covenants and no one is calling you to account.”

Bank debt is also the cheapest form of institutional capital on earth, which allows them to have high standards. Think of banks as your toughest high school teacher or coach. They're a pain but if you play the game and play it well, you'll do better and be a better person for it. In fact, many workout bankers sincerely view themselves as rehabilitators, not collectors. You'll need to keep their support and do the basics like holding yourself to higher reporting standards than they require, being exceptionally honest when trouble is brewing, and controlling the story arch of your business. This is where credibility comes from.

A Quick Review of Secured Commercial Debt and Alternative Lenders

Evil, Mean, Sadistic Lenders

Honestly, I've never worked with an evil, mean, or sadistic lender. Every senior workout officer I have dealt with has been tough, smart, and demanding but also honest and honorable. Every one of them wanted to help me, and they all wanted to help the good entrepreneurs. Even the rotten entrepreneurs (earlier examples) were treated more respectfully and professionally than they deserved.

But there is an ancient sadistic streak in the institution of lending that is built around a sense of Old Testament–style justice in which the reckless are expected to suffer and repent. When a reckless borrower is slow to repent, the suffering should increase until there is a clarity of vision. Banks embrace this at their core, as do commercial lending laws. Lenders believe deeply that if you have been disrespectful with their money, then you should be suffering ulcers and sleepless nights.

The only authentic bamboozling I've ever seen from a bank was a large regional lender in the upper Midwest who flat‐out lied to a CEO when they promised a 120‐day forbearance period and then immediately sold off the defaulted debt to a predatory hedge fund who they'd been colluding with for months. Six days after the smiling Judas bank officer told my associate how pleased the bank was with his progress, he was being foreclosed on by some predatory hedge fund out of Manhattan. Turns out that this bank has done that before and is developing a reputation for unscrupulous behavior.

Federally insured banks rate and manage commercial credits in partnership with their government regulators. These files on creditor performance, stability, and direction are critical for banks to keep clean books and records for regulators but also for publicly traded banks to show the strength of their balance sheet by reporting performing and nonperforming loans.

The following sample bank commercial loan risk rating matrix (Figure 4.1) shows how banks view and rate credits. Each company's monthly financial numbers are plugged into the bank's big computers and measured against all their other loans. When the credit quality of your loan degrades, there are internal conversations about you and your business, which eventually leads you to a tough conversation with your bank.

Once your loan is rated special mention, the differences between large and small banks become more obvious. A large bank will usually move a credit to workout once rated special mention, whereas a smaller bank may send the loan officer to invite you to lunch, do a tour of your facilities, and try to understand what's happening. Once a credit is rated substandard, banks must take the loss on their books. They will rate the loan as nonaccrual (nonperforming), which means they have just taken their loss on your credit. Smaller banks may want to help rehabilitate your business, but larger banks will simply want to “exit” the credit. This means they are done with you and your business and you will likely be liquidated.

Your suffering business is now affecting the bank in ways bigger than most business owners can understand at the time. The following ratios are standard for lending institutions and reported to shareholders:

• Total nonaccrual loans to loans
• Criticized loans to loans
• Restructured and nonaccrual loans (dollar amount)
• ALLL coverage ratio (allowance for loan and lease losses)

As a loan moves from healthy to nonaccrual or as it is restructured or classified as a troubled debt restructure, then the bank wants to exit even faster as these loans impact their ratios even more and will require a detailed quarterly impairment analysis, which consumes valuable time and resources within the bank.

Smaller banks are more likely to work with you for many reasons. They want to be community lenders and will protect their relationship within the community. They also want depositors and shareholders seeing their efforts to support tough situations. Although a big bank may call for a quick liquidation so they can redeploy that capital, smaller banks are usually willing to be more patient. Even if we can get the business turned around, and even if we can bring in fresh capital, the company may still need 12 months of good performance to get the loan upgraded to performing. Part of this is driven by the numbers. A $5 million loan at a national bank is a mere rounding error and has no real impact on anyone inside the bank. I know this because I've gone to great lengths to get big banks to care about something beyond the loan balance, like jobs, community, tax base, economic vitality, and so on and they don't. They just need to process the paperwork and redeploy the capital. But at a small bank, $5 million may be meaningful. It may also make an appreciable difference to someone's year‐end bonus, and you might survive just for that.

Being a big credit at a small bank has its own set of problems. Many small community banks do not have workout departments, and when a big loan goes south, they are wholly unprepared to deal with it. I've seen some act like reckless ninnies, worried about nothing but their own jobs, whereas others might be gentle and supportive to a fault, when more vigorous early intervention could make a difference. In trying to size your company to a bank, I recommend a ratio of $0.5–$2 million in borrower revenue for every $1 billion in bank assets. For instance, a $10 billion asset bank I know well is right sized for a business with revenues between $5–$20 million. Above and below gets out of its sweet spot. Equally, a $100 million revenue business will be oversized for a bank with $30 billion in assets. Many midsized banks will offer outsized loan facilities by syndicating or sharing the risk of a loan with other banks. Syndication gives smaller banks the ability to play in the bigger leagues, but that doesn't always give them the required skills.

In Detroit, there was a notoriously tough workout banker who tortured borrowers in the initial meeting. The business owner and spouse were both required to attend with their fully completed personal financial statement (PFS), and there would be no lawyers. The workout banker would take the statements and repeat a quick lecture about the felony risk of lying to a federally insured bank. Then he would ask for their wallets to see if their contents were listed on the PFS. Slowly, painfully he would try to determine if the $53 in your wallet was accurately reflected on the PFS. This was pure psychological warfare. He would review the clothes and jewelry they wore and make sure they were properly accounted for on the PFS. They would discuss hobbies: boats, skis, guns, tennis rackets, and so on. This could take hours; he might bring in recording devices or note takers just to up the stress factor. It would be hot in the room and he would not offer you water.

Then he would move on to the purpose of the meeting – to talk about your debts. He would recite in the same agonizingly methodical way how you signed each and every loan document, “Can you confirm that this is your signature again on page 24?” Then a page‐by‐page review of the legal documents with specific attention to covenants and legal remedies in default. This will likely be your first time ever reading that section and he would take the debtors through yet another extended and torturous review of their rights under default. Then he would review the personal guarantees, the guarantees that absolutely seal your fate. Then he would talk about the good faith of the bank, the great community works, the history reaching back 150 years, the strength and credibility of its bond, and the fiduciary commitment to depositors and shareholders. And, in a boiling crescendo, he would pound his fist on the table screaming that the bank would eat their souls if they didn't get their act together immediately. It was very effective.

Bank Strategy

Here's our strategy: We want a 30‐day verbal forbearance agreement from the bank, giving us 30 days free rein to fix the business and get the bank out of our hair. We'll show stability and momentum today promising that if they protect us for only 30 days more we will prepare and deliver to them a complete turnaround plan and a way out. That's what we're after, and if we lay it out in a compelling fashion, they will support us. Unless we'll need additional cash during those 30 days, then all bets are off.

We'll walk in with remorse and contrition hoping to avoid the torture and verbal abuse. As a turnaround consultant I'll call the bank the day I'm engaged and tell them how completely dialed in you (the debtor) are and how committed I am to keeping you focused on salvation. There is a chance that you annoyed the lenders so bad that they just have to torture you a bit. I've had to sit through those sessions. Either way, we get through that and then take control of the meeting.

We lead with the collateral status review sheet. This recaps the status, value, and location of the collateral, mostly receivables, inventory, and equipment. This is strongest if it's submitted as an affidavit with your signature. Make it just one page, very brief. Receivables are collected by our staff within a process that nets X days of sales outstanding (DSO), Inventory is stored in X location, valued by this method and categorized in these groups and values. Equipment is maintained in good working order at X location, most recent appraisal (attached) was performed on X date.

This gesture of leading with collateral is your bow to the authority of the bank. Our message is this: Here, sir, are your belongings, which we use only by your grace. It's a small step for the borrower but speaks volumes in the credit committee.

Then we pivot to the list of changes. This tells them everything they need to know about your commitment and direction and it is also where we take control of the meeting. You are a CEO possessed with making things right, and they need only give you room to work. This gets you off the liquidation list.

Then we show them our cash‐flow forecast. There are only four options here:

1. Company generates sufficient internal cash flows to fund operations and can recover with a good plan and great execution.
2. The company embraces significant change but that alone does not create enough internally generated cash to fund a substantial recovery.
3. The company will undergo radical surgery but needs an immediate cash injection to maintain going‐concern value and to fund the conversion of bottled up orders into shipments and receivables. The cash‐flow forecast must show that the business will turn cash positive by no later than week 10.
4. The company is not cash sustainable and has no ability to become cash sustainable even with radical surgery.

Option 1, we're good to go. We'll come back in a month and update the bank on our progress. The key here is to hit the gas and get out of trouble as fast as you can. Make sweeping changes, tighten up your culture, cut some costs, raise some prices. If you're aggressive, you can lock in five years of good financial health in the next 90 days and make this situation an incredibly positive experience. It's very likely the bank will put you “back on the line,” which means you leave workout after a quick scare and go back to playing golf with your old banker buddy. This presentation is option 1: sufficient cash and a good plan to reverse course – the company stubbed its toe. This company would either never formally enter workout or be “returned to the line” of normal lending. It is rare.

Option 2 is a false option because it is not a solution to the problem. The workout banker needs to get this file resolved, and you need to move the business out of its current situation. If significant change wasn't enough, then radical surgery is required. This often means an amputation. We are saving lives, not limbs. We will shut down divisions, sell off locations, liquidate inventories, eliminate departments, and exit lines of business. The cash‐flow forecast has to indicate survivability within 13 weeks, and we have to keep adjusting the plan until we have a model that is sustainable. Focus on the jobs you are saving, not the ones you are cutting. The only alternative to deeper cuts is a quick distressed sale to a gutsy buyer.

Option 3, we're committed to radical surgery, because it is the only survivable path forward. But for many reasons the business will go cash negative until the benefits are realized. The business is often out of cash or even overadvanced by the time I'm called in or it's headed there with a momentum that can't be stopped. Or the radical changes create an extraordinary cash need, such as severance expense, especially in unions or more progressive countries such as Europe and Canada. We have to convince the bank (credit committee) that this is a risk worth taking. Some big national banks will just pull the plug despite the rosy prognosis. Some will fund the turnaround, but this goes against the very mantra of collections: “Our first loss was our best loss.”

What if we project four more weeks of positive cash flow before the business goes cash negative for five weeks? That's a tougher sale because we're going to be depleting their cash collateral for four weeks and then asking for a cash injection and further depleting their working capital for a few weeks after that. What's critical is where we show “the turn” in our forecast – that is, where we start building back cash in the business. The sooner it happens, the safer the bank feels; the longer it takes to happen, the more risk and exposure they are facing.

In Option 4, an expedited going‐concern sale is the most graceful way to avoid complete loss. You still have leverage and can get out of this relatively unscathed if you play your cards right. Getting an overadvance from the bank when you're headed toward liquidation is unlikely. If you can convince them of the return on those extra funds, you may have a chance. If we have a letter of intent from a solid buyer, we have lots of options. I've funded operations from bank overadvances but also from the buyer in dire situations and even from customers who are heavily reliant on the products. Once we rented out a lumberyard to a prospective buyer. We couldn't afford payroll and were ready to shut down, but he was interested in the business and needed time for due diligence. So, we rented him the business operations, and he came in with his crew and ran the place for 30 days to see what foot traffic was like. This was like a low‐cost, risk‐free test drive.  Simplistically, this is an operating lease.

For me, our upcoming bank meeting is 100% a sales call. I am making every possible effort to persuade them to support our way of thinking about the business. The banks know that I am leveraging my professional credibility to the hilt but that I'm also not putting my credibility at risk. I tell CEOs to remember a few key points when pitching the bank: first, every single bank employee is more worried about his or her job than your business, each reports to someone higher up, and no one believes your dreams in credit committee. As CEO, you're being compared to every other CEO in workout, so if your documentation and plans are on point, your thoughts will be heard and often supported.

When heading over to the bank, the entrepreneur and I will role‐play the toughest questions we can think of and practice our responses. Remember, all we're offering is contrition, stability, change, and transparency. I'll do most of the talking since we need to preserve and rebuild your credibility through action. Said another way, the bank is likely in “Gotcha” mode and just waiting for you to screw up.

Q: Where is our money?

A: The stack of reports we brought you today clearly answer questions on the health of the business, but no one is spending time looking backward. One hundred percent of our efforts are focused on rebuilding your position.

Q: How did you screw up the business so bad?

A: Mistakes were made and we're identifying the best solutions.

Q: He's unfit to run the business.

A: My client has great strengths and some offsetting weaknesses. Might I remind you that he's the only one in this room who has ever built a business and employed 100 people.

Q: We need you to pay everything today.

A: Let's review the business's ability to service the debts in the cash‐flow forecast.

Q: We have rights, and we can foreclose immediately.

A: My client also has rights and if forced to, he can maintain those rights. (I try to never use the word bankruptcy in these meetings; it's too emotionally charged. Everyone on the other side of the table knows exactly what is being said.)

Q: We demand immediate dominion over all cash

A: We think you should have complete control of the cash through me (turnaround agent). We acknowledge your rights and will inform you weekly, in advance, of every scheduled payment in our cash‐flow forecast.

So, we're prepped, we've got our best plan for the meeting and you know exactly where you stand with the bank. We're in the parking lot, about to walk inside the bank and I turn to you asking you to recall that scene in the movie Animal House where the new fraternity pledges are being hit with a wooden paddle. After each new violent smack of the paddle, the pledge, through gritted teeth yells, “Thank you sir, may I have another.” This, I tell my client, is your “Thank you sir, may I have another” meeting. Remember that; it's your only role today.