by Sean McManus
Staff Writer
You know you must be talking to a consultant when you hear phrases like, “flexible definition of success” and “fiduciary obligation shift.” But Ed Lipscomb and the company he works for, Allomet Partners, can’t help it. Usually they don’t get called until the situation has become pretty grim. By that point, success can be defined as barely avoiding bankruptcy court and assuring creditors that someone finally has stepped in to bear the fiduciary obligation.
Lipscomb is in the crisis management business. And like storage facilities, railroads, and discount shopping outlets, when the economy is hurting, their business is booming. They’re billed as a turn-around firm, helping companies get out of trouble. Lipscomb recently brought the New York-based Allomet Partners to Jacksonville, running the division out of his home in Atlantic Beach.
“I’d say generally the resolution is pretty positive overall,” said Lipscomb. “It’s like the old adage that the best hospitals have the highest mortality rates because they get the sickest patients.”
And Allomet gets some pretty sick patients. Lipscomb returned recently from the site of a sock manufacturer outside of Atlanta that made socks for some of the biggest names in sports apparel, like Nike and adidas. That was until they tried to grow too fast and alienated their biggest client.
“By the time we came in,” said Lipscomb, “a lender had said that they are going to either pull credit or try to see if management can turn things around by using a firm like ours. The equity group, at that point, is usually in pretty serious trouble.”
Step one, Lipscomb said, is to call all the major venders and try to keep the operation on track.
“We tell them they’re not going to see any money today, but if they will continue to sell to us, we’ll do every future transaction cash in advance, so there’s no risk,” said Lipscomb, adding the most important part of his job is to bring credibility back to the debtor and insure equal treatment to the creditors. “Generally by then, bankers have heard a litany of good intentions,” he said.
The next step is to make sure the legal environment is secure. In other words, it’s time to call in the lawyers. That’s when, Lipscomb said, things usually get messy. “Basically the company is no longer operating in the interest of the equity group but the creditors instead. When the owner is the president, he’s got to be instructed not to act in his best interest but rather in the bank’s interest. That’s a tough sell.” Enter the fiduciary obligation shift.
Now take a situation where this is a family-run operation. The owner is 68 years old and just wants to shelter all the money he can. The son, who is 30, is relying on the future of the company. The two objectives are totally different. Allomet is then responsible for bringing the dichotomy together. That, said Lipscomb, is the really hard part. And of course there are some ego issues.
“Basically it’s a whole new game,” said Lipscomb. “The CEO and management are used to just monitoring normal market growth and all of a sudden, they’re trying to figure out how to avoid losing everything. And by then, their best guys have left. We think it is better to get an outside perspective when that happens, obviously.”
Lipscomb said that what Allomet offers is a group of people who are working on the problem instead of working in it. By using a crisis management firm, the sock manufacturer in Georgia was able to begin operating as if it was in bankruptcy about five months before they really were. That enabled them to liquidate assets more easily without incurring the expense of a bankruptcy. It also kept them out of court.
“Many times management is operating under the assumption that as long as P&L [profit and loss] ratios are intact then they’re OK,” said Lipscomb. “But in the context of an insolvent company, cash is king.”
Allomet Partners began in 1985 and since its inception has handled about 400 engagements all over the country. Lipscomb said they are professionals, as opposed to “the guys who have been through a bankruptcy and now consult on it.” Lipscomb got to know Allomet in 1997 when he was brought in as an outside CFO for a company that was using Allomet for a turn-around project. Since then, he worked for one of their competitors in Dallas and was freelance consulting working with lots of different troubled companies.
One of those was a box manufacturer out of Jacksonville about five years ago. They had made what Lipscomb called a critical error by acquiring a much larger packaging and distribution company. When the marriage didn’t work, they called Lipscomb. “About the only thing they had in common was cardboard,” he said. “Everything else about them was completely different.”
Allomet can prevent problems like that on the front end by getting called in for pre-transaction due diligence, but he said they’re not cheap. Lipscomb said that what they offer, in contrast to traditional consultants, is a heavier focus on culture and people. “The accounting is important,” he said. “But there are always much weightier issues that impact the success or failure of a merger.”
And Allomet’s niche is the middle market. Their clients range in size from $30 million to about $250 million. They also can oversee smaller clients by outsourcing their style of consulting to outside players. “What you get is a smaller dose of us supplemented by additional resources. We handle oversight of the critical issues and ensure quality control,” he said
A common problem that firms like Allomet run into is a question of “Who is the client?” It can be the CEO, the board, the equity partners or the bank. And Allomet’s flexibility in being able to restructure really depends on the situation and the willingness of management to relinquish control.
Lipscomb admits that sometimes there is a lack of perspective.
“We come in and look at a company that is distressed,” he said. “Sometimes management is frustrated at what they perceive as a lack of knowledge about the history of the company.”
But there are operational triggers that are the reasons why Allomet is there in the first place. Usually, inventories are growing too fast relative to sales and accounts receivable is out of control.
“We see situations where companies are borrowing at 50 percent,” said Lipscomb. “They are telling us they just need more time. But usually, time is up.