Cost of Debt and Equity Capital in 2010

Source: Pepperdine University Private Cost of Capital Survey

Pepperdine University, along with research contributor Robert Slee, conducted the first ever private cost of capital survey (PCOC), which was the first survey of its kind to provide information on the capital markets for small to midsized US companies.

They surveyed senior lenders (typically banks), asset-based lenders (ABLs), mezzanine capital, private equity and venture capital as they relate to midsized private companies.

This survey may be useful for your business, as the results highlight the benchmarks that must be met to qualify for capital, along with the required investment returns for the capital providers.

Armed with this information, you should be better able to plan your budget, your ideal capital structure and determine the likely cost of capital in 2010.

We are going to summarize what we think are some of the most important points, but would also encourage you to download the full 67-page survey.

At the end of this email, we provide a link to go to Pepperdine University's website to download the complete survey.

BANKS (Cash-Flow Lending)

Interest Rates

According to Pepperdine's survey, over half of banks responded that their current all-in interest rate (including spreads over prime and LIBOR) is between 6% and 6.5%, with the remainder lending at rates between 6.5% and 7.5%.

44% of loans were refinancing existing debt as opposed to loans for working capital, acquisitions, new equipment and other purposes. While they didn't expect lending rates to increase significantly, most banks expect lending to become more restrictive through the middle of 2010.

ClearRidge: Please take action early in preparation to refinance debt. A major concern is the number of business owners that are going to be surprised by higher loan costs and tighter credit requirements when it comes time to replace debt. That, coupled with declining bank lending levels throughout 2010 will likely lead to liquidity problems for thousands of US businesses.

Fixed or Variable Rates - 38% use fixed rate and 62% use variable rates, of which most are pegged to prime.

Median Credit Ratios

Fixed-Charge Coverage (Min): 1.2

Funded Debt to EBITDA (Max) 3.0

Debt Service (Max) 1.25

Debt to Net Worth (Max) 3.0

Covenant Thresholds

Max Debt/ Total Assets 3x

Min Cash Flow Percentage 125%

Min Fixed-Charge Coverage 1.2x

Max Debt/EBITDA 2.75x

You will notice that these ratios and thresholds are more restrictive than in recent years when many businesses last refinanced debt.

ASSET-BASED LENDING (includes some banks)

Asset-Based Lending focuses mainly on collateral and liquidity; whereas a traditional bank loan focuses mainly on cash flow. An ABL is a loan secured against the assets of a company - mainly inventory and accounts receivable, but sometimes also machinery and equipment, intellectual property or trademarks.

[Banks also operate within this category and sometimes offer a blend of cash flow and asset-based loan.]

Asset-based loans are typically categorized into three tiers depending on loan dollar amount:

Tier 1 loans : >$10M; Tier 2 loans: $3-$10M; Tier 3: <$3M

Interest Rates

According to Pepperdine's survey, variable interest rates in 2009 and 2010 are ranging from prime plus 0.5% to prime plus 16%. For larger loans typically pegged to LIBOR, rates range from LIBOR plus 3.5% to LIBOR plus 6%.

Other fees

ABLs may also have closing fees ranging from 0.5% to 4% of the loan amount; modification fees from 0.1% to 3%; commitment fees from 0.5% to 1.5%' collateral monitoring fees from 0.1% to 12%; unused-line fees from 0.25% to 1%, as well as audit fees, attorneys' fees, insurance, annual and due diligence fees.

ClearRidge: In other words, it's important to look beyond the headline rate and determine the all-in cost of an ABL, which will likely cost you north of 10% and can be as high as 35%.

Over half of Asset-Based Lenders expect prime rate to increase, LIBOR to increase and credit spreads to widen through mid 2010.

Median Credit Ratios

Fixed-Charge Coverage (min): 1.0

Funded Debt to EBITDA (max) 4.25

(compared to bank lending max at 3.0)

Debt Service Ratio (min) 1.2

Lending Advance Rates

Accounts Receivable: 85.0%

Inventory - Low quality: 22.5%

Inventory - Intermediate quality 35.0%

Inventory - High quality 55.0%

Equipment 67.5%

Real Estate 65.0%

Land 50.0%

Firm's Cash Flow 65.0%

Marketable Securities 80.0%

Refinancing accounted for over half of ABLs, followed by acquisition and growth financing. In spite of rising costs, almost every asset-based lender expects demand for ABLs to increase through 2010.

ClearRidge: When traditional bank lending becomes too restrictive or is unavailable, many businesses will turn to ABLs to refinance their debt.

MEZZANINE CAPITAL

According to Pepperdine's survey, all-in interest rates for mezzanine loans are currently running at around 18%.

Mezzanine is most often used to fund a management buyout, growth or acquisition financing, with only about a third for refinancing.

Most mezzanine capital loans would be made to firms with more than $10M in annual sales and for loan amounts between $1M and $10M. One in three mezzanine loans are straight interest, with two thirds comprising interest plus stock warrants.

Pre-funding Median Ratios

Total Debt to EBITDA (max) 3.75

Senior Debt to EBITDA (max) 2.5

Fixed-Charge Coverage (min) 1.2

Median Financial Ratios

Maximum Multiple of Recast EBITDA 4.0

Maximum Multiple of Operating Cash Flow 4.0

Maximum Total Debt to EBITDA 4.0

Maximum Senior Debt to EBITDA 2.5

Minimum Fixed-Charge Coverage 1.2

PRIVATE EQUITY

According to Pepperdine's survey, Private Equity in today's market has an expected annual rate of return of between 20% and 30% on new investments.

Only 7.5% of private equity funds will consider an equity investment of $1M or less, but around 40% will consider an investment smaller than $5 million. Two-thirds are control investments and one third are non-control.

The median targeted equity ratio as a percentage of invested capital in each deal is 41%, with a range between 20% and 50%.

ClearRidge: This equity ratio is in contrast to the easier credit days in 2007 and 2008 when private equity would rarely need to contribute much more than 20% equity to the capital structure.

VENTURE CAPITAL

According to Pepperdine's survey, VCs currently have an expected rate of return on investment of 40% to 43% for each investment they make. However, the average rate of return for realized investments in prior funds is between 24% and 29%.

Below is the Pepperdine Survey's summary of VC investment stages:

Stage 1: 22.5% of VC investments fall into this category.

No product revenues to date and limited expense history, typically an incomplete management team with an idea, plan, and possibly some initial product development. Expected exit by VC in 6.2 years.

Stage 2: 17.0% of VC investments.

Still no product revenue but substantive expense history, as product development is underway and challenges are thought to be understood. Expected exit by VC in 5.8 years.

Stage 3: 17.8% of VC investments.

Significant progress in product development; key development milestones met and development is near completion, but generally no product revenue. Expected exit by VC in 5.1 years.

Stage 4: 28.3% of VC investments.

Additional key development milestones met and some product revenue, but still operating at a loss. Expected exit by VC in 4.8 years.

Stage 5: 10.9% of VC investments.

Product revenue and operating profitability or breakeven/positive cash flows. Expected exit by VC in 4.0 years.

Stage 6: 3.5% of VC investments.

Established financial history of profitable operations or generation of positive cash flows. Expected exit by VC in 3.5 years.

Summary of Capital for Business in 2010

To reiterate what we said in 2009, we would urge you to be thoroughly prepared when it comes time to refinance or recapitalize debt. The credit markets and equity markets are open for business, but it will take better preparation than in the past to get through the loan committee and get your loan approved.

If you need to look at alternatives, raise some capital or replace debt, please give ClearRidge a call and we would be happy to talk through your options with you.

Tax Credits

If you would like to learn about business incentives and tax credits that may be available for your business, you may find the following useful:

www.clearridgecapital.com/taxcreditsoklahoma.htm

Pepperdine Survey

Download a PDF of the full Private Capital Markets report from Pepperdine's website:

http://bschool.pepperdine.edu/research/pcmsurvey/form/

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.

ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

ClearRidge was quoted on likely trends in 2010 for bank lending and business bankruptcy filings.

Matthew Bristow, Managing Director was quoted on bank lending and business bankruptcy filings after a recession in Oklahoma's Statewide newspaper, Journal Record. VIEW FULL NEWSPAPER ARTICLE

Has recession turned into recovery?

October 2, 2009

TULSA – Oklahoma State University economist Russell Evans believes the national recession could bottom out late this year.

BOK Financial Chief Investment Officer Jim Huntzinger is far more optimistic.

“I think it ended at the end of June this year,” said the 27-year veteran of Oklahoma’s largest bank.

Although some national observers agree with Huntzinger, Bob Dauffenbach doesn’t buy it. While he’s seen some indications of improvement, the University of Oklahoma economist expects lingering problems to keep the U.S. recession in a sustained flat bottom well into 2010.

“There’s just a wide, wide variance of opinion about where things are headed,” said Dauffenbach, director of the OU Price College of Business Center for Economic and Management Research.

“You may be having the blue-chip economists forecasting a big rebound, but they didn’t predict the downturn, so why should we trust them?

“It’s just an upside-down world and I fear it’s going to remain so for a while,” he said in a phone interview Thursday. “It’s going to stabilize, but I don’t think that’s the end of the story. My sort of best-guess as to what we’re going to look at for the next two years is periods of positives and periods of negatives. We’re going to kind of oscillate a lot around the lower edge.”

All agree on one thing: When it comes, the U.S. will endure a mild, restrained recovery, with Oklahoma continuing to perform above national standards despite today’s still-low natural gas prices and slowly recovering oil prices.

“Knock on wood, we’ve made it through this recession in pretty good shape,” said Huntzinger.

But several potential time bombs could derail both trains. While rising unemployment brings immediate concern, with Huntzinger and others anticipating national levels could reach 10 percent,many wounded retailers fear the worst from shaken consumers heading into the key holiday sales season.

Looming over those issues are worries concerning the nation’s $700 billion-plus mortgage-backed securities nightmare, rising bank failures and bankruptcies, revenue-stressed state and municipal governments, mounting war debt and military reinvestment costs, health care reform questions and the looming bill for President Barack Obama’s multitrillion-dollar economic stimulus package.

“This has been a very different set of circumstances that have set up this problem in our economy,” said Matthew Bristow, managing director of ClearRidge Capital of Tulsa. “So this could be a very different outcome.”

Those many governmental issues spiking the federal deficit raise what is, to some, the supreme chill of increased taxes – a budget-freezing point for executives even in Oklahoma.

“Clearly taxes have got to go higher,” Huntzinger said in an office interview Thursday. “The medicine we took to help get us through the recession and the economic meltdown one year ago came at a very high cost.

“But higher taxes would be problematic for the economy, as weakened as it is,” he continued. “We’ve got to find some ways around that.”

While BOKF’s executive vice president agrees the national economy’s not out of danger, Huntzinger takes his recovery position from several months of improving data topped by the Conference Board’s leading indicator index.

“They have been up five months in a row now,” Huntzinger said of the 12-element index. “And not just slightly, but rather significantly higher.” While indicators charted by the OU Price College of Business mirror some of that, Dauffenbach attributed some key spikes to Obama’s temporary stimulus, including the Cash for Clunkers program. He fears those improvements may not sustain themselves, as Thursday’s report of declining national auto sales suggest.

“Calling the recession at an end just because you bounced off the bottom is kind of an incomplete picture in my view,” he said. “There’s a lot of cheerleading going on to keep the consumer spending, to keep the consumer borrowing.”

Both Dauffenbach and Huntzinger noted positive movement in both consumer saving and spending trends, although the OU economist said the improvement needs to be stronger. Huntzinger said some of the negative data that continues to churn concerns in the press, such as rising unemployment, reflect lagging results that always trail real economic activity. He suggested national unemployment stats might show continued volatility through next year even as they slowly improve.

As for the number of troubled real estate loans and securities, which some analysts chart at more than $1 trillion, Huntzinger said falling property values have adjusted for many of those problems.

“We’re not out of the woods yet,” he said. “However, I think the market has priced itself appropriately for the magnitude of the problem.”

The lingering credit crunch remains a concern for Bristow, who like Huntzinger feels the economy bottomed out this summer. But his studies of past recessions indicate the nation’s banking system may face a $350 billion shortfall in capital needed for commercial and industrial loans vital to any recovery.

Huntzinger doubted that, although like Dauffenbach, he foresees a muted turnaround on the horizon.

A normal expansion following a recession of this magnitude might lift the nation’s gross domestic product by 6 to 8 percent, he said. Huntzinger expects this recovery to chart at just a third or fourth of that.

That paralleled Dauffenbach’s expectations, as well as an outlook of a midyear economic update issued last month by Evans and Kyle Dean at the OSU Spears School of Business Center for Applied Economic Research.

“The consumer is still overleveraged,” said Huntzinger. “He needs to pay down debt and is already doing so. He has taken the proper steps.”

Bristow’s studies indicate business bankruptcy filings, already up 64 percent in the second quarter from a year ago, could continue to increase two for five years after the recognized end of the recession, dampening any recovery efforts. Dauffenbach fears this may prove true.

Like unemployment statistics, Huntzinger suggested bankruptcies could represent trailing data to economic activity, not withstanding the key recovery role bankruptcies play in recycling capital and resources.

But he understood how the negative public perceptions brewed by that activity hampers consumer and business confidence, which Huntzinger sees as one of two key foundations for a sustained recovery.

All that led Dauffenbach to question the method of defining how or when a recession turns its corner.

“There’s all these different kinds of ways of measuring it,” he said. “One of the ways you can look at it is how long it takes you to return to the prior level of employment you had in the economy at the time when the recession began. From the year 2001 recession, that took 47 months. It took an extended time from the ‘91 recession to return to your previous end of employment.”

Under that standard, with unemployment levels increasing, today’s proposed turnaround could mark a false bottom, or no turnaround at all. Or historians may glance back and consider it a retooling period, when employment standards revised themselves.

Huntzinger expects a sustained recovery to hinge on two factors: improved consumer and business confidence, and how the federal government works through its building funding crises.

“It’s clear that we’ve got to have a plan as well thought-out as it can possibly be to take the economy out of the government’s hands and put it back in the hands of private business,” he said, expecting that to evolve over the next three to five years.

While everything from health care reform to Social Security to military infrastructure will play into how Congress and the president untangle the growing deficit, Huntzinger focused on the still burgeoning stimulus package as a prime foundation for his recovery views.

“In many cases I think it was appropriate for the government to do some of what we did, because we are clearly in better shape today than we were in September 2008,” he said. “So far, so good.

“It was the worst period of extended market conditions that I’ve seen in my life,” he said. “Much of the corporate infrastructure had ceased to operate. That’s how serious it was.”

As one who questioned several of the stimulus policies, Dauffenbach fears these approaches point to more short-term solutions. To the OU economist, the real issue reflects America’s standard of living and economic role in a growingly global economy.

“I think the cure is America waking up to the opportunities of the future, to begin saving again and investing again, making things, drilling the earth for energy and growing the economy,” he said.

“There’s this thing we call the real standard of living that we enjoy in this increasingly global economy. That’s increasingly under debt when you’re the top dog.

“It’s competitiveness, and in the long term, how do we remain competitive in a world economy?” he said. “Those are ultimately the issues we have to examine. Our standard of living is based on the real stuff we consume. That’s the malaise I see. I see us remaining on top, but on a relative sense less so in comparison with the rest of the world. I don’t know what you do about it, except you do what those countries do, which is save more.”

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

New Mergers and Acuisitions Data: Fresh Wave of Equity Capital

Fresh Wave of Private Equity Capital Available
New Data from Preqin, Dow Jones, PwC and IFS

We bring you the latest industrial manufacturing M and A data from PwC further down the page, but we start today with breaking news and data from the Private Equity arena.

The last couple of months have seen private equity firms stepping up their marketing efforts to source new investment opportunities.

In response to the growing number of calls and emails we have been receiving from private equity firms, we thought we would dig into the numbers to see if the latest industry data confirmed our observations.

Dry Powder = Fresh Capital

According to Preqin, a London-based research firm, the global private equity industry's dry powder (uncommitted and available cash to invest) currently exceeds $1 trillion, or $1,000 billion.

So, the next time that someone tells you there is little money available to invest in companies, you can let them know that there is over $1,008,000,000,000 fresh cash currently looking for a new home.

Where has the money come from?

The principal investors (known as limited partners) are pension funds, university endowments, foundations, hedge funds and other investors who have continued to invest in new funds.

First Half 2009 Investment Levels

A report published on Monday by International Financial Services in London, estimates that only $189 billion of private equity was invested in 2008, down by 40% from 2007 (we picked this up from today's Financial Times blog: ft.com/alphaville).

Investment in the first half of 2009 was estimated to be down 80%, representing a 12-year low.

The chart below speaks volumes.



Look at the huge dollar difference between funds raised and funds invested.

US Private Equity has largest share of cash

According to Prequin, the US accounts for $609 billion of the $1,080 billion in dry powder, with the rest of the world sharing the remaining $471 billion. Of the $1,080 billion, $507 billion is specifically for acquisition targets, $194 billion for real estate and $153 billion for venture funds.

Returns for Private Equity

Returns for Private equity as an asset class are down 27.6% year-over-year, which reflects the impact of poor performance of the broader economy, bailouts, bankruptcies, credit tightness and company collapses.

It is important to note, however, that short-term performance has not dampened investor confidence in the sector. Most Private Equity investments will ride through the storm with a longer time horizon than other investments (typically 5 to 7 years).

New fundraising levels

According to a recent Dow Jones study, during the first 6 months of 2009, 179 private equity funds raised "only" $55 billion, 64% less than the $153 billion raised by 261 funds during the first half of 2008. The additional $55 billion joins the mounting pile of fresh cash.

Impact of Tight Credit Markets

Average debt levels in buyouts fell to 42% in 2008 from 47% in 2007 (the lowest level since 1994).

Banks have been more reluctant to fund leveraged buyouts with higher debt leverage and are also reluctant to offload distressed assets unless absolutely necessary.

Although banks continue to be the largest lenders to private equity firms, $500 billion in loans are due to be refinanced in the next few years, so other participants will be able to pick up some of that debt.

Best time to invest + Wave of fresh capital

Historically, private equity has made the highest returns from buyouts made through the down cycle.

Most firms are anxiously looking for healthy acquisition opportunities to deploy their cash and there is significant competition for investment opportunities in attractive middle market companies.

ClearRidge recommends that you consider planning the sale of your company if it has performed comparatively well through this down cycle. There are myriad creative ways to structure a deal to ensure you get a fair sale price for your company today and also benefit from upside over the coming years.

Sources: Dow Jones, Preqin, International Financial Services, Financial Times blog (ft.com/alphaville)

Industrial Manufacturing M and A Activity - PwC Update

Getting down to more industry specific data, PricewaterhouseCoopers released their latest "Assembling Value" quarterly report this week on Mergers and Acquisitions in the Industrial Manufacturing industry.

Relevant highlights are below:

Decrease in number of deals as well as their value

• Overall number of US deals declined from 27 in 1H2008 to 7 in 1H2009 for deals worth $50 million or more.
• Overall value of US deals worth $50 million or more has declined from $8 billion in 1H2008 to $1 billion in 1H2009, representing a decline of 88%.
• Average deal value during 1H2009 was $129 million versus $268 million in 1H2008, representing a 52% decline.

Decreasing Financial Investor Activity

• US-based private equity firms raised $55 billion in 173 funds in 1H2009, representing a 64% decline compared to $153 billion raised by 261 funds in 1H2008

US as a Proportion of Global Activity

• Deal Activity is still largely driven by North America, which accounted for 27% of all first half 2009 worldwide deals with a transaction value of $50 million or more.

Click the link below to download the full 24-page report:
PWC Report

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

Maximizing Enterprise Value as a business, financial and strategic advisor to midsized US companies.

ClearRidge’s Directors have completed over 200 M and A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies.

Restructuring includes financial, operational and strategic restructuring.

Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

We provide top tier advice and relationships with Middle America values.

BOA Business Capital Provides $55 Million to ClearRidge Capital Client

Bank of America Business Capital provided a $55 million senior secured credit facility to ClearRidge Capital’s client, a lumber and manufactured wood distributor. The asset-based loan is being used to refinance existing debt. ClearRidge Capital acted as advisor for the transaction.

"Bank of America Business Capital structured an asset-based loan that will help us reduce operating expenses given the state of the residential construction industry,” said Cedar Creek’s D. Wayne Trousdale. “We now have financing with fewer, less restrictive covenants and greater financial flexibility.”

“Because of its knowledge of the industry, experienced ownership and strong management team, Cedar Creek has a long-standing record of profitability.” said Bank of America Business Capital West Division Executive John Mostofi. “We were able to structure an asset-based loan that reflected the client’s financial strength and refinance their credit facility with more favorable terms.”

Headquartered in Tulsa, OK, Cedar Creek, Inc., is the seventh largest lumber and manufactured wood distributor in the United States. Cedar Creek has provided premium wood products to building material dealers in 15 states for more than 30 years.

ClearRidge Capital maximizes enterprise value as a business, financial and strategic advisor. ClearRidge’s Directors have completed over 200 M&A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the United States and Canada. ClearRidge provides Restructuring, Mergers & Acquisitions and Corporate Finance services to middle market U.S. companies.

Bank of America Business Capital

Bank of America Business Capital is one of the world’s largest asset-based lenders, with more than 20 offices serving the United States, Canada and Europe.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

Resizing a Business in a Downturn

Resizing a Business in a Downturn

Taking Positive Action to Add Stakeholder Value

We are all looking for some good news right now and the subject of this letter suggests the theme is negative.

Opposite.

This is a wake up to take positive action and encourage others to do the same.

"In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing."

- Theodore Roosevelt

The most successful businesses are those that anticipate early and react to changes quickly.

In good times, that may mean investment in hiring, expansion, new product lines and new geographies.

In tough times, that may mean resizing the business, slimming down operations and focusing on cost controls, debt and creditor relationships.

There is no way to tell if the economy has bottomed out, but we do know that eventually it will bounce back. When it will happen, how it will happen and what the new economy will look like is the million dollar question.

Even without that information, you should be taking positive steps to ensure that your business survives and thrives.

In this article, we will consider 9 Success Factors to downsize your business, look at socially responsible ways to increase loyalty and performance and look at Restructuring and Reconditioning.

Please keep emailing us your questions and suggestions for articles you would like us to cover. Please also follow this link to sign up friends or colleagues who you think would like to receive ClearRidge emails.


10 Success Factors to Downsizing your Business

To start with, we need to remember critical lessons from previous downturns: trust, reputation and communication. The community, customers and employees will judge your business on its behavior during these tough times.

1) Redesign the Organization to Create Value, Not just to cut costs
Revenue growth covers the flaws in an organization's structure and business model. If a company is failing, because of poor strategy, firing employees doesn't fix the problem. You'll lower payroll costs, but still have the same problems.

2) Consider Tactical Improvements
Hiring and pay freezes, reduce travel, re-evaluate all departmental budgets, reduce discretionary spending, reduce other identified SG&A costs and make incremental process improvements.

3) Get more value from your employees
Identify areas to improve efficiencies in the business operations. Create standard operating procedures. Create Key Performance Indicators. Incentivize each employee to create new ways to improve their department's efficiency.

4) Improve openness and communication during downsizing
Now is the time to be clear, open and honest about your intentions and reasons for the changes. If you withhold information from your stakeholders which include your employees, misinformation will prevail. More often than not, the rumor mill will be worse than the real story.

5) Involve mid-level and lower-level managers
If they participate in the downsizing process, they are more likely buy into the process and more likely to communicate a positive story and effectively implement the new plan. They are on the front line and have valuable knowledge on the workings of the operations. Encourage them to challenge your plans, but mandate they provide an alternative solution.

6) Think carefully about which employees to let go.
A percentage cut across the board does not fix the problem. Carefully select those to go and create increased responsibility, increased opportunities and increased efficiency for those who remain. Everyone needs to feel like a team to pull through the tough times together.

7) Give advanced notice or severance pay
This may cost more in the short-term, but those still working for you need to understand that you will look after them if the worst happens. Again, make your employees feel as safe as possible about what the future may hold.

8) Tell employees in person
Losing a job is humiliating and hurts an employee's confidence and pride. Be considerate in how you communicate layoffs. Your employees will judge you on how you treat their former co-workers. Moreover, at some stage in the future, talent may be scarce again and you need to be the employer of choice to attract ex-employees and new hires.

9) Consider alternatives to layoffs
Reduction of hours, redeployment to another employer, job redesign, or partially paid sabbaticals with benefits and contributions.

10) Time to be a responsible leader
If the time has come that you and other stakeholders would be able to make better choices with the assistance of experts, it is time to make the call. Consider the value of being able to brainstorm with experts who have been through troubled business situations many times before. Consider how much value they can bring from lessons they have learned. It takes confidence and strength of character to ask for help, but sometimes it is the smartest, most responsible and valuable course of action.

Being Socially Responsible Increases Loyalty and Performance

Few companies will avoid the need to reorganize, restructure, downsize, acquire, divest, outsource or enter into joint ventures. For most industries and most companies, if the recession has not already caused a significant decline in demand, it almost certainly will at some point. For some companies, the worst may be yet to come.

If you need to resize your company, you need to think about how you are going to make the cuts and how you will deliver the news to stakeholders in your business. The process of change can determine the success and long-term benefits of the restructuring process, as much as the substance of what is actually done.

There are positive steps you can take today to ensure, not only that you can pick up market share while other companies fail, but also structure your company so that you exit the recession on a firm footing, in a lean condition and ready to accelerate revenue growth and improve your margins.

Points to remember:

* Show commitment to stakeholders (including employees) and you will reap the rewards when the economy turns around.
* Consider the values of your own company when making tough decisions.
* Focus on MAXIMIZING VALUE for all stakeholders.

Restructuring and Reconditioning

If you owned a sports franchise and your team had just won the championship, you should spend your off season analyzing why you succeeded last year and finding new ways to improve next year.

Your athletes need to train even harder in the off season to win by a higher margin next year.

Maintaining last year's performance does not win championships. You need to improve every year.

Whether or not you have made tactical improvements in recent years, you need to spend some time considering tactical changes that can and should be made. You are playing a different game on a different field. You need to make wholesale changes to adapt to the new game.

Remember that doing nothing can quickly lead to failure. You need to consider every option you have open to you and brainstorm every structural change that you could make. Talk through all of your options and ideas.

You need to be able to make changes for the sake of your company and for the sake of your employees.

You need to be able not only to survive, but also to outperform your competitors during a time of reduced volume.

Out of every recession, new market leaders will emerge. There are always a few surprise winners and a few surprise failures. If your company fails, everyone loses except your competitors.

One thing is critical. You need to Act Now. Structural changes can start delivering changes immediately.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

4 Myths About Restructuring Experts

What is the role of a restructuring expert?

To step into a Company that is in crisis, force some layoffs and slash costs? No. No. No.

Restructuring is a word most business owners want to avoid, yet ongoing restructuring processes are central to the success of the world's best companies.

Unfortunately, media coverage has associated restructuring with failure, but if implemented appropriately and before a company gets into trouble, can be a key to long-term success.

Myth 1 - Fancy Plan and Walk Away

Restructuring professionals come up with a fancy plan, take a fee and walk away. Not True.

First of all, qualified restructuring professionals are usually Certified Turnaround Professionals recognized by the ACTP and are members of the Turnaround Management Association.

To achieve this designation they have met the rigorous requirements of education, years of experience in the field, completed exams to confirm their technical knowledge, submitted case studies from successful engagements, passed interviews, a screening process and have had professional references verified.

Secondly, CTPs like to be referred to as resultants versus consultants. Meaning results are achieved as opposed to just being talked about. Walk the walk versus talk the talk.

CTPs have proven operating experience in most aspects of business from finance and accounting to manufacturing and distribution to sales and marketing.

If the company owners and senior management are willing and able to acknowledge the need for unbiased expert advice, an independent restructuring professional is much more likely to drive success.

Owners and Senior Managers understand their industry, employees and their company better than anyone.

Restructuring professionals bring experience and a track record from countless real-world companies, where their solutions have delivered long-term health, growth and profitability.

Collaboration between managers and a restructuring professional delivers fast, effective and long-lasting results.

Restructuring professionals provide the leadership, processes and day-to-day decision-making needed to lead the development and implementation of a restructuring plan.

Myth 2 - Restructuring Always Involves Layoffs

Not true.

Restructuring begins with a thorough understanding of the current processes and utilization of resources (people and assets), including technology. The Restructuring plan will include changes in the business' operational model only in areas that increase the leverage of all of these resources to maximize value for the business enterprise.

Areas in the business model that are consistent and repetitive should be standardized and processed with technology to maximize efficiency.

This frees up time for the existing employees to be more focused on adding value with customers, vendors, and other team members with support and training.

It is true that if the company has failed to operate a lean business model, that layoffs are possible, but that is the decision of the owners and senior managers. It is not the goal of the restructuring professional. Employees are the lifeblood of the company.

Remember.
The most successful entrepreneurs are those constantly looking for ways to improve their Company. Restructuring is a cost-effective and integral part of the process.

Myth 3 - Too Expensive

Not true.

Too expensive is a relative term. Doing nothing may be catastrophic. You could lose your company if you live in denial and ignore financial, operational and strategic problems. Waiting too long to engage a Restructuring Expert will cost you far more in the long run.

Having said that, you should only engage a Restructuring Professional if you feel confident that they will be able to add enterprise value far in excess of what it costs to hire them. If it costs $25,000 to add $250,000 to the bottom line, you got a great deal.

There are going to be many firms starting up as a result of the financial crisis. You should take your time interviewing a restructuring professional. Seek professional references from banks and attorneys who have hired them to help their clients and have them explain how their process could work for your company.

For a successful restructuring process, you want the experience of professionals who have successfully completed many restructuring projects over many years. It is a specialized skill and requires a specialized expert to add real and lasting value.

When you have researched and chosen the best firm for your company, it is time to be clear on what they need to achieve.

Ask your restructuring expert to detail in writing everything that they hope to achieve for your company.

In addition, you may want to carve out some of their fees into performance-related incentives. If you align their pay with your goals, then they will have additional incentives to perform.

Myth 4 - Only a Short-Term Solution

Restructuring is just financial engineering and it will only have short-term effects.

Not true.

Financial Restructuring is only one part of the process. It is, however, critical to the long-term success of your Company.

If your Company has too much leverage or fails to meet the earnings covenants in your Credit Agreement, then the restructuring of your Balance Sheet is required. This involves evaluating all of your Company's Assets, developing and executing a plan of action to increase the Asset turnover ratio and improve your company's liquidity.

Debt must be evaluated with a plan of action to reach a debt level that can be serviced and remain within negotiated covenants. This can involve bringing in equity capital, negotiating haircuts with lenders as well as negotiating deals with vendors to inject capital back into your business.

A quality restructuring of your Balance Sheet will position your company not only to survive, but to thrive for many years to come.

If you want to learn more about how Restructuring Experts could add value to your or your client's Company, please call our office in Tulsa at (918) 392-2900.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

www.ClearRidgeCapital.com

Lessons from Troubled Companies - 5 and 6

LESSON 5 - ACCOUNTS RECEIVABLE

The Business Cycle is not complete until you collect the money. Sales and Gross Profit can be extraordinary, but if you do not collect the money you can't pay the bills or make payroll.

Accounts Receivable management requires not only that your company has discipline, but also that your customers pay on time. The temptation to be flexible with customers is greatest when sales are stagnant and competition is high.

Many management teams of troubled companies are pursuing revenue growth so aggressively that they fail to enforce payment terms on certain customers, and they may even take on customers who are trying to avoid tough credit policies with their competitors. Guess which customers are most likely to default on their credit.

Many companies borrow against or factor their receivables to shorten their A/R turnover (sale to cash days). The importance of prompt collections does not go away. Generally, businesses can only borrow 85% of their receivables that are not more than 30 to 60 days past due. The business then incurs the interest charges and is still burdened with the delinquent dollars.

Successful companies have a strict credit policy and they begin from Day One with firm and consistent application of this credit policy. The truth is that your customers will have more respect for your company if you maintain your discipline.

Your A/R discipline is a reflection of your company's ability to deliver and perform on difficult tasks and in tricky situations. Failure to follow this discipline registers with many customers and competitors as a sign of weakness. Short-term success may be followed by failure in the long term.

LESSON 6 - DEBT

In today's tough business environment, too many businesses are drowning in debt. Companies may have industry leading profit margins, but with leveling or declining revenue growth these companies are struggling to cover their interest costs and debt service requirements. As discussed earlier, many companies, especially start-ups and troubled companies, must determine how much debt is the cap. If you're burning cash too fast and you have to float more debt or raise more capital, then start back at lesson number one and read the lessons over again. There are underlying issues that need to be cured.

All successful businesses have a fundamentally sound, effective, and efficient finance function. Whether a company is an early stage company or a mature company in a consolidating industry, the basic financial scorecards must be kept and studied. Troubled companies' management teams are usually in denial when it comes to the financial trends and scorecards.

If all of this sound likes the basics of business, it's because it is the basics. Unfortunately, there are too many CEOs, CFOs, and Management Teams that do not maintain the intense and persistent focus that is necessary to build and sustain a successful business.

Bankers, private equity professionals, successful CEOs and CFOs are fundamentalists. They guard cash as if the business' life depends on it. They develop and study the business plan and then challenge the assumptions that the Company's success hinges on. They hold the management team accountable for the development and execution of sound cash, operational, and CapEx budgets.

Before they invest or loan funds, they are confident in the quality and commitment of the Management Team, feel secure that the business has adequate HR and technology resources, efficient systems and processes, and they are convinced that there is a viable core business purpose within the industry or marketplace. Every business owner would be well served to employ the same discipline and best business practices on a day to day basis.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.