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Stride 2 Freedom Speaker Series: Sometimes You Just Have to Work It Out!

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Today on the Stride 2 Freedom podcast, we sat down with Alan Chaffee, the Founder and CEO behind Turning Point Consulting, to talk about how businesses can best prepare if they are going to have a run-in with their banking partner (e.g. breaking covenants). While Turning Point is an expert in turnaround situations, they also provide fractional finance leadership (CFO level support). Turning Point is based in Seattle, Washington and I’m proud to highlight their great work on this podcast.

Firms like Turning Point are here to support small to mid-sized businesses, bringing stability and clear-headedness in times of turbulence and showing a path forward toward financial health. And of course, this year many of us are feeling the heat. Alan and his team have done a great job acting as an ally for their clients that find themselves breaking bank covenants, helping them work out solutions with their lenders. So today, we want to help you understand how you can put a plan in place and ease both you and your bank’s nervousness.

In many cases, clients come to Alan and Turning Point to fix key problems surrounding a failure to execute their business plan. Whether they have yet to execute it or the business plan isn’t thought out very well, somewhere in the midst of forging ahead they’ve failed to achieve what they set out to do in the first place–and now the bank is knocking on their door. From there, the goal is to rebuild trust between the company and the bank, and that’s where Alan’s team works their magic: finding ways to increase cash flow, increase communication with lenders, rebuild trust, and find a solution that works for both parties.

For business owners, it’s a no brainer that having a steady relationship with your bank is incredibly important… but it’s fair to recognize that when the weight of financial stress weighs in, owners can become overwhelmed and lose sight of where they need to refocus. But understanding how to build and maintain a healthy relationship with your lenders is a skill every business owner should have in their tool belt. Enjoy the episode!

Who should I interview next? Please let me know by clicking here.

 

In this Freedom Speaker Series episode with Alan Chaffee, you will learn:

 

  • Why it’s important to build rapport with your lenders
  • How to build trustworthiness and maintain a good relationship with your bank
  • What you need to know about navigating financial relationships in the Covid-19 era
  • Why developing a great CFO is especially important to business financial health

Listen Now
 

We are fortunate to have Alan available to spend time with us on this edition of Stride 2 Freedom. If there is a speaker you’d like us to interview, click here and let us know. Stay well. Stay safe. Stay healthy.

Show Notes and Links From Episode:

Alan Chaffee LinkedIn
Turning Point Consulting

 

Episode Transcript:

Russell Benaroya: Hey, everyone. Welcome to the Stride 2 Freedom podcast. My name is Russell Benaroya, and I’m the co-founder of Stride Services, a virtual back office, bookkeeping, and accounting firm serving hundreds of clients around the United States.

This podcast is designed to help small business owners focus on growth and innovation. In other words, focus on those things that inspired you to start your business in the first place. We call it your genius zone. We do our job on this podcast when business owners feel like they have the trust and confidence to build the right team of partners around them that will help them grow. Thanks for joining. Let’s go.

This week, I’m excited to welcome Alan Chafee to the Stride 2 Freedom speaker series. Welcome, Alan.

Alan Chaffee: Thank you. Glad to be here.

Russell Benaroya: Alan is the founder and CEO of Turning Point, a fractional finance leadership, CFO, and turnaround specialist based in Seattle, Washington. I have watched Alan and his team over the years do some amazing work to support businesses trying to get a handle on their financial infrastructure. They have also been an ally for companies that are finding themselves breaking bank covenants and need to work out a solution with their lender.

Alan is a strong partner for businesses because he thinks and acts quicker than anybody I’ve ever met. I can see in the eyes of his clients, he gives them such trust and confidence that he has things under control. I’m excited to learn more about Alan today and Turning Point. Let’s just jump in. Thanks so much for joining us. Pleasure to have you, Alan.

Alan Chaffee: Thank you.

Russell Benaroya: If you would start out by telling us a bit about who you are, a little bit of background on Turning, why you even started this business in the first place. What was the problem to solve that you didn’t see existing in the marketplace?

Alan Chaffee: This is my second iteration of it. I started the business in 2000 by buying a CPA firm here in Seattle. I had spent 10 years of my career as a CPA working for Coopers and Lybrand and some other private companies, in businesses that were in distress. Some of those were by accident, and some of them were intentional. The idea was to find a local CPA firm to do the consulting to the middle market, the way that the Big Four or the Big Six were doing consulting to the Fortune 1000.

I knew that the CFO at the Fortune 1000 has a completely different job than the CFO in the middle-market company. At the Fortune 1000, they are managing stock price, shareholder relations, large contracts. At the middle market, what are we managing as a CFO? We need to work on those things that create success, operationally, that reach the financials. At the middle market CFO, I am working on operations, cost management, systems, people training, banking, cost of equity. We’re doing a completely different role and there was nobody focused on it. In 2000, I wanted to bring that skill set to the middle market.

Russell Benaroya: What you’re saying is that didn’t exist out there. Was the market receptive to your offer? Did you have to do a lot of education and evangelizing to help people understand that this is what you do?

Alan Chaffee: It’s hard to tell our staff today that 20 years ago, when I’d say, “I want to come in and be an outsourced CFO,” and that time it was like $150 an hour, a third of what we charged today, people would say, “I’m not going to pay you to do debits and credits for that.” In the beginning, it was a little hard. One of the things we have really developed is the niche in the turnaround of distressed businesses.
Part of that was, not only was that my background, but I could also get my rates of fees there because they really need our help. We always earned our fees by convincing them that paying us that level for our services was not always easy in the beginning. Today, fractional CFO is everywhere and people understand why they do it.

Russell Benaroya: Talk about that dynamic and that turnaround situation. What’s typically the circumstance? What is the profile of a company that typically finds themself in a situation where they’re having to negotiate with the bank? Who brings you in? How to how does it unfold?

Alan Chaffee: There’s a common thread in the 20 years that I’ve been doing this, 95% of clients that come to us, the common thread is the failure to execute. Whatever their business plan is, they have not executed to it, or the business plan isn’t well thought out, and they fail to achieve what they set out to do.

Generally, the bank calls them up and says, “Dear borrower, you have tripped covenants, or we’re unhappy with the state of your business.” It could be as simple as just reporting, all the way down to they can’t make payroll tomorrow and the bank won’t lend them capital. Often, they give three names, but usually, they emphasize one. “We want you to hire Turning Point, but in case you don’t like them, we’ll give you these two other companies to talk to.” Then the client is forced to hire us.

In the beginning, banks were really nervous about it because of lender liability. That’s still out there but they’re not as nervous as they used to be. We are an engager right now for KeyBank. Key wrote us into the contract, “You will hire Turning Point or we will not give you forbearance.” They’re a little more aggressive today than they were 20 years ago.

Russell Benaroya: What is the bank expecting you to accomplish?

Alan Chaffee: First and foremost, they want somebody they can trust. When you have tripped your covenant and the banks call you up, most entrepreneurs or CEOs get upset and say it wasn’t their fault. The bank says, “You need to put money in or take a home equity loan or you need to cut costs.” The entrepreneur says, “No, I don’t want to do that.” That relationship gets very entangled, vendor fatigue happens. They don’t want to hire us at first, but they don’t have a choice.

Russell Benaroya: Is your role then to play that middleman around communication? Is it to help put in some operational changes at the business? Is it to negotiate with the lender?

Alan Chaffee: First and foremost, is to create trust between the borrower and the lender. We step in between the two of them. Often, our client, the entrepreneur never talks to the bank again, or if they do, everything has been negotiated. We’re going to sign a forbearance or we’re going to do that whatever steps are next. They have a short brief phone call with me on it monitoring what’s happening.

Our role is to come in and tell the bank what they need to know. We always put in a 16-week cash collateral budget. We re-forecast the business all the way through the balance sheet so everyone has clarity on where we’re going and how bad it’s going to be. The next thing we do is we take our operational experience and we put in a restructure plan. Generally, we cut costs, take payroll dollars down, eliminate facilities.

The next thing we do is we try to squeeze the balance sheet for cash if there’s anything left. Even in this most recent COVID, I see all these articles out there saying that cash is king, pull in your AR, and stomp on your trade payables. That’s common sense stuff that every entrepreneur knows. Most of that’s already happened. They’ve called all the customers who were late paying and tried to get them to pay, they’ve not paid their trade vendors at all, they’re trying to skip their lease payment on their facilities. That’s already happening.

What we’re trying to do is get beyond the basic stuff that’s got common sense, and figure out how we can improve cash flow first, increase communication with the lender, and create a level of trust in what’s happening. Find a solution, whether that’s a new bank or keeping the same bank in place, and then execute the plan.

Russell Benaroya: Banking relationships often start in a very relation-oriented manner. You get to know the bank, you build a rapport, build some trust. What it sounds like is that in circumstances like those where you get called in, it turns from relationship, open dialogue, and communication to being pretty transactional. Is that true?

Alan Chaffee: The relationship is usually hostile. As the borrower gets in trouble, especially if their line of credit is tied to 85% of AR, or they lose a major customer, sales go down and they can’t support the million-dollar line they have, they don’t tell the bank, or they know they’re in trouble so they draw the line completely down. That’s the first thing. Then the RM gets in trouble with his credit administration because he didn’t know.

Russell Benaroya: RM is the Relationship Manager?

Alan Chaffee: The person that the borrower talks to every day. Now everybody’s tense and uptight. The relationship has moved from how do we help you grow and support your business, to how do we get our money back? The relationship is gone All the banks, when we come in, our number one mission is, “Get us out paid in full and do it fast.”

Russell Benaroya: If the borrower had been more proactive and said, “This is the circumstance,” would the bank have been more accommodating or not? Was the borrower right to be anxious about disclosure?

Alan Chaffee: I think the borrower’s right to be anxious about disclosure, but I don’t believe that they should not communicate with the bank. Every banking agreement has a material adverse change clause. People call me all the time and say, “This is going to happen. I don’t want to tell them because they’re going to freeze my line and I won’t be able to make payroll.” My answer is, “Put a plan in place. Tell them how long it is before you cure the default and ask them to work with you.” If you do that in advance, 9 times out of 10, the bank will work with you. If you surprise them and you don’t have a plan, they’re not going to work with you. Generally, they’re going to ask you to find another lender.

Russell Benaroya: Take the exogenous event of COVID-19 and the environment that we’re in and variables that no one could have anticipated, which has had a material impact on many businesses and their credit facilities. What is the approach that banks are taking in general, given what has transpired? Are they just operating under the rules and provisions of the agreements that they signed?

Alan Chaffee: That’s a good question. Part of the CARES Act, section 4013, and the Interagency Memo written by the FDIC to encompass the Treasury, FDIC, and the SBA, allowed banks to do up to six months of modified loan program. If you tripped covenant because COVID, let’s say you own commercial office space and nobody’s paying rent because they’re in trouble, they will give you up to six months. It’s called a modified program. They can’t do more than six months. They can do that without putting you into special credits. They call them TDRs, total debt restructuring. They can do that right now.

That’s what most banks have done. They’ve allowed people to skip payments, they’ve allowed them to trip covenants, and they’re not doing anything about it. They’re just watching them. The genesis of the interagency memo says to the bank, “Use common your sense. We’re not going to force you to do anything right now.” Before COVID happened, they’d force you. If someone was stripping covenants, you have to take action, you don’t have a choice. Now they’re saying, “We’re going to allow you. If you think this would be cured once we come out of COVID, then you don’t have to do anything. You just modify the program, you don’t even have to tell us.” You can only do up to six months, and it has to be over before 12/31/2020. You can’t go beyond that.

Wisdom is telling everybody that they’re probably going to extend that but that’s not what’s happening right now. Most banks have done nothing but put them on a watch list. I’m talking to special credits at a number of super-regional banks. They’ve got them listed. They’re watching, and they’re gearing up. I got an RFP for a National Bank that said, “Tell us how much capacity you have and what your rates are going to be and what your specialties are because they’re queuing up for this.”

Russell Benaroya: How do you think this is going to unfold as your tone would suggest?

Alan Chaffee: I think it’s going to be tough. I think there’s going to be catastrophic failures.

Russell Benaroya: What’s the profile of businesses that you often see? Are these $5 to $10 million revenue businesses, $100 million across the board?

Alan Chaffee: Our typical client today is 25 to 50 million. We have some over 100 and we have a couple that are around 5 million that are well funded. I think this is going to be agnostic in terms of who it hits. It’s going to take companies out at all levels. We just saw Accenture is laying off a bunch of people, which tells you that their clients, which are the Fortune 1000, are disengaging from them. Avanade, the Microsoft-Accenture partnership is laying off a bunch of people.

In the beginning, it was lots of smaller companies who immediately shut down all payroll until the PPP program came out and they’re trying to bring them back. Now we’re seeing the firms that support the Fortune 1000 doing massive layoffs. It’s going to be tough.

Russell Benaroya: What advice would you give to smaller mid-market clients that are watching this impending date and need help? What can they do today? Call you? Get in touch with their bank? Work on a new plan? What are the top three things they should be doing?

Alan Chaffee: Work on a plan. I believe you should have a 12 to 18-month financial forecast through balance sheet cash flows with supporting schedules. You can have three levels, which is a V-shaped recovery and we’re going to be back in business by September-October, everything’s going to be returned the normal. Otherwise, L-shaped and it’s going to be June 2021 before it comes back and somewhere in between that. Have those plans and be thinking about the worst case.

What we saw in the 2008/2009 collapse, a lot of companies whittled at it. They whittled their cost structure. By the time they got down to where they should have been in the beginning, the bank was fatigued with them. The employee culture was wrecked because they had four rounds of layoffs and no one knew what was safe. They were out of cash because they took too long to get there.

This time, what we’re telling everybody is assume the worst, you can always come back. That’s what I think people should be doing. We need to be looking at the ugly in the eye and making plans around that because we can always recover. The chances that this is going to be better by September I think are pretty slim.

Everyone should be cutting hard, communicate with your bank. If you haven’t gone in yet for a modified loan program, be looking at doing that. If you lease a building and you haven’t asked for rent abatement, no matter what the state of your business is, you should be doing that. I guarantee you, these large reads aren’t making payments on their debt. They’re taking advantage of the modified loan program. At this point, it might be three months into it, but they have done it.

Russell Benaroya: You are a business owner and an entrepreneur just like your clients. Of course, you need to come to the table with some level of IQ. I’m assuming that you also have to come to the table with some level of EQ to help them somewhat emotionally through this roller coaster. What role do you play there and how do you want to be perceived?

Alan Chaffee: Good question. All of my clients yell and scream about the bank. They’re emotional. Their livelihood is at stake. What they’ve invested their heart and soul in, their business is at risk. They’re always very emotional. I’ve got two receiverships going now that are extremely tough because these people in business 30 years, they’re completely wiped out. The bank, of course, is putting pressure on them because there’s probably not a path to recovery. It’s very emotional. My role is to do my best to clear away all the emotional drama that’s happening to them and try to find the path forward.

Russell Benaroya: How do you do that?

Alan Chaffee: 20 years of doing it. I’m a really good listener. I pause before I talk to them and I’ll say, “I hear you but and that’s really important, but now we have to focus. We’ve got to solve this problem right now.” I understand that that’s happening. Just listening, acknowledging the fear, the disappointment, and staying focused on the transactional stuff you need to do to get to the next step whether it’s a liquidation or coming out of it.

Russell Benaroya: It’s so nice to know that you’re out there and that your firm exists. In a perfect world, would you want companies to be proactively reaching out to you directly? Does that happen or are you usually brought in because the bank dictates it?

Alan Chaffee: Usually brought in by the bank. Early in February, before this hit, we were looking at where do our clients actually come from. Honestly, it’s only about 40% that come through the banks, which is 80% of our revenue. As you know, I have lots of relationships in the business community in Seattle. I do get lots of referrals from other business owners, but they’re generally a smaller project. It can happen both ways.

What I know is people don’t Google “Can’t make payroll, bring up Turning Point”. That doesn’t happen. It has to come from somebody who they trust, that knows that we can do good work for them.

Russell Benaroya: Without mentioning a particular client, I’d love to hear an experience you’ve had where a client, after all is said and done and you helped navigate them through this period of angst and restructuring, where they really thanked you and acknowledged you and appreciated you. Does that happen?

Alan Chaffee: It happens all the time. I had a client that Sterling Bank in 2013 brought us in. They went to count inventory in the warehouse. The book said 2.5 and they found 1.2 million. They had already lost about a million dollars. They’d reported a million-dollar loss, their bank was already on the watch list. Then they had to tell the bank, “Actually, we lost 2.6 million when all the other adjustments were made.” The bank quickly put us in within 24 hours of them reporting to the bank and they were hostile. The CFO won’t even talk to me.

I just beat my own drum and ignored that anger. “Guys, here are the steps. We need a cash plan. I need to forecast. I need to figure out what happened to the inventory. Was it intentional? Were you bearing costs in inventory to hide them from the bank?” At the end of that process, 12 months later, the owner gave me ownership in this company. I’m still there today. They are $120 million and they were $27 million in revenue in 2013 on the verge of bankruptcy.

In that case, I got the bank to hold tight. Usually, when they have a big event like that, banks want out. They weren’t happy about it. I got them to hold tight and the bank stuck with them. Today, they’re still growing. Even in this COVID environment, they’re still putting more to the backlog than they’re shipping out the doors. The business is still growing.

Russell Benaroya: Wow, that’s a great story. What is something that you wished people would ask you about Turning Point and what you do and why you do it, that they don’t typically ask that you would like to share?

Alan Chaffee: Good question again. I tell you what our focus is, it’s not doing client work, although I think we do a pretty good job at that. It’s about creating great CFOs. My mission is to take these young CPAs who don’t want to sit behind a desk and produce financial statements that no one reads, but who want to make a difference. They don’t want to do tax work, which is just compliance. Certainly, there’s a lot of value in that, but I want CPAs who want to make a difference operationally. We bring those in. Today we’re at 23 employees and I teach them to be great CFOs within the market. I want my legacy to be that we made great CFOs in the middle market. If I do that, our clients get taken care of.

Russell Benaroya: Awesome, Alan. That is a great place for us to end. If people want to get ahold of you, are you comfortable, I’m going to include your email address and website on our show notes?

Alan Chaffee: Yes, please. Thank you.

Russell Benaroya: Awesome. Thank you so much for joining us today on this edition of Stride 2 Freedom. We wanted to talk financial leadership with a specific angle on turnaround situations. You’ve certainly given me a lot to think about. I’m grateful to better understand your business. I’m more grateful that companies out there know that you exist. As they’re looking at their alternatives in a period of uncertainty, that you’re there to help play a go-between between them and the bank, which is super valuable.

Thank you, everybody, for spending time with us on this episode. Alan, thank you for joining us for this edition of Stride 2 Freedom,

Alan Chaffee: Russell, thank you very much.

Russell Benaroya: Such a pleasure. Have a good day, everybody.

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