BLACK SHELL FINANCE

ACTUAL COMPANY CASE STUDY


SURVIVAL ACTIONS FOR A COMPANY

The below company could have survived and been profitable if it implemented four fundamental processes:

1 - Created a realistic STRATEGIC OPERATIONAL PLAN

2 - Put in place an ACTION NOW BOARD

3 - Sourced viable long term, cost effective FINANCES (CASH)

4 - Implemented a reliable on time order and delivery SUPPLY CHAIN


DEMISE OF A COMPANY FROM DAY 1

XYZ Limited carried out a due diligence study over 12 months for the acquisition of two going concern companies.


No 1 company was bought for $2m plus stock - retail business

Comments

1. Due diligence was flawed :

   -investors did not have any retail experience and performed the due diligence

    themselves

2. They ignored reports that detailed stagnant, non growth historical sales trends, loss         trending historical results, very high cost percentages of fixed costs to sales, 60%              stock either obsolete or very slow moving, unreliable supply chain 

3. They relied upon bank finance P&L rather than building a real operating P&L

    sales were estimated to unrealistic figures : 

    -fixed costs were not incorporated accurately into the P&L

    -stock costing, sales prices and margins were not reviewd in detail

    -stocks were accepted on basis of valuation by previous owner

    -an org chart with required staff for the future was not done and previous

      owners staffing all kept in situ

4. Operations were a dismissal failure -

   -no leadership or formal structure by CEO and things were left to an adhoc basis

   -advice from staff on how to make the company profitable were ignored

   -pricing reviews were delayed six months and only applied to 20% of stock

   -monthly sales targets were always missed and no requirement for making

     up the monthly sales shortfall in the following month

   -bonuses structures were left in place even though the company was

    making consistent losses

   -the sales breakeven point was never achieved

  -daily monitoring reports to the CEO / owners on operations not meeting targets and        cash flow reports showing growing deficiencies in cash flow resulted in zero actions or    comments

   -all operations were on a reactive basis rather than pre-planned

   -zero cost benefit analysis on decisions

5. No cash reserves, no profits and inability to organise cost effective financing resulted

    in owners injecting large cash injections every couple of months 


No 2 company was bought for $5m plus stock and fixed assets - manufacturing business

Comments

This was a purchase of an entirely different business from retail and was initiated

on a "hope it works basis" there was no due diligence on this loss making

local manufacturing operation

This resulted in :

   -increased drain on cash resources

   -increased monthly losses from both businesses

   -increased panic / reaction based decisions that compounded losses

   -irrational operational decisions made without thinking the impact through

   -staff totally demoralised

   -cutting corners on OH&S

   -loss of staff expertise from resignations and firing of key staff 

   -investors not having or not willing to inject more cash

   -investors never recovering their investment 

   -combined business that cannot be sold 

   -insolvent trading

   -total investment failure 


Main causes of the failure: (** fundamental causes)

1. No strategic transformational growth leadership **

2. No factual independent Due Diligence review

3. No adequate structured financing facilities in place **

4. No real negotiating on the purchase price of each business

5. No 5 year strategic business plan **

6. No real understanding of the business fields they had invested in

7. No Action Now structured Strategic Board **

8. No realistic budgets

9. No immediate action / WIN attitude by investors to make the venture a success **

10. No actions on any recommendations made by the CFO for saving the company

11. Signing off on very high cost financing facilities

12. Using new finance facilities to pay down old finance facilities to buy time

13. Excessive use of expert skilled workers from Labour Hire company

14. Running creditors out over 120 days, stop credit and COD terms increased

15. Granting Debtors 60+ day terms 

16. Inadequate job descriptions and no operational KPI's

17. Adhoc massive firing of key operational staff, without thought to operations

18. No Risk Management strategy or monitoring

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