Bob Tormey - San Fran - GLGiGetting the Last Million Out of Your Portfolio Company's Budget - 12.12.07

Getting the Last Million Out of Your
Portfolio Company’s Budget
December 12, 2007
San Francisco
Robert Tormey
Partner, Tatum LLC

© 2007 Gerson Lehrman Group Inc., All Rights Reserved
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Council Member Biography
Robert B. Tormey is a Partner at Tatum LLC, a GA-based
professional services provider of financial and information
technology leadership. His practice focuses on restructuring
assignments within portfolio companies of private equity groups
and associated stakeholders. Mr. Tormey has supported
numerous portfolio companies of private equity groups. He has
experience managing turn-around, leveraged buyouts,
recapitalization efforts, and acquisitions. Mr. Tormey has over
twenty-five years of accounting and finance experience across
various industries. He holds an MBA from Cornell University and
Bachelors in Arts from Loyola University. Mr. Tormey is a
Member of the Association of Certified Turn-Around
Professionals (ACTP) and a Member of the California Society of
Certified Public Accountants (CALCPA).

Topics
► Anticipating the turn in credit markets
► Importance of maximizing opportunities in the budget process
► Risks of consultant advice and avoiding missed opportunities
► Advantages and disadvantages of controls vs. initiatives
► Pros and cons of rolling forecasts vs. the annual budget process

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Gerson Lehrman Group
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212-750-1435
cpisarri@glgroup.com

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© 2006 Tatum, LLC All rights reserved.
Maximizing Opportunities
in the Budget Process
Robert Tormey
Tatum, LLC
December 12, 2007

9© 2006 Tatum, LLC All rights reserved.
Why Maximize Opportunities?
Success in leveraged investing has relied in part on:
Declining interest rates (since early 1980‟s overall and since 2000)
Accommodative Monetary Conditions affecting advance rates
Expanding multiples of enterprise value
Expanding pool of private equity sponsors
These trends may be reversing themselves in 2008
Credit environment growing more severe
Advance Rates may decline in 2008
Interest Rates remain quite low by historical standards
Earnings multiples are already quite high
Improving Earnings Opportunities critically important

These Stories Have Much in Common
All are portfolio companies of private equity (PE) sponsors
Companies needed earnings or working capital opportunities
PE Sponsor hired expert advisors to find them
Circumstances led to my involvement
Opportunities were available the advisors had not found
Gerson Lehrman felt this might be of interest to you!

Maximizing Opportunities in the Budget Process
Profit and Loss
Strategic Spend Optimization vs. Common Sense
Expense Reduction
Shared Services Centers
Unprofitable Customers
Balance Sheet and Working Capital
Estimated Tax Filings and Form 4466
Receivables
Credit Insurance
Vendor Initiatives
Legerdemain - Understanding Insurance
Workers Compensation – LDF vs. Case Method
Plant Consolidation and Workers Compensation
The Rolling Forecast vs. The Budget Process
Conclusion

Profit and Loss
PE Sponsor pursuing „Roll-Up‟ strategy acquires 12 companies
domestic and international over 24 months
Strategic consulting firm to implement Strategic Spend
Optimization Program (SSOP).
SSOP costs $4,000,000 in professional fees & 2 years
EBITDA declines from $30,000,000 to $10,000,000
“Out of the Money” management team resigns
PE Sponsor commits additional „equity‟ to appease lenders

Expense Reduction and Controls
CFO implements Thompson PPC „checklist‟ called “Guide to
Management Letter Comments and Expense Reduction
Recommendations”
CFO/Controller and Department heads implement programs to
reduce under-managed „spend‟
Savings results of program are $2,000,000
Cost of Thompson PPC „checklists‟ - $176.00
Website for Thompson is http://ppc.thomson.com/

IT Rationalization and Shared Services Centers
CFO notices 12 acquisitions using:
10 General Ledger environments
10 Software platforms
3 Transaction accounting environments
CFO asks CIO to migrate to single G/L and Software Platform
CFO/CIO Consolidate 3 Transaction Accounting environments
to 1 Shared Services Center (SSC)
Software license fees reduction and personnel reduction
savings total $1.4MM

Unprofitable Customers & SKUs
CFO hires financial analyst to review „Customer Profitability‟,
Customer Sales Agreements and SKU profitability
Analyst recommends „firing‟ unprofitable customers & skus
Losing Unprofitable Customers frees up capacity
Sales Declines but EBITDA increases by $6,000,000
Production Capacity, Scheduling, Overtime, Line-Fill all improve
Working Capital improves due to decreased receivables
Cost of analyst - $100k/year
Don‟t ask or expect transaction accountants to be Analysts
Revenue is Vanity – Income is Sanity

Profit and Loss and Enterprise Value
PPC Expense Reduction $2,000,000
Software Rationalization $1,400,000
Unprofitable Customers $6,000,000
Total Cost Reductions $9,400,000
Enterprise Multiple (?) 10
Enterprise Value Impact $94,000,000
A penny saved is a penny earned – Ben Franklin
A penny saved is a dime in enterprise value! – Bob Tormey

Professional fees and Default interest- liquidity under pressure
Fourth quarter earnings surprise lowered taxable income
Company paid estimated taxes in quarters one, two and three
CPA neglected to file Form 4466 for refund of ES Payments
Advisors unaware of taxpayer advocates‟ within IRS and FTB
CFO files form 4466 through taxpayer‟s advocate
Company receives $2.5MM in cash within 60 days!
Lenders agree to forbearance
Cost of idea – Form 4466 download + first class postage
http://www.irs.gov/pub/irs-pdf/f4466.pdf

$18,000,000 in Outstanding Receivables – 60 DSO
Receivables staff consists of 6 A/R clerks – no incentives
CFO implements collections „incentive‟ initiative with „cash
bonuses‟ of up to $300/month, awards and monthly lunch
Receivables declines by 10 DSO or about $2,500,000
Company maintains „Senior Leverage Ratio‟ and avoids default
Cost of initiative for 6 clerks, $3,600@for one year - $21,600
Interest Expense Savings $2,500,000 at Libor + 2 = $166,500
EBITDA „bought‟ at 4 times leverage ratio - $600,000!
Cost of avoiding Senior Leverage Ratio Default – Priceless!

Company has Accounts Receivable of $15,000,000
Company doesn‟t insure receivables because:
“We know our customers”
“We‟ve never had any losses”
Distribution channel suffers severe competition that year.
$900,000 in Credit Losses – Company Defaults
CFO (New) implements Credit Insurance to assuage lenders
„Foreign Receivables‟ insured under Policy
Bank includes „insured foreign receivables‟ in collateral base
Price of insurance $200,000 – Cash Collateral - $1,000,000

Company is privately held
Company does not want anyone to know anything about it
Dun & Bradstreet information on company is incomplete
D&B BIR has low Paydex score and R4 Risk Rating
New CFO contacts D&B – rewrites D&B BIR as company press
release – includes link to PE Sponsor Website
New CFO uses BIR to promote Vendor Marketing Initiative
Requests Purchasing push for increased terms
Vendors Credit Officers turn to new BIR for their decision
Improved DPO raises $10,000,000 in vendor support

Managing Cash
PEG Sponsor pursuing consolidation strategy
Completes many acquisitions over several years
PEG Sponsor retains Big 4 Accounting firm to do cash
management and controls study
Cost of study $1,500,000
Result – Company runs out of Cash and Sponsor puts in
$10,000,000 „Equity Relief line‟ to support working capital needs

Managing Cash
Big 4 firm failed to recommend consolidation of 57 company
bank accounts and 3 merchant services centers
CFO reduces 57 bank accounts across multiple banks to 17 at
one institution and single merchant services relationship
Cash management on-line environment managed by 1 clerk
Tracks Cash in EXCEL – Maintains 13 week cash visibility
Interest and bank charges savings $300,000/annually

Legerdemain - Understanding Insurance
Insurer says workers compensation under-funded $1,000,000
Earnings charge puts company in default
SNC Lender freezes credit facilities
Sponsor retains financial advisor to examine company
Lenders retain investment banking firm/restructuring advisor
Company retains outside CPA to assist company
Company spending $200K per month on „advisors‟
Months go by . . . . . .

Company appoints new CFO (myself)
Insurance company using Loss Development Factor (LDF)
method to determine reserves
Insurer/agent unaware of alternative GAAP methods
„Case Method‟ of testing reserves differs from LDF method by
$1,000,000 in companies favor
Accountant agrees to accept „change of estimate‟ for GAAP
method of presenting reserves
Income improved by $1,000,000
Cost of Idea – subscription to accounting research bulletins

Legerdemain (2) Workers Compensation
Sponsor retained consultant to find cost reduction opportunities
Consultant proposed two year plant consolidation plan,
requiring millions of dollars in working capital to produce annual
savings of $2.5 Million dollars
Private Equity group had company on a „first dollar‟ policy
Large cap deductible policy reduced costs by $1,000,000
annually and could be implemented immediately
Cost of idea – 1% fee for standby Letter of Credit
No impact on senior leverage - standby LC‟s are „unfunded‟
Increase in EBITDA - $1,000,000
Increase in Enterprise Value - $10,000,000

Rolling Forecast v. Budget Process
Budget Process is too often an „annual event‟
People don‟t get good or creative at something they do once a year
Too many things change during a year
Substitute Year Round Rolling Forecast Discipline
Build a Model (in Excel) that reflects the business in detail
Update Org Chart and Payroll Masters
Get to Customer Profitability and SKU Rationalization
Analyze the Balance Sheet – your earnings surprises are there!
Demand Bridge Studies on major initiatives or changes
Document the Budget Process with MD&A
Ask for „Word Documents! – don‟t accept PPT!
Get to How and Who and more than just „What‟
Task for more than P&L – Task for Working Capital Initiatives
Look for Process and Operational Excellence Opportunities
Rolling Forecast is updated Monthly with comprehensive MD&A Quarterly

Getting the Last Million Out of Your Budget
Lessons you can take home and use tomorrow
Avoid complexity – Be cautious with experts
Simple Ideas are good
Cheap ideas are very good
Controls are safer than initiatives
Incentivize cost conscious behavior at staff levels
Experts often sell what they know – Be a ‘generalist’
There is low hanging fruit – use PPC checklists and
encourage your CFOs and Controllers to do same
Don’t budget annually – Roll your forecast

Bob Tormey - San Fran - GLGiGetting the Last Million Out of Your Portfolio Company's Budget - 12.12.07

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