Podcast

Episode: 366 |
Kyle Sturgeon:
Turnarounds and Restructuring:
Episode
366

HOW TO THRIVE AS AN
INDEPENDENT PROFESSIONAL

Kyle Sturgeon

Turnarounds and Restructuring

Show Notes

 

Kyle Sturgeon, an alum of Alvarez & Marsal and McKinsey, is a Managing Partner and Co-Founder of MERU. 

He has led complex transformations and restructurings for companies across industries, with a focus in retail and consumer, healthcare, and materials. 

Today we discuss what’s involved with guiding a company through bankruptcy or restructuring. To find out more about Kyle’s company visit: wearemeru.com.

 Key points include:

  • 00:58: The birth of Meru
  • 04:32: Shutting down a $200,000 company
  • 10:22: How to sell off inventory
  • 17:06: How Kyle’s business model works
  • 21:34: A restructuring project
  • 22:47: The Tough Mudder case study
  • 31:52: Orientation towards cash
  • 41:30: The growth of Meru

 

One weekly email with bonus materials and summaries of each new episode:

Will Bachman 00:01
Hello and welcome to Unleashed the show that explores how to thrive as an independent professional unleashed is produced by Umbrex, and you can sign up for our weekly newsletter by going to M bricks.com. Slash unleashed. I’m your host, will Bachmann and I’m excited to be here today with Kyle Sturgeon, who is the managing partner at Meru, which is a turnaround and restructuring firm. Kyle, welcome to the show.

Kyle Sturgeon 00:28
Thanks for having me.

Will Bachman 00:28
Well, so Kyle, what I thought we could talk about today was a couple case examples. Before we start recording, you gave me a couple. We talked about a couple that that would be really interesting. And then in the second half, we can talk some about your firm in particular, and how you and your founders started it and how it’s grown now. So maybe you just give us a one minute though, intro into kind of who you are, what your background was and how you got, you know, to where you are today.

Kyle Sturgeon 00:58
Sure, happy to do that. So my background has been in the turnaround and restructuring space. So I started out in 2006, at a firm called Alvarez and Marcel, which has now grown to be a pretty large consulting firm that serves all sorts of different needs originated as a boutique turnaround restructuring firm focused on guiding companies through distress. And I was part of the restructuring practice in Atlanta, Georgia where I live and was there for many years, I got headhunted into McKinsey’s turnaround practice RTS as that was getting going back in 2012. And then I left McKinsey in 2016, to start Meru, my firm back in early early 2017. And so what we what we do the firm just as the cliffsnotes of what we do is we assess with companies, both in turnaround situations, typically private equity owned businesses that are underperforming and help develop operating turnaround strategies, as well as with companies that are in distress and need assistance, managing through liquidity issues, covenant compliance issues, and potentially going through a bankruptcy and restructuring practice. And to give people a little bit more context on Meru, so you started it with, I think, with three other partners. And yeah, it was actually just just me and one other guy. So so my good friend, Nick Campbell, and I had worked together back at Alvarez and Marcel, and had stayed close. After I left, he stayed I left to go to McKinsey, we actually had breakfast. We bring our kids, you know, once a month on Saturdays, to give our wives you know, the extra hour to sleep in or whatever, and have breakfast at 8am on Saturday mornings, and the idea of of Meru grew out of those those breakfasts, believe it or not,

Will Bachman 03:04
And what’s the name of the firm? mean?

Kyle Sturgeon 03:07
Yeah, the name good question, I need to record a video on this, we get asked about it a lot. So it’s actually a mountain in the Himalayas. There’s a great documentary by Jimmy Chin, the same filmmaker who made Free Solo that Nick had seen, as we were talking about the idea of the firm, he begged me to see it. I was inspired, it’s about three guys who tried to scale the shark’s fin face of this remote Himalayan mountain. They can’t do it, they come back several years later, and try again, it’s it’s just a really cool story. It’s different. We didn’t want name to form after ourselves. So it resonated with both of us, it was the the placeholder name that never got replaced. So it’s still there,

Will Bachman 03:52
I can see the connection. So you know, so climbers are starved of oxygen, your clients are starved for cash. So see the connection. So let’s talk a couple examples. So one, the first one is one that actually did not turn out so well, or maybe you were brought in, you know, with the expectation that it was not going to survive, but one client you were brought in to help actually shut them down. And that’s something I don’t think I’ve talked about really before, just what’s involved and actually taking the company that you know, is going to run out of cash and how do you do that as gracefully as possible?Talk us through that case example.

Kyle Sturgeon 04:32
Sure, I’ll give you the high level and then try to try to go into a couple of specifics. So the company was about a 200 million revenue, women’s apparel retailer, and believe it or not, we were actually brought in to help try to improve the finance function of the company. There was a belief that the forecasting process wasn’t working very well. There was not great visibility into Some of the operating metrics and liquidity and so when we were hired, it was more like, hey, this company’s not doing as well as we would like. And we kind of don’t like to see f Oh, he’s gonna be gone. And so maybe you guys can take a look around and see if there’s anybody in the business who could who could be the CFO. And if there’s a better way to run the finance function, because it’s not just we’re not getting the information that we need. We don’t believe the numbers. I’m sorry. But I’m already laughing at this because it’s like, because you told me the ending. It’s like, I can imagine the day when you’re like, I have bad news for you. Well, yeah, well, well. So the other piece that I don’t think we mentioned, for the we started recording, this was in February 2020, when we start having this conversation, and so we show up on the ground that the client in March 2020. As as maybe future listeners will hopefully not know the significance of that date. But that was obviously when the COVID-19 crisis began to hit the US in full. There was an immediate flow through into sales the company, first day, we were there looking the sales report was like down 45, or 50%, or something like that, versus what their plan was, they were just getting absolutely annihilated. And, you know, a week later, all the retail stores had to be closed. Two weeks after that the company before they even realized what was going on, decided to cut roughly 50% of the heads of the business and was sort of faced with a glaring need to either inject significant additional capital into the business to make it viable, or to try to gracefully winded down. And the sponsor was not willing to put in more money. And so that left sort of one option.

Will Bachman 07:02
So what’s what’s involved from that point? When once a company, and the owners have decided to shut it down? What Yeah, not gonna go into bankruptcy and restructure, but just say, Okay, we got to shut it down. I always wonder about these things. Like, who’s like the last person kind of paying the bills and turning the lights off? And yeah, sure that they’ve, you know, that there’s still I don’t know, accounting records, or someone has to file the taxes or something. Right. Yeah. How did that? How did you? How did you wind it down? Can you tell us a story?

Kyle Sturgeon 07:35
Yeah. So taking a step back, right, the company was not viable, is it going concern, and so it needed to be shut down. That being said it had a decent size, abl asset back loan with a large commercial bank that everybody would know the name of? And so the, and the private equity firm had a relationship with that with that lender, and it was, you know, they had collateral of everything. And so the first goal was, okay, how do we get these guys have to get the bank paid back? In and also, how do we produce as much value out of all the inventory that we have, and all the practice on the way and in in selling and development in order to generate as much money as possible and pay the creditors the business as much as possible? Unfortunately, what we learned pretty quickly was there was a tremendous amount of past due accounts payable primarily with, with the the panel vendors, but also with with a bunch of other creditors. And so as we’re looking at it, it was just very clear that it was unlikely that everybody was going to get get out hole. And so our job was basically to try to generate as much value as possible to leave everybody to get out to get all the creditors paid back as much as they possibly could, with the bank coming first, because they have first priority lien on all the assets. And so that was sort of the, we knew what the endpoint needed to look like. And then we had to map out between Okay, here’s where we’re at now, we have all these heads, a lot of people’s jobs, like don’t necessarily make sense anymore. If we know we’re not a going concern, right, we don’t need to design for the winter season, if the company is going to be around to the winter. You know, the the marketing team doesn’t need to be the same size and scope that it is. If the business is going to shrink the retail team, the retail stores right in the management structure set up around that but that doesn’t need to exist. So there was all these sort of micro decisions that started getting made in the way in order to skinny down the cost structure as much as much as possible such that all the cash that was being generated from selling off the inventory could be used to pay back the bank and then ultimately as much cash as possible being used for other creditors as well.

Will Bachman 10:22
And then how did you manage to sell the inventory of clothes? Was it just yeah, to all online? Or like, how do you get it up?

Kyle Sturgeon 10:31
Yeah. So it’s a great question. So fortunately, the business had a large presence, direct presence, branded online presence, as well as a catalog and call center. And so and that was still dramatically impacted, you know, very negatively comping, but at least, was a way to sell goods, when the retail stores closed, they actually never reopened mate, we kind of did the math, and it didn’t make sense to ever reopen them, because we’d stopped paying rent. And to get the landlords to take the padlocks off would have required more than than we would have generated by selling the product that was still left in the stores, we actually packed up all the inventory was in stores, brought it back to the distribution center and ended up selling it through the through the website. And just had to be increasingly promotional, in order to move product in the environment that was the kind of COVID spring, early summer of 2020.

Will Bachman 11:35
And then, how does it you know, a company ended up winding down. I mean, most of us are used to kind of dealing with an ongoing concern, but right, how do you, you know, and you can imagine building up a company, you keep hiring people, but right, how do you kind of narrow it down so that you at the end, you kind of file your taxes, and then file some kind of form that says, We’re not going to file taxes in the future? And then just, yeah, turn off the key. And it’s just, it’s just, you know, gone and disappeared, then?

Kyle Sturgeon 12:06
I guess? The way that I would describe it, right, if you think about it, there’s there’s really two worlds right one world, you’ve got enough money to pay everybody everything that they’re owed. And then I think to your point, it’s you, you come up with a plan for for letting everybody go and paying them what they’re owed. And I think you follow the final tax return. Like there is a fairly orderly dissolution process, you can dissolve the company with the Secretary of State Incorporated, some legal stuff that you have to do in terms of resolving everything, and you probably need to keep your records because just in case, there’s future litigation, there’s that risk as well. Right. But so that’s that’s the easy world in which there’s, in which there’s enough money to go around. And in this case, there wasn’t and it was, it was very obvious that there wasn’t gonna be enough to go around. And so really, in those circumstances, you can file a company for for bankruptcy either chapter 11, which is used typically for companies that are going concerns. That gives you a chance to reorganize your affairs and convert debt to equity or come up with a plan to pay back your creditors to the extent possible and in the in the priority order that they’re owed. Chapter Seven bankruptcy is just a straight liquidation. Where a liquidator is a professional appointed by the court is appointed, he’s in charge of basically paying everybody what what they’re owed based on the proceeds that are available. That’s a federal process that can be very unpleasant, because chapter seven trustees frequently pursue litigation against people who get paid, before company goes, goes out, goes goes bankrupt. And so that can be a very unpleasant and uncontrollable process. People don’t in the industry, try to avoid chapter seven if it’s possible. And then another alternative, which is the one that we use in this case was something called an assignment for the benefit of creditors or ABC. And that’s a state legal process where effectively a trustee takes over a insolvent estate, for the benefit of a creditor in this case, it was for the benefit of the secured lender and administers the proceeds of the estate tries to generate as much from from what’s left. So for the inventory that we had sold for the intellectual property, the brand that was actually sold for quite a good amount actually end up being a good recovery for some of the unsecured creditors as a result to somebody who’s looking to get into apparel, consumer apparel, one of the brand to keep going. And then they’ll they’ll take care of the taxes. So there’s other firms that do this assignment for the benefit of creditors process. So that’s ultimately the route that the board of directors for this culpably, this company ended up choosing it’s much lower cost than bankruptcy. And can just be a better result for creditors as a result.

Will Bachman 15:21
So assignment for the benefit of credit. So, in that earlier one, I think there chapter seven, you said, he said that can be done, because it’s people that got paid, before you declare bankruptcy, they can kind of go after them and says, Oh, you

Kyle Sturgeon 15:34
Sometimes Yeah, what was called a preferential transfer, the whole point of bankruptcy is to treat everybody fairly. And so if, if you know, you’re going bankrupt, and you pay all your friends, you don’t pay all your enemies, right? The trustee can come and try to make things right says, Hey, instead of you getting 100 cents, and somebody else getting zero, I’m going to take back that 100 and give you both 50 cents, because that’s what that’s what should have happened. That being said, that can be the that can be a very aggressive process and a lot of things that were really, hey, we’re paying because we need this inventory, right, we’re trying to generate as much cash as we can, it’s better for us to sell the inventory through our website than to sell it to a liquidator liquid or pays 10 cents on the dollar cost, we can get to $2 on the dollar, because we’re still selling it as if it’s, you know, branded, branded merchandise, things like that, that are ordinary course business decisions can can get questioned and it becomes an expensive and a process that that you’ll lose control over. And so people people don’t like it.

Will Bachman 16:39
So, and then, I suppose at some point people, as a consulting firm, how do consulting firms in these kinds of situations, and I suppose it’s similar to just turnarounds where the country is company’s troubled, but they may get back on its feet? Do trend turnaround firms typically, you know, require payment in advance, or, you know.

Kyle Sturgeon 17:06
How does your business model work? Kyle? Is that the question that I’m hearing?

Will Bachman 17:09
Basically, yeah, yeah,

Kyle Sturgeon 17:11
We we are dealing in in distressed situations, right, even for companies that are that are have bad balance sheets, but are gonna survive through a bankruptcy process. You always risk if you have like, if you Oh, if you are owed money by a company that files bankruptcy, right like that that amount that you were owed is at risk, the way that we deal with it as a firm and our he’s still there we go.

Will Bachman 18:21
So how to turn around and turn and how to turn around firms typically get paid in that case? Do you typically, you know, get paid upfront, you know, sort of require a retainer, because there’s a fairly decent risk that you won’t get paid? Otherwise? How do how do firms deal with that in the industry?

Kyle Sturgeon 18:40
Yes, if you hit the nail on the head, typically, firms like ours and cutters of ours will will require a retainer and basically get get pre paid for the work that we do that actually is shielded from from preferential transfer recovery. So we want to end up if our client has to go through a formal insolvency process like a bankruptcy, we want to end up owing them money, right? Where we’ve been paid for more work than we’ve done and suppose the other way around, because if we are owed money, that money is at risk if we want to continue to serve the company, once it’s in bankruptcy.

Will Bachman 19:20
So you structured such that the payments to you would be shielded from this kind of chapter. That’s right. clawback process.

Kyle Sturgeon 19:26
That’s right. That’s right. And And to be clear, the clawback process exists and in chapter 11, as well, but it’s just typically it’s something that is is something everybody knows about and negotiates as part of the overall restructuring because a lot of the creditors are similarly situated and and don’t want to get sued either. And so it’s, it’s just more controllable when it’s not in the purview of chapter seven trustee.

Will Bachman 19:56
So to avoid the chapter seven, let’s say that the company But he does not have enough funds to pay everyone 100 cents on the dollar. Yeah. Do you then try to get people just to agree to accept something less? And and and then if everybody agrees, you can, you know, you can avoid doing that.

Kyle Sturgeon 20:15
Yeah, that’s it’s that’s definitely a possible way of doing that. Right. The challenge is, you, you have a holdout problem. So if a company has a large number of creditors, and you need basically unanimous agreement, because if you don’t get it, somebody can say, Now, you know, I don’t have to agree to this, right? I’m not going to agree to it, and sue you for the money and and if you don’t have the money to pay them, that becomes a problem. And so that’s, that’s typically the reason why you don’t you see bankruptcy used and to restructure liabilities is to solve for folks just holding out for where, from a collective action problem, it may be better for the collective for everybody to agree to something less than what they’re owed, but without a mechanism to enforce it. You kind of You, you, you need that that hammer, which is the bankruptcy process to enforce it.

Will Bachman 21:17
Okay. Let’s talk through another example, when it turned out a little bit with a rosier outcome. Talk to me about a kind of restructuring project, a turnaround project that, that where they exited, and there’s they’re now going concern.

Kyle Sturgeon 21:34
Yeah, those are the ones that we prefer. So another interesting project that that we did was for a company called tough mudder. It’s a it’s a company that puts on obstacle course races, actually. And I know they probably there’s probably some debate about the the origin of this. They’re the first well known company doing this in the United States, right? The these races, they’re 10 miles long, you go and you climb over a wall, and you go through a freezing ice bath and stuff like that, and get a get a metal in a beer at the end. I don’t know we’ll have you ever be around a tough mudder or Spartan Race?

Will Bachman 22:17
I have not. You know, I suppose short sections in my life myth felt that way. But I’ve not done with those. I’ve heard about it, though. And it sounds and I’ve also heard that these are very much about people, like help each other out finishing the race, right. And there’s like this whole community thing around. That’s right. So I’ve definitely heard of this company. I didn’t know that they had gone through this financial trouble. But you hear that they’re quite popular. And they were like exploding in popularity, right for a while. So tell us the story.

Kyle Sturgeon 22:47
Yeah, it’s it’s it’s a it’s an interesting story. So tough. mudder was started by a guy from England. And his, his old school friend will been is the primary founder. He was a Harvard MBA, very interesting guy started this business, they they put Facebook ads out for a race. And it’s sold out in two days or something like that. And they made a ton of money off the first race. And they realized, hey, this may actually be a business. And so it went from, you know, one, one race in rural Vermont to $100 million revenue company in something like two years. So just scaled incredibly quickly. Was was very profitable. And it was it was a bit of a fad. And so I think a lot of people just want to say, hey, I’ve run this once. And that’s enough, right. And so once they worked through all that, they started to see sales, sales decline. Another thing that happened was, they were started in 20. Get the year wrong 2010. Or there abouts. Really the infancy of Facebook advertising, when Facebook advertising was incredibly inexpensive, it was a fraction of the size it is now. And so they were able to acquire customers incredibly, efficiently. And over time that that became much, much more difficult. Also, there was a ton of competitors that entered the space as well. Spartan Race started about the same time, there were a number of other companies that are all basically trying to do their flavor of the same thing. And so the company began to burn cash. And when we got involved, it was actually right on the brink of of running out of cash. And one of their creditors had agreed to put more money in but contingent upon getting a change in the kind of executive leadership function and getting a better getting a turnaround person basically to oversee that. Turn around. And so that’s that’s sort of when we got involved.

Will Bachman 25:03
And walk me through the story. So what what do you kind of do first when you start one of these engagements?

Kyle Sturgeon 25:11
Yeah, great question. So the first thing that turnaround folks do is understand liquidity. So when we got involved, there had already been an agreement to put in some more money, there was an understanding that the company needed more money in order to be able to continue to operate. And so there was an agreement to put in some more money. We wanted to understand very quickly, and I think within two three weeks, had a decent six month outlook to say, here’s here’s what you’ve agreed to put in, here’s how much more we think is is needed. Just to understand so we had a full runway of what what additional money was going to need to come in to make the make this Herat successful? And how do you sort of the first stage?

Will Bachman 26:03
Do you go through an exercise almost sort of week by week? Cash forecasting, or, yeah, by day? Or what’s the process? You know, the very tactical level that you’re doing?

Kyle Sturgeon 26:14
Yeah, sure, yeah, there’s a tool that turon folks all know and love called the 13 week cash flow forecast, it’s typically 13 weeks long, because that that tracks with a company’s fiscal quarter. But it there’s no magic to that 13 weeks can be can be longer or shorter, we typically do at least 26, just to have a little bit longer view. But it’s a very granular view of a company’s cash forecast, a lot of companies will only forecast at the call, you know, cash flow statement level, which is an indirect cash flow forecast. This is a direct cash flow forecast where you show receipts on the top. And then disbursements in different categories like payroll and rent and marketing dollars, underneath on a week by week basis. So it’s kind of like how you might think about your own checkbook, right? dollars coming in dollars going out, what is the ultimate liquidity at the bottom look like? And shows, hey, we’ve got an interest payment coming up at the end of this this quarter this month. And so we need to make sure that we have the liquidity to make that things like that.

Will Bachman 27:23
And then are you doing things like looking immediately for immediate cash savings? Either, you know, layoffs, or getting out of contacts or closing things down, shutting down real estate, shutting off advertising, whatever?

Kyle Sturgeon 27:39
Yeah, so there were a couple of things that we had, that we did. So So one, once we had a handle on liquidity. We also had a built a decent, full year budget. So we understood kind of what the overall trajectory of that business was, and had a sense of where it had been, and identified some gaps, kind of right from the start. So, you know, part of that was on on overhead, we just couldn’t afford the overhead structure that the company had, right, it had had skinny down somewhat, but there was still a lot of the the legacy overhead from a bigger company, that because it had shrunk and particularly shrunk, you know, holding the same number of races, but having half the number of people attend is, you know, the the races themselves are basically fixed costs, right? You pay to construct a course. And then each racer that runs over it is almost is 90% incremental margin, right, you buy him a beer, you give him a T shirt. And that’s basically it. So it didn’t, we had to evaluate the fixed cost structure. And in light of the fact that a lot of the challenge of the business, they’re trying to run the same number of races with a lot fewer erasers running over them, and it just wasn’t nearly as profitable anymore. So understand the overhead costs, you know, headcount. Other kind of overhead support, looked very carefully at marketing. Like I mentioned, Facebook, had had ballooned in terms of total cost. And so we realized that we had to get the cost of acquiring a racer down significantly for the business to make economic sense. And so there were a number of specific initiatives, turning up emails and getting more efficient out of email marketing, for instance, being smarter about how we were spending our digital marketing dollars, we realized we were paying for it, just to use an example it’s actually a funny story. So historically, the company had had paid for their own name on Google, right? They bought any search related tough mudder if somebody searches tough mudder the first thing that comes up is a is a paid ad for Hey, race on tough mudder. They actually had stopped paying Google and so got to turned off by Google ads, because they were out of money before we got involved. And they realized that when that happened, their organic traffic spiked. And so they were spending all this money on buying branded search, where they were going to get the traffic anyway. So don’t pay Google if you’re going to get it. So it’s making smarter decisions like that, to let you get your cost per racer come down and just have better flow through economics on on the races?

Will Bachman 30:27
And would your firm be kind of the ones getting in there and driving those projects? I mean, that sounds like a classic kind of management consulting project. How can we optimize, you know, customer acquisition cost? So, you know, why would someone from your team be be like leading those kind of initiatives?

Kyle Sturgeon 30:48
We were We were involved, I would say, for this one, it was a smaller team. And so a lot of the companies that we work on are not, you know, the giant, you know, when I was in McKinsey that the giant 10 billion 20 billion revenue companies, right? So for us to dedicate a full team to those projects, sometimes it just doesn’t, doesn’t scale. And so I would say for that one, that was actually we were supporting the work that the marketing team was leading, and, and helping them to execute all of those initiatives. But that is something we have subject matter experts at the firm that we can can get into the weeds, elbow deep into those type of marketing and sales efforts. When did the engagement scope or

Will Bachman 31:36
how does it turn around consultant? think differently about companies than a your your typical management consultant? You’re? So the RTS folks at McKinsey, how are they? Yeah, differently than your average McKinsey consultant?

Kyle Sturgeon 31:52
Yeah, great question. I’d say probably the first and largest way is just an orientation towards cash, as opposed to towards profitability. I think that’s born out of the the recognition that, you know, cash is the lifeblood of the business without cash, we can’t do anything. So that’s, that’s why we always start with understanding what the liquidity runway looks like. Right? Like, that’s something that you know, a lot of my experience in McKinsey, right. A lot of management consultants never even really think about the balance sheet. Right? They don’t think about how much liquidity do we have? Do we have the ability to refinance, next maturity, things like that, right? It’s just not a problem that we’re ever confronted. And so we’re always thinking about cash about thinking about how, you know, the balance sheet can constrict. I company, another example, is ticket a capital intensive business, right? They have without cash, they may have much older equipment, and so be the losing out on on revenue and margin to better funded competitors. Because they just don’t have the money to invest in their product or another. Another example, we’re working for a retailer, retail entertainment retailer, and if they don’t invest in their, in creating newness and freshness in their locations, they’re going to lose out to their competitors who are doing that. So I think we’re keenly aware of how important caches and how access to cash can be a huge constraint in interrupt situations.

Will Bachman 33:32
And so how does that kind of belief and key focus inform other kinds of decisions or things that you’re looking at or actions that you’re taking?

Kyle Sturgeon 33:45
Yeah. I’d say you know, one thing is that we tend to be probably more near term oriented as a result than then maybe your your typical management consultant would we tend to look for extremely fast, you know, cash on cash payback, and be skeptical of, you know, large cash investments that don’t have a clear, clear return profile that makes sense. And so you just end up being more near term oriented. You know, for better for worse, right? Like there’s, there’s, you can you can point to some company like Amazon where they said they’ve been plowing all their earnings back into, into the product, and that paid off enormously over time as they were able to do that it was a flywheel that created this the company size it is today, it’s now enormously profitable after being marginally profitable or unprofitable. For years. They had the capital to be able to do that they had the support of the capital markets. A lot of our clients have other constraints on their capital that they don’t Don’t let them do that. And so they have to be more broad near term oriented in terms of how they’re managing their cash.

Will Bachman 35:05
You’ve shared a couple examples from tough mudder. What are some other examples? You know, perhaps from other clients, you’ve served, have that kind of quick cash on cash payback, of you know, some some, tell me some stories about things that you’ve uncovered over the years that you were able to quickly free up cash for business?

Kyle Sturgeon 35:26
Yeah, I mean, the, there’s the fastest lever probably for any company that’s looking for cash, is accounts payable. Basically, working capital, generally, right, accounts payable, accounts receivable inventory. That’s typically where we’ll look first. ap is easy, right? Because you can, it’s completely within your control. And, and it’s amazing, sometimes you’ll find companies that are very, very cash constrained, and you look and you say, why are you paying, you know, everybody, you know, 15 days early, right, like, take advantage of your full payment terms, or have you when’s the last time we’ve negotiated payment terms, you’ll, you’ll often find that procurement folks are the ones who are negotiating payment terms, they have cozy relationship with the supplier, get taken golfing, or whatever. And they may also be incented to prioritize getting the last, you know, sent out of out of product cost, and they’re giving away payment terms as well. So there’s a lot that you can do in terms of the AP side of things, whether it’s negotiating longer payment terms, batching, your payments, just just you know, paying, paying less, you know, less frequently or pan, you know, at the end of every week, there’s a lot that you can get going quickly out of AP, similarly on AR and we’ve done a bunch of engagements like this, where you look at, you know, why is a our accounts receivable high? Can we get money out of AR we collect faster and, and, you know, even small process changes, where you pick up a few days of accounts receivable can result in meaningful, immediate cash recovery, right? Even just saying, Hey, we’re saying net 30 days, but the invoice date isn’t the same as when they actually made the order. So we’re just going to change that from a system perspective. And that causes the invoice to fall due three, four days earlier than it would be can produce amazingly material cash returns in you know, 30 to 45 days.

Will Bachman 37:38
What are some other tips around accounts receivable, things that can help just with you know, getting in the payments a few days earlier?

Kyle Sturgeon 37:44
Yeah, I mean, it’s one of the things we’ll do is look at the collection function, and and see how good the metrics are for especially for less mature companies, right? You remember, one of our favorite stories can go in and say, you know, how many calls have you guys made today? Like, where’s your call log? And it’s like, oh, yeah, we’ve got four collectors, they made six calls yesterday. Okay, that doesn’t feel like we’re getting everything we could out of this group. Right. And so there is some, some just putting some rigor and process management around. What that you know, that function, how they operate? What kind of metrics they use, who they’re calling, right? Are they? Are they calling the people who owe you $100, but not calling you the people? Who do you $100,000 so really putting rigor around the collection function? Let’s see what else. We’re looking at the way that you can when you set up a new customer, or when you renew a customer, how you give them credit, or you give them payment terms, does that make sense? to another level as well? Yeah, I mean, on the accounts receivable, just in my own experience, learn to, you know, art experience, sometimes, there’s things that you can do to accelerate it like mistakes you can avoid, like, if the client requires having a p o number on the invoice, like, make sure you have the P o number on there, right? And you know, on the very day one, when you start the project of the work, you know, ask for a p o number Don’t wait until like you’re about to send the invoice and then ask for it. You know, put a unique invoice number on there, make sure it’s going to the right person, you know, make sure that the it has the right you know address on there so they don’t kick it back for some silly reason. And and make sure that you’ve set up payment ahead of time. You know, those those sorts of things if it’s a new a new client. So yep, in terms of other That’s right, yeah. So outside of accounts payable and accounts receivable, what are some other kind of common go to places where you’re able to free up cash? Yeah, so another one. inventory is a little bit more complicated because there tend to be bigger picture supply chain issues. But one thing is just looking at, you know, your excess inventory, excess inventory, is there stuff that we can either sell to existing customers offer them a discount, because it’s been sitting around for, you know, 90 121 year, two years, you know, old inventory, can we just turn that into cash, it’s just sitting on the floor collecting dust and and, you know, frankly, risking obsolescence, if we don’t move it, looking at stocking levels on inventory as well. And that, again, tends to be a very integrated into the SLP function and into supply chain, but making sure that when we’re carrying inventory, it’s the right, we’re thinking we’re thinking carefully about how much we’re carrying, and not just carrying more. Because some old rule of thumb or having a rigorous process for deciding that kind of stuff. We have a whole playbook that goes through all these case working capital letters that we use for for most of our companies, as you might expect.

Will Bachman 41:09
Let’s transition and talk a little bit about your firm. So we touched on in the beginning of the show, tell you so you started with a friend, and one other co founder, tell me about the growth of it, too. I think today you have something like you know, 20 or so employees. Tell me about how you’ve grown over over time and about how that experience has been like?

Kyle Sturgeon 41:30
Yeah, it’s a bit bumpy. But, but but really fulfilling, I would say. So we started in January 2017. Myself and my co founder, Nick, in a two person, we work office in Atlanta. And I think we hired our first employee in June, so about six months into it, we actually originally thought that we might try to make the business work without really engaged without a full staff and just by leveraging independent consultants. And I think what we what we realized was, that was just going to be difficult to scale. And we, we really wanted to create a firm, we weren’t trying to just keep ourselves utilized. I think we thought we could do that. But we really had had the vision of, of creating a firm, right? The whole the whole reason we started stepping back into the 2016, right the year before, we both really valued a lot of the experiences we had at McKinsey and a&m, but we saw kind of things that each firm did, that we didn’t like, or that we thought could could be done differently done better. I think we saw that, hey, the way that McKinsey brings expertise into tournament situations is really differentiated. Right? Like that’s something that’s, that’s really powerful. And I got to witness firsthand that powerful of expertise. That was something a lot of turnaround firms weren’t, weren’t bringing in in terms of really deep functional and industry experts. But, you know, their ability to do that, for companies that were below the gigantic company level was was pretty limited. And, um, was really focusing very heavily on advising large bankruptcies as opposed to the core kind of turning companies around. That that’s really why we both got into the business. And so we wanted to create a firm that focused on those things. So we realized that to really scale that vision, we needed to take the step of hiring some hiring people so we could guarantee their availability and invest in in training and developing them in the way that we wanted them to learn the business. And so we started hiring back in, in probably June, July of 2017. We didn’t pay ourselves for, I think, nine months after we started the firm. So that was a, that was a bit of a fun process. But that gave us the balance sheet to feel like we could actually invest in in people we’ve had we got a couple projects under our belt, I actually brought some work with me from McKinsey that helped us helped us get started and and then we were sort of off to the races at that point.

Will Bachman 44:24
What have you been doing to create a culture that is perhaps distinctive from the firm’s that you’d worked at Alvarez and Marcella McKenzie, so I’m sure a lot of things are similar, but what have you aim yet intentionally to make different from from those firms?

Kyle Sturgeon 44:41
Yeah, so the first thing that we did when we had the idea to create the firm before we left was really agree on the core values of the firm what those would be, you can you can find those on our website. It’s something that we every every employee that it starts here, with We spend an hour with them their first week at the firm going through those core values in detail and explaining kind of what we really mean, why they’re important to us and what that means in terms of what we expect from our people. But those core values are working with the best striving for excellence aligning with our clients and collaboration. And we think we we took each of those from things that we saw that worked really well at our prior firms, but we felt like that combination of things was going to be what differentiated us in terms of the specific work that we were going to do the specific market that we were going after. And so I guess, to sorry, to circle back on your question, so I think it started with agreeing on what those core values, were making sure that everybody understood those talking about them all the time. And, and talking about them as a group, holding ourselves accountable to them calling out when we saw things that we know, are these consistent with our core values, are they congruent. And then over time, it’s it’s meant evolving, those those core values into more specific and detailed elements of our culture that we’ve actually taken the time to put on paper as well, in the last few months, and just getting and talking about those things, as well all the time with a team and having them feel like this is this is what’s different about this place. And this is what’s expected of all of us as narrow colleagues.

Will Bachman 46:46
Something that’s tough for boutique firms is making that decision of when to bring on additional full time employees. If you you know, if you do that in advance of getting the work. So that Yep, then you’re carrying that, that? Yep, non utilized, folks, or do you like wait, and then then you’re scrambling? How have you managed that process? You know, as you as you’ve grown?

Kyle Sturgeon 47:12
Yeah, the first few hires that we made, were somewhat on faith, in the sense of, we had some we had some work, but we were still sort of managing the firm higher on 13 week cash flow forecast, right, we were looking at our own cash and our how much we weren’t thinking about cold, the revenue is recurring, right? It was more of just like, here’s what when this project ends, like, here’s what the cash flows at this project look like, and not counting on anybody to call us back. And so eventually, we realized that, for us to be able to grow, we needed to have capacity that we controlled. And so we did decide in summer of 2017, to hire a few folks in advance of kind of in advance of the work just to be able to say we had enough of a balance sheet from work that we’ve done, and from us not not paying ourselves anything, to be able to feel like we have a good amount of runway. And we’ve gotten enough traction in our core relationships with the people who were, who were calling us about things that we felt confident that it was going to be a good investment, we had identified some really high caliber people that we felt excited about bringing onto the team. And so it was that sort of confluence of things that that led us to make that initial wave of hires. And since then, we’ve been, you know, we try to manage to what we expect in terms of the overall from utilization. As the firm grows, we’ve added two other partners, Tanner and Rob, who both sit out in San Francisco, and and we have kind of more normalized view of kind of what we would expect from from utilization and from our ability to generate business and what that means in terms of what what team we require.

Will Bachman 49:13
And what’s what’s the sort of sales pitch been been that you’ve used when you’re recruiting? Because these are folks that are experienced consultants that you know, have a lot of options and to go to, you know, a small boutique firm, what what does it take to attract folks to join you? And how do you how do you convince them? Yeah, that’s it’s, it’s, it’s, it’s tough, right?

Kyle Sturgeon 49:36
As you as you might expect. I think we’d like we’re very passionate about the work that we do. And we think that the work that we do is is really interesting, and it’s not something that that other folks are doing right, these are. These are companies that are typically smaller than then you know, your McKinsey or BCG or Bain would serve but we’re serving them oftentimes in a different way, then another restructuring firm might serve them. And we like the idea and the ability to say like, Well, look, we’re not just going to go and manage a bankruptcy process, right, or work on a gigantic transformation, that you’re one of 100 consultants all working on the same effort, right? You’re, we’re a smaller team, but it’s a highly credible, highly capable Strike Force, working on interesting business problems turning around businesses, that that, that that need the help and don’t have a lot of other places to go for it. And that that pitches resonated with, with the folks who have managed to bring aboard and we’ve been fortunate in recruiting a really, really high quality team. You know, starting with our two other partners, but at all levels, we have people from really top firms that have that have placed a bet on on us as a firm I think they they’re grateful for it. But you know, folks from McKinsey, partners in performance, Ernst and Young Accenture, Alex partners, and really, really high quality firms were folks that work before and so they’re, they’re choosing to come over to us because they believe in what we’re doing. And they know it’s making a difference.

Will Bachman 51:24
And on that note, for any listeners of the show who wanted to learn more about perhaps opportunities with your firm, or just learn more about the work you do, where would you point them?

Kyle Sturgeon 51:37
Sure, you can go go check out our website. huge project last year to refresh that. We are meru.com. We are a D and E r u.com.

Will Bachman 51:51
And I’ll include that link in the show notes. Kyle, thank you so much for joining today. This is a great discussion.

Kyle Sturgeon 51:58
Yeah, thanks for having me. Will, it was It was my pleasure.

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