Strategy

How to Weather the Down Cycle

Carl Marks' Frieze Offers Six Commonsense Suggestions
Ed ZwirnJanuary 29, 2001

Layoffs. Plant closings. Earning shortfalls. Lowered growth projections.

The signs of a slowing economy are all around us.

What should companies do in order to adjust to this new environment? Absolutely nothing, if they had been running their business correctly all along, insists Stanley B. Frieze, managing partner at Carl Marks Consulting Group, the advisory/consulting arm of Carl Marks, a merchant banking firm which specializes in leveraged buyouts and real estate. “If you run a company in good times the way you would have to in bad times, you’d make four times as much money when you’re in bad times,” he adds.

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Frieze’s consulting operation grew out of Carl Marks’ need to provide guidance to firms in which it had a stake. It is now a firm which, at the request of the lenders, trouble-shoots ailing companies.

Over the past 10 years, Carl Marks Consulting has performed its services for some 300 manufacturing and other–mostly private—firms whose revenues typically range from $20 million to $1 billion.

And, given all of the signs of an economic slowdown, Frieze expects to be swamped with demand for his services for the foreseeable future. “We’re not the only company in our business and I hear around that everybody is getting swamped,” he says. “It’s the beginning of a wave that’s going to last for a few months.”

Frieze’s group works this way:

“The company has done something to merit the bank’s attention,” Frieze says, pointing out that lenders dislike surprises.

Although the presence of his consultants is often unwelcome, Frieze maintains that his group often helps management fend off the toughest folks at a bank, the “special workout people, who are basically there to see how much cash they can get as soon as possible.”

What To Do Until The Doctor Arrives

How can you prevent your company from reaching this point?

Frieze says that there are several common sense approaches management can take to steer a viable firm clear of trouble.

  • Each day, the CEO should be furnished with “an 8½ by 11 sheet” that details the prior day’s sales, cash position and other key measures. This should be provided, along with anything else that also constitutes “fundamental, basic information, like breathing,” he quips.
  • Force this information on the CEO, whether or not he wants it. “Who’s charged with providing this information? Invariably it’s the CFO,” says Frieze. “If the CEO says ‘I’m tired of reading this,’ it’s too bad, the CFO must provide it anyway.”
  • Get as much information as you can, as early as you can get it, particularly as this information concerns “cash, the petrol that makes the company go.”
  • Frieze also takes issue with the school of corporate management that, in effect, says you should only provide information to a bank or lender when asked. Rather than avoiding too much communication with a lender on the grounds it will only bring unwelcome attention, Frieze says that “if you’re smart, you’re going to over-communicate with your lender.”

This way, “when things turn bad, you want him (the lender) to feel confident that ‘[you’ll] do the right thing.’”

  • Plan For Downturns. But before things turn bad, Frieze advises doing contingency planning to minimize the impact of eventual downturns. “You can’t call the bottom of a market and you can’t call the top of a market,” he says. “Nobody’s that good. You have to have some liquidity available.”
  • Absent a crystal ball, it is necessary to prepare for the worst. “We ask our clients what they would do if revenues fall off by 5 percent, 10 percent, 15 percent,” he says. “Then, when they say that revenues are off by 5 percent, I would tell them ‘do the 15 percent plan.’”