Repercussions of COVID Relief Programs

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The Faces of Business

Repercussions of COVID Relief Programs

In this, The Faces of Business, Alan Chaffee, Founder & CEO, Turning Point Consultancy Services, talks about the Repercussions of COVID Relief Programs.

The COVID relief programs in the US provided critical help to businesses, but some of these programs will pose future financial challenges to businesses.

Turning Point Consultancy helps companies with complicated financial problems, using financial data to make operational changes that lead to better cash flow, higher profits, and better use of the company’s resources.

Download our free business valuation guide here to understand more about business valuations and view our business valuation FAQs to answer the most common valuation questions.

Alan leads Turning Point, helping businesses improve cash flow and profits and training great CFOs.  Alan has been a CFO and consultant for more than 30 years. During that time, Alan gained enormous experience improving business profitability. He has helped companies, from media to manufacturing, use financial information to improve operations, handle cash flow, and make more money. As CFO, he has worked for over 100 middle-market companies with annual sales between $2 million and $150 million.

Alan revealed that in the 1990s, his first four jobs were restructuring jobs. He would reengineer the businesses “on the verge of bankruptcy.” An ardent lover of hard work, he learned the craft.

Damon asks Alan about some of the critical things he has learned. Entrepreneurial-minded people, the guest believes, are optimistic. Contrarily, thinking we can grow faster is easier than done. He reveals that his ability to make correct and “painful decisions” has made him successful. Downsizing staff is a tough decision. As an accepted cultural practice, no CEO heartily lays off their people. Alan thinks underperforming staff has to leave. While many people think firing a large number of people is a shock, Alan believes he is redefining the culture in his way.

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Moreover, cutting down on staff numbers is more than just saving costs. It is an attempt to preserve the soul of the business. So you can grow forward.

“You lose credibility,” remarks Alan. Workers lose their trust in the management when, instead of acknowledging their hard work, it makes lame excuses like “oops, sorry about that.” People begin to talk negatively about leadership, which takes the organization’s energy and soul out.

Together with the underproductive staff, Alan points out another group that he calls “the terrorists.” Often they are highly contributing individuals who mean a lot to the organization, but they stand behind the curtain. And they back-talk and pull energy away from the mission.

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Alan thinks that the needs of companies have changed over time. The first factor is “disruption is happening a lot more.”

He gives glimpses of the technologically interconnected and interdependent world. The emergence of global enterprises revolutionized the way we carry out business. We change with the changing trends. To compete, dig down, cut costs, and find more customers are tacit acknowledgments that the industry is changing.

Alan traces the factors leading to business restructuring. Because the established order suffers from frequent disruptions, it shows businesses to borrow money to refinance their operations. As a result, people turn up to commercial banks. It adds to the financial volatility. To name a few, fluctuations in interest rates, equity leverage, and debt service coverage are some factors. “By forcing everybody into a box, they create this whole world of alternative lenders.” In his view, a “commercial lender doesn’t like a lot of inventory.”

­­­D­­amon believes a good plan requires good execution and asks Alan about his thoughts. The guest says that he has had “clients go 13 or 18% interest, which they can’t pay.” If businesses are successful, they are worth more “than the high-interest rate cost.” The execution will decide if a company can be restructured faster and better. Moreover, under this kind of circumstances, apart from a monthly basis, we get financial statements daily to know “how we did yesterday or how we did this morning.”

While talking about Turning Point and its business environment, Alan says, “we’ve got unique business here.” Although their Microsoft-centric consultants cost them more, it gives them unique flexibility. He discloses that Microsoft and Amazon don’t rely on consultants but use local resources in their film business. Boeing, in his view, is famous for acquiring its suppliers. Jokingly chiming in, Alan quipped that “Boeing eats its suppliers alive.”

Damon asks Alan about the repercussions of the COVID-19 relief programs. Moreover, the former invites the latter thoughts on the relief the business community can get from these programs. Alan answers that he hardly saw any commercial vendor work wholeheartedly and diligently. During the Covid-19 pandemic, he observes, the government organs worked day and night to find relief for the business class. He praises the government’s intervention to give reassurance to its people. “That’s a good program,” remarks Alan. The debtor is to pay 3.75% interest. Amortization will be as long as 20 years. Moreover, the first two years’ interest will be accrued.

Damon adds that Paycheck Protection Program (PPP) and the COVID-19 Economic Injury Disaster Loan (EIDL) are effective and “pretty solid.”

Alan reveals that in 2009-10, the Federal Government pivoted to support the banks that had failing loans. As a result, the banks just failed those companies. Turning Point helped 37 receptions, hundreds of thousands. The government then decided to support the businesses. It turned out to be a good step. Similarly, during Covid-19, the government bailed out many companies on the verge of bankruptcy through PPP.

While talking about the repercussions of some of these COVID programs—the main street loan program—Damon suggested that we must make sure our financial teams are planning appropriately. Agreeing with Damon, Allan adds that apart from these programs, our financial teams must plan all the time appropriately. “The banks are slowly ratcheting back covenants.” Alan had a client that renewed their line of credit for a million dollars. The bank went from a 3.5 debt-to-equity leverage ratio to 2.5. Alan views it as an early warning signal for debtors.

Alan does not see a “whole lot of bright spots.” The cost of hiring talent is raised to 25% from a year ago. To run the business, companies now have to work hard. Alan feels sad when he sees the young talent scantily offered new positions.

Similarly, Alan sees growth in the restructuring industry in the coming years. “I think we’re just now beginning to see that pickup,” he adds.

Damon Thanks Alan for taking the time to share his thoughts.

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41:03

SUMMARY KEYWORDS

business, people, cfo, companies, happening, clients, industry, programs, loans, inventory, ppp, banks, year, lender, boeing, helping, equity, talk, turning, pretty

SPEAKERS

Damon Pistulka, Alan Chafee

 

Damon Pistulka  00:00

All right, everyone, welcome once again to the faces of business. I’m your host, Damon Pistulka. With me today, I’ve got Alan shapeE. From Turning Point, strategic advisors, I want to say consulting, because that’s what I saw on one of your website pages, but turning point strategic advisors out of Seattle, Washington. Allen, great to have you here today.

 

Alan Chafee  00:22

Thank you. Glad to be here. I appreciate him.

 

Damon Pistulka  00:24

Yeah, it’s gonna be fun. We’re gonna be talking today about the repercussions of COVID relief, we’re going to talk about your practice a bit more, and how you’re helping people. We might even talk about that University of Oregon Ducks see what they’re doing, you know, a friendly a strong team. I mean, he can’t say anything about bad about that perennial, your strong team but and, and what it’s like living as a duck out of water in Seattle, kinda. Yeah, it’s a little rivalry there. So let’s start off by having you tell us a little bit about your background, and kind of how you really decided to get into turning point and doing what you’re doing today.

 

Alan Chafee  01:08

Great, thank you. I. So my background is University of Oregon Go Ducks. We’ve talked about that. Public accounting, Cooper’s librarian back in the day, doing auditing, did that for a couple years, went out into private industry. And you know, it wasn’t intentional. But the first four jobs I had were all heavy restructuring jobs, every company was on the verge of bankruptcy. And, and, and I should have done a better job vetting my job opportunities. But what I learned is the craft, I learned to love the hard work, it takes you know, being an operator in a company in distress is so different than a company that’s running smoothly or at least running profitably.

And so in 2001, after 10 years of being in private industry, I bought a CPA firm in Bellevue, Washington with the idea that we would do restructure turnaround work from the office of the CFO, similar to what some of the work that the Big Four were doing back before they busted up, doesn’t 4005. So in 2009, we spun that group of consultants out to create a turning point. And today, we’re 36 consultants, primarily in Northwest so that we do have clients around the world and around the US, but all of them have a Northwest connection.

 

Damon Pistulka  02:17

Yeah, yeah. So you are so true, they can’t I just can’t emphasize it enough. It is so much different when you’re working in distressed company compared to a company that’s just operating normally making profits. So what are some of the critical things you think you learned, right off the bat being I mean, you were in the feet to the fire right away.

 

Alan Chafee  02:43

I’m gonna tell you a little bit of the journey. Because what made me successful early on is ability to make decisive, painful decisions. So we decided, okay, we need to cut 32 staff and I would cut 50 or, you know, whatever, it would take a go, go deep, go hard. Get it done, once. People would say to me, oh, my gosh, what about the culture? And what about this customer, and I said, you know, what, culture doesn’t matter when I can’t make payroll, get out of the way. Right.

And today, one of the things I tried to do before we pull off the knife and we still go deep, and we go hard on the expense reductions before we look to revenue increases or margin moves, is finding a set of common shared values, amongst employees, and creating a sense of culture. Because after that, after the staff reduction, everybody’s pretty wounded and hurt. And they’ve all remember, these people have been fighting for some period of time. This is a shock to them, and they’re already beating up, we come in and do that we have a set of common values that we can rebuild on.

 

Damon Pistulka  03:41

Yeah. Well, that if people listening now, if you’ve never been in a distressed situation, what you just said is gold, and it would I, I went through a half a dozen or more of these. But the ability to cut beyond where you need to be today, I posted about this several months ago, because what happens if you don’t is your cut once and then you go all that wasn’t enough, you go back and cut again. And you go back and cut again. But if you don’t cut enough, and the first time, everybody’s wondering if I’m next. Right,

 

Alan Chafee  04:18

you lose credibility. Yeah. And when you’re digging out of a deep hole, and you’re asking people to do more than they’ve ever done before and to do it differently, because what they were doing wasn’t working. You have to have trust, right. And part of that trust comes from common values.

The other part of that trust is being accountable for what you said you’re going to do. When you stand up and say this is it guys. And here’s what we’re going to do. And here’s the vision board. If you have to say oops, sorry about that. I was wrong. And oops, sorry about that as wrong. You’re going to have your very best if they’re still there leave because they can’t trust you interview. People are going to begin to really talk negatively about management behind their back which takes the energy and the soul out of the organization.

 

Damon Pistulka  04:57

Yeah, yeah. No That’s great, great point. So cut deeper than you think you may need at the time. But so you don’t have to do it again until you’re, you’re ready to go on the other side of it. So what are some of the other things you learned working in those distressed companies that were really valuable today, even in even in good running companies?

 

Alan Chafee  05:21

Well, that one is it always cost more and takes longer than you think, no matter what I don’t have a single example where that isn’t true. As entrepreneurial minded people, we’re optimistic, right. And so we think can we can grow this faster, we can negotiate these better contracts, we can change, we can find new customers, we can change our pivot, whatever we’re doing, but it takes longer and cost more than you originally think.

So that’s one. So whatever budget and plan you have, know that it’s going to take longer and cost more and build that alternative budget, you may march to your original ones, you may hold accountability meetings to the original one. But the second one is I look in organizations for what I call the terrorists, right, and I take them out. And often they are high individual contributors who mean a lot to the organization, but they stand behind the curtain.

And they back talk, they pull energy away from the mission, they sabotage the mission, either mentally, so I also look for I don’t always just keep the people who are the very best what they do, I also make sure that again, they’re coming back to that culture piece, if they’re if they’re high, individual contributors, but they’re lone Wolf’s. And they don’t fall in line, we take them out in the first round, too. So I’m now more patient and waiting to make my moves to make sure I understand who the people are, what skill set they have, what they bring, do they fit the culture, and then and then make the moves. Wow. Sorry,

 

Damon Pistulka  06:51

go ahead. Go ahead.

 

Alan Chafee  06:52

I was just say, early in my years of doing restructuring, I was fast, I had a lot to prove, we’re going to come in in three days, you know, we’re lining people up and getting, you know, taking care of severance, or whatever you need to do to get them out the door, get them off the payroll. And now I wait. Because, you know, it’s more than just cutting costs. It’s trying to preserve the soul of the business. So you can grow forward.

 

Damon Pistulka  07:13

That is another mic drop gold nugget moment right there. Because you’re right, it’s yes, you need to move quickly. But you have to preserve the soul of business as well. And I really liked what you said about taking out terrorists because there are some, I mean, they can be good performers to the business. They can be talented in their own way. But like you said, if they’re a lone wolf, and they’re talking, downplaying the management’s ability to do what you’re trying to do or anything like that, they have to go because you have no chance. If you don’t have everyone working together, that’s correct, or much less chance, I should say.

Wow, those are great. Those are great. Who bring back some memories there. So, as you got into this, you learned all this stuff. And now you’re in companies helping them do it? How do you think that the needs of companies have changed over time, because you’ve been doing this more than a few weeks. And you know, it’s kind of changed at how, you know, the whole financing piece of business. And then when you talk about restructuring, turnarounds, all that so So how is it the needs of these business? Businesses really change the ownership groups and things like that?

 

Alan Chafee  08:31

That’s a good question. Let me think about that. I’d say that one is that we find disruption happening a lot more. So we’ve gone into companies that were operating well and the internet came along, or Amazon came along, or you know, the iPhone came along and disruptive print media, right? So corrugated came along and still production to create paper. So what I’m finding today, what I see the most is there’s a lot more just it’s happening rap more rapid, that there’s disrupting businesses. And in ears, there’s a tendency to fight the fight even fighting.

Yep. So dig it, dig down, dig in cut costs to hang in there, find more customers, whatever you try to do without really acknowledging the underlying reason why your industry isn’t changing, right? So one of the things we look at, as we say, okay, is this company having issues? Or is the industry having issues? Right, if the industry as a whole, and I have a number of examples of clients for the industry as a whole has been disrupted when everybody is still fighting the fight the way they fought it 10 years ago.

And we got to that point, you got to stand back and say, What are we going to do differently? Where what technology changes, service change what’s happening? Because if we fight this fight every year, it’s going to be n minus $1 in revenue or an n minus the next year to n minus $1 revenue. So that’s one. I think, I think that that standardization of loan commercial lenders, which happened to the Frank Got Act changes things along, right? You really can’t get much different terms from Bank A to bank, commercial bank, a commercial bank B, which is built up a wide variety of other alternative lenders who aren’t regulated.

So I think that that’s a good thing, right one, whether you’re dealing with your local bank here, a local bank, their, their, their interest rates are going to be plus or minus 50 basis points, the covenants are going to be plus or minus, you know, three to 3.5 times let you know, equity leverage or debt service coverage is all going to be very similar. But by forcing everybody into a box, they create this whole world of alternative lenders.

So I think one of the things has gotten easier is when we come into a business, and they’ve got lender fatigue, and lender wants them out. I’ve got way more choices over here to find a lender, that’s alternative nonregulated, who will lean heavy into inventory without any art like a direct to consumer business, right?

They don’t have a payment on credit card. Yeah, generally have a lot of inventory, right? Well, commercial lender doesn’t like a lot of inventory, they’re gonna give them 20 cents on the dollar, with a pretty low cap. So finding, so I think that’s something that’s interesting. And we’ve been able to use a lot when we’re helping companies refinance an aggressive lender out and give them you know, 12 months to operate outside of a traditional covenant to put their business back on the right track.

 

Damon Pistulka  11:21

Now, this is something that someone asked me the other day, it just came up as you’re thinking of this. So how many times do you see companies that you’re helping to restructure? And not because of the work you’re doing, but because of the work of the company or the industry or other be able to come out of those alternative forms of financing back into traditional financing? Once they’ve, they’ve gone? There? A lot? Okay, do

 

Alan Chafee  11:46

it all the time? Yep. Okay. And one of the things we do is we start early on, if we have a path forward, we have a forecast and a path, and we’re having some success, right? We start to shop it early on. Okay, what we’re getting is the credit back in backs back credit, guys that understand the credit, they start thinking about it banks are hungry, right? There’s more money to lend. And there are people willing to, we’re available to borrow, banks are really hungry for deals. And so we’ve built because of our reputation in the marketplace in the Northwest, and they say oh, turning points bringing us a client, they start to say, okay, when is it going to be ready?

Right. And so we heard they were eight months out and we begin to shop it, we get them ready. We even do introductions to a leadership team. So that’s, you know, that so we get them out all the time. Now, if I can’t get them financed, right, so the banks fatigue, that they’re going to be more aggressive with court action. If we don’t find that alternative lender, we can’t get an alternative lender because it’s, it’s, it’s too far gone, then we’re looking at possibly either equity sale at a big discount or a liquidation. Yeah,

 

Damon Pistulka  12:54

yeah. Okay. Awesome. Awesome. Because I know, I knew, like you said, with a good plan, if you’re executing, you can do it. It’s just a matter of, I think a lot of people here have people that go into an alternative financing situation, may not have a good plan may not have a, you know, a good plan good execution. And you know what that does?

 

Alan Chafee  13:17

So I knew, you know, we’ve had clients go 13 or 18% interest, we can’t pay that. That’s crazy. That was paying six and six and a half, yeah, four, plus three, or whatever it was. And I’d say, look, the only other option is equity in your business today is worth very little. And if we’re successful, you’re going to be worth a lot more compared that change in valuation compared to the cost of a high interest rate, and they often every time they go, Okay, I understand. But how fast how long can we get out of there?

Like, okay, well, it depends on execution. From there, we have a plan, we’ve got an alternative lender, we break it down into daily measurements of inputs and outputs, that make sure we’re on track. I don’t want to wait the end of the month. Yeah. You know, through exactly the month we get financial statements and say no, yeah, we want to know how we did yesterday or how we did this morning.

 

Damon Pistulka  14:14

Yeah, that I tell you that that X that that measurement, you know, like you’re saying on a daily basis, weekly basis at the worst is really a it’s critical. Otherwise, you’ll get like said you get to the end of month No, we didn’t make it. You’d have no time to adjust. just wasted too much. It’s gone. It’s interesting that you say that because I think that’s another key point between a business that’s running normally.

And in a business that’s distressed is that daily measurement of those knowing where you’re at. You know, almost if you can do like to a gross margin line to the business event. It is really is key to staying on track. So as you This is great, man, you experience here is so incredible. So do you think that the Do you think that this region, the PN W really has any special needs different from other areas of the country much or it’s the blend of industries are pretty similar? Are they good?

 

Alan Chafee  15:20

Yeah, another good question. I don’t know if I can answer that. I think that we’ve got unique business here. We’ve got a business environment. We’ve got a lot of Microsoft centric consultants and Microsoft is, you know, that it does cost them more, but it gives you unique flexibility. I’ve watched some lights out hold towers, then one day, we’re done, right? And they everybody, Nick’s ego, and everyone goes dark. Everybody’s gone.

Right? You can’t do that with their employees. Right? Yeah. The latest issue so Microsoft, Amazon, of course, says it doesn’t really rely on consultants and much they’re not that’s not their philosophy, but they do use a lot of local resources in their film business. They’re shipping right and Boeing, right, we’ve gotten heavy Boeing both in the south end and up in Everett, and a large contingent of Boeing suppliers, which most of them aren’t doing very well, because Boeing eats its suppliers alive.

 

Damon Pistulka  16:14

Yeah. Yeah.

 

Alan Chafee  16:16

Yeah, yeah. It’s, you know, I was in that industry, I’ve worked with lots of clients, there are some that figure it out and do well, but a lot of them, you know, negotiate heavily with Boeing going up the curve. They don’t make a lot of money, they just get up and then it goes into going negotiates heavy down the curb again.

And then they just announced today, right that the 737 10, or they change the name for the max of 10. Right, it’s now going to be laid further, I’ve got 200 plus million dollar clients that desperately need that skyline to come back up. So it’s in Boeing has been telling them going procurements been telling them, that’s going to happen. It just announced today, it’s not going to happen yet. Yeah, that’s

 

Damon Pistulka  16:56

there are some unique. I mean, in certain respects, this is almost like the Michigan area in the automotive industry for US Air airlines up here are their aircraft. Awesome. So now, when we were talking about this before, you brought us some interesting, interesting topics about the COVID relief programs, you know, we have a bunch of the COVID relief programs. And that’s kind of it’s one of the topics we wanted to cover today is the repercussions of some of these. But let’s talk first about all about where you saw the COVID relief programs, helping the businesses, and them using it successfully.

 

Alan Chafee  17:38

I think I’ve never seen commercial vendors work so hard. Seven days a week, 10 hours a day doing PPP one. Yeah. Right. They didn’t know what they’re doing very few of them headed sophisticated back into management, they’re doing it all manually. They didn’t it was no one ever done anything like that before. And I work a lot with commercial lenders. And to T that they were exhausted. And not many them got it right. As you know, many use names. And several the local Seattle based lenders didn’t get it. Right. And the ones that did really benefited, right, because, in fact, you know, we were collecting ones or working in ones behind the scenes, like we’re not going to get there.

And so there was a lot of movement. Yes, commercial accounts at the end of that, because there are so exhausted. But that certainly was a lifeline to a lot of clients. And there were some clients who took a lot of PvP and didn’t need it. But for most of our clients, it was in the first round, we were in they were in terror, and when it was going to happen. Second round was much more relaxed, people built the back end, you could do it online, it was pretty easy. Yeah. And then after that there was the small eidl I think it was $50,000, then 250,000, eventually up to 2 million.

That’s a good program. It’s a 3.75% interest. 20 year amortization, the first two years interest accrued. So that’s a good program. And I think we helped quite a bit of our client base squat and take advantage of that. And the amount wasn’t really based on much right. It was just like what you asked for you got it’s a Fed program, they have no ability to manage it, and they want don’t want to manage it, right. SBA program for that one, sorry. And then the one you and I talked about before was the main street and I think that’s going to be a problem.

Okay, the main street was like three or four times 2019 EBIT da it’s got a balloon at the end of the third year. It’s got 15% principal payments starting in year three, so you know, the fourth years fifth years of balloon sorry, and 15% of principal payments. So if you max that out, so you took a two and a half million dollar Mainstreet loan in 2023, depending on the You took the loans, but sometime in 2023, because the program ended in 2021, you’re going to have a 470,040 $75,000 balloon payment principal payment, do I think that that’s going to be tough?

 

Damon Pistulka  20:14

Yeah. Yeah, the Fed

 

Alan Chafee  20:18

has come out and said they have no interest in doing anything about it, if you have to pay it, so I don’t know what’s going to happen. But we’re talking to a number of lenders who took some most banks that were not doing that they could see what was going to happen. And they’re gonna have to go to try to collect a lot of banks did not enter into underwriting Main Street loans, but some of them did. And, and I think there’s going to be at significant issue in 2023, around Main Street.

 

Damon Pistulka  20:46

Yeah, so the main street loans. I mean, I’m not familiar with that program. So Whoa, who would typically be looking at that, or would have looked at that

 

Alan Chafee  20:56

anybody was available for it, you didn’t have to really show need. It’s a, it’s a, like I said, a five year balloon with 15. So interest accrued for the first year, interest only for the second year, and the third year interest payments monthly. And you could choose to make a principal payment each month or you can choose to make a 15% payment on the anniversary and 15% the next year, and then a balloon after that. Right. Okay, the balance. And so I think that it’s the list of we pulled the list. I’m sorry, let me just call me. We pulled the list of borrowers. It’s quite a few of them in the billions of dollars. Wow. Sure.

 

Damon Pistulka  21:42

Yeah, that’s gonna that’s the one that said that you said is going to be kind of

 

Alan Chafee  21:46

happened when the system right, are you backing back here?

 

Damon Pistulka  21:49

Back here now? Okay, good. Yeah. So that’s gonna be a stinger for some businesses, especially if, you know, three to 4x EBIT? Uh, yeah. I mean, if you’re planning, right, you might be able to, you can, you can bring that around to do it, but you gotta be planning for it. That’s for free.

 

Alan Chafee  22:08

We, um, we did contract underwriting for a local lender on main street, there was a client there that did 30 $26 million in Main Street loans. Oh, wow.

 

Damon Pistulka  22:19

So

 

Alan Chafee  22:20

you know, the time off they can have how are they going to do that? Right. It’s it’s a disaster.

 

Damon Pistulka  22:26

Yeah. Wow. Yeah, that’s, that’s hard to comprehend with some of that. So. So as we’re looking at this, but it overall like the PPP programs, eidl those programs pretty solid, you’re feeling like

 

Alan Chafee  22:43

I thought they were good programs and desperately needed. Yeah. desperately needed. Again, there are a few people out there who took some pretty significant PPP loans so that their business was actually thriving, but for the in our space, the clients that we know. And we helped put through 42 or 43, PPP loans. They were very much needed when they took the loans.

 

Damon Pistulka  23:08

Yeah, I know a few that, that we worked with that, you know, it was couple were on oil and gas and things like that, if they wouldn’t have got them, it would have been a heck of a mess. And not and not, you know, these are eight, nine figure companies that it definitely helped them out an awful lot to get through that time.

 

Alan Chafee  23:28

You think about what the government the federal government did, in 2009 and 10, they pivoted to support the banks who had failing loans. Yeah. And what happened then is the banks just failed those companies. We did 37 receptions, hundreds of 1000s across the country, probably I don’t know the number, but they moved to pivot to support the banks, and the banks had not pivot to support the loans, right. And so this time, the federal government, okay, we’re not gonna do that we’re gonna go right to that business owners put money into them. In either case, or we’re certainly a percentage of that, that probably was not used correctly. But overall, I think the result was good.

 

Damon Pistulka  24:08

Yeah. And you make a great point, the result to the actual business owners and the people the borrowers was probably much better through these co guide relief programs. Yes, because it got to the places that it really was being used to, to put I mean, because a lot of the places obviously the PPP loan was helping people keep paychecks coming in, and keep the business afloat, which is really good. We had clients

 

Alan Chafee  24:34

who had laid everybody off, we’re done. And then the PPP came through, and they brought everybody back. Yeah. Right. So that’s, that’s a great benefit.

 

Damon Pistulka  24:43

Yeah. Was so as you see, other things happened in the industry. I know we talked about the repercussions of some of these COVID programs, the main street loan program. Yeah, if someone out there has got it, they need to under Stan, what they’re going to be in for next year. And really make sure your financial people are planning appropriately. And you’re ready for that.

But as we’re coming out of this now, and we’ve talked about this a couple times, what are you seeing just from the effects of COVID, on the companies in general, the economy, certain areas of the company, because you’re in a unique position at turning point there, because you’re working with companies that are distressed, that are struggling a lot of times. And I think that where we see at first kind of as an indicator of what the what’s happening in the economy. And I might be wrong, but I just thought that we might be an interesting thing to talk about.

 

Alan Chafee  25:46

It may seem this is the right answer, because I understand it. I think I understand the question. Here’s what we’re seeing in our client base right now. And I think we’ve talked a little bit about this before, they’ve got too much inventory. Right? The banks are slowly being ratchet back covenants, we just had a client that renewed their line of credit for a million dollars, not even a very big one.

And the bank went from 3.5 debt to equity leverage ratio to 2.5. Now they qualify, but the banks ratcheting it back, because it’s an early warning signal for them, right? If this client pushes, that means we’re losing money equities going down, right, we’re going down, that signals them quicker, that say, we need to be looking at this. So you’ve got banks ratcheting back their credit, you’ve got companies who’ve got too much inventory and more on the water. For the most part, I ordered what I ordered last year is not exact fit for what I need this year.

So the result of that is going to be I’m going to have inventory, I can’t really sell potentially, potentially, right? We heard I just was sharing with you that we heard Costco CFO on the analyst call just last week saying well, we got 24% Too much inventory, most of its Christmas trees, right, we ordered way too much last year, they’ve been sitting there all year. I find that in our client base, that our manufacturing distribution, 100% of them had the same problem. In the COVID Bump.

They all didn’t have enough product, they ordered everything and get their hands on, it got delayed, or down in demand. It all showed up. They’re struggling to pay for it. It’s not the right product for the season. Target. Yeah. I mean, you got some of the best logistic companies in the world, Amazon target Walmart Costco, who got this wrong? Yes. Right. And look at that, you know, 100 million or $50 million e commerce or manufacturing distribution, they don’t have that level of sophistication. And they’ve all got their way at the same problem.

 

Damon Pistulka  27:41

Exactly. He’s got to be a lot tougher for them. Just wow. Because yeah, you don’t have the, the 10s or hundreds of millions of dollars of exceptional physical to do this, right. So I’m sitting here with, you know, like you said, a 20 or $50 million company trying to do that. And, and it is interesting, because I think that this is going to bleed over. I mean, this is not going to go away. And then the next couple of months, that’s for sure. with what’s

 

Alan Chafee  28:11

happening now, do you think? No, it’s not going to go away. I mean, they’ve sitting on that inventory credits, ratcheting back, cost of credits going up, right, or interest rates are significantly up both not only in your home house mortgage, but also in your business lines of credit or term notes. Demand is still down in big parts of the industry industries, right? Aerospace, we know is still down to consumer consumption is down the real estate market slowing, which means that more consumer consumption is going to go down. So I think that you know, this is this potentially could be pretty significant. Pretty rough coming into 2023.

 

Damon Pistulka  28:48

Yeah, yeah. What are some bright spots? You see? Because I mean, it’s we’ve talked about doom and gloom, because that’s easy. That’s where do you see some bright spots where people are going, oh, man, it’s things are going well, for us now.

 

Alan Chafee  29:05

I don’t see a whole lot of bright spots. If I were to add to my doom and gloom, I’d say, you know, the cost of hiring talent is up 25% from a year ago. It could be if I was to work really hard, I might say that people are willing to switch right now. Now they’re getting a premium. But even in our business, we’ve had some fantastic talent come to us that we would have had a hard time get before. Now they’re expensive. It could be that now with that the common perception is I can leave my job today and get a 20% Bump. We got people entering the marketplace that would not traditionally be leaving their jobs

 

Damon Pistulka  29:45

at that point. So if you’re in desperate need of people and can’t afford to pay them, you can probably get them. Yeah,

 

Alan Chafee  29:52

because businesses obviously need the very best talent to be successful. I’m a firm believer in that right? Yeah, yeah. If you can get the very best talent, they will pay for themselves. Yeah,

 

Damon Pistulka  30:03

that’s true. They a player’s will, will more than make up for a lot of BNC players franchise for sure. Yeah, cuz I’m trying to think through I mean, we’re not around it here. But I know the oil and gas is going through a pretty good time they’ve been in extended highs and you know, something’s happening there.

But, but there’s, but you’re right. There’s a lot of industry that is really struggling. And some, you know, when you look at some of the heavy industry, or heavier industries, like the trucking industry and things like that, they’re still the supply chain is still just kicking them so hard that they can’t do what they do. I’ve got a couple of friends that are in larger, or publicly owned kind of companies there.

And you know, when you can’t get product to either assemble or deliver what you’re supposed to deliver. And in these big facilities. Well, I think we have a pretty good, pretty good graveyard or partially clean or not graveyard, but waiting area of partially completed trucks here south of Seattle or so. So thesis Yeah, yeah,

 

Alan Chafee  31:10

I think large tech is still going strong. Yeah, small tech is getting crushed by valuations. But the clients that I have, and the people that I know who are supporting Microsoft, and Amazon and Google and Facebook, all in Seattle here are still going red hot. Okay. But that so that’s if you’re looking for something industry that’s doing well, that’s still going pretty well, in both recruiting for those and development of software development. Those guys were doing well.

 

Damon Pistulka  31:38

Yeah. Yeah. Well, it’s, it’s interesting to go because you, you obviously get to see across the board and understand it a lot more. But well, hopefully, that the people that at least the people you’re working with, and some of the other people that have run into some of these challenges are successful in doing that. Because I mean, we could, it could be pretty ugly for a long time, if we don’t get a few of these things ironed out in the next couple of quarters. So what do you think? What do you what are you guys thinking for the, you know, the q1 2023 kind of thing? Are we going to be kind of more of the same? Or?

 

Alan Chafee  32:19

I think our restructure business is going to be very busy. Yeah. I think that we’re just now beginning to see that pick up. And there’s no solution. Short term, they’re gonna break Feds gonna raise rates again. Right. So that so it’s rates are still going up. fuel prices are coming down a little bit, but not fast enough. Yeah. Employees are still expensive. Supply chain is better. But most people got too much of what they have. They can’t afford to buy what they need. So I think that it’s we’re going to be for a while into, you know, still more of the more businesses in distress than we have been prior to the COVID.

 

Damon Pistulka  33:06

Yeah, yeah. Yep. I would agree. So now you guys do one thing, I think is pretty unique, though. You actually helped to develop CFOs. Explain a little bit about that. Because you don’t I mean, I mean, people say, Well, we develop CFOs for middle market companies.

 

Alan Chafee  33:24

It’s actually my true passion. The reason I’m in this business, yeah. So when you go to school, and you get your accounting degree, and you go sit the CPA exam, and you go to one of the big houses, they don’t teach you how to be the CFO in the middle market at all right? They teach you for lack of a better word, big company gap, right?

We’re in we’re, we’re doing stuff, we’re checking source documents and validating their recording transactions, according to the GAAP or you know, and so, when I left, I thought I was, you know, like, hey, a couple of years of Cooper’s accounting degree, I got my CPA went to private industry, and I got my job at a $25 million Candy Company as the controller. I didn’t know anything. Everything I learned school is out the window. Yeah, I didn’t know how to use the system. I didn’t understand inventory terms.

I didn’t understand working process accounting. I can, I had memorize the journal entries, which is far different than every time you sit down in a month, and you got to figure out what revenue is. It’s not what you invoice is what you earned, right? And so all the stuff that we do in the middle market, I didn’t learn in all those years, I went to school and worked in the accounting field. And, then I went from controller to CFO, and my boss at the time, the still very good friend of mine would say, I, you know, I do this big write up. He’d say, I know what to do with this.

And so I would work harder to give him more numbers and he’d say, Oh, my God, what are you doing? I don’t want to do this. And, and then he got he left. And I became president really? You know, 300 employees primary aerospace should not have that job. And my controller who I trained, brought me the same book and I said, I don’t know what to do with this. Oh my god, what am I gonna do with all these numbers? They make no sense to me, right? I can’t connect what’s happening in the spreadsheets to what I’m seeing on the plant floor, what my customers are telling us.

So I quickly learned how to be see oh, so my, my position is that in the middle market, your CFO has to be a CEO, they got to understand, you got to get time, financial statements out time, they got to be according to the GAAP, they got to be TTL, you got to have a variance. You gotta have budgets, you got to know what that’s where we start, we got to move from the tower, we often call it the accountant sitting in a towel around the carpet, out into the factory floor for lack of a better analogy, and go to work. Right? How do we bring inventory turns? How do we increase them up?

How do we increase inventory turns? How do we get better, better labor utilization? How do we? How do we negotiate smarter with our vendors for just in time delivery. And so those things that we that I spent eight or nine years in private industry, learning how to do across three different companies. And I sit back and I’m like, okay, the CFO and the middle market, it doesn’t really exist. They’re either controllers, or their CEO. So how do we blend that to what I call shaping the future?

Like, how do we get from the office of the CFO who understands operations, to sit with the executive and helps shape the future because he’s only for years, she are the only person on that team, who has the financial models to dial like, Okay, this means this, and it means this and here’s our wage a range of outcomes if we do the following things. Now, whatever we forecast is wrong, by definition, we can’t get it right. But I can get close. Yeah, I’m passionate about that. The only reason I started this business, was to train people to be CFOs in middle market as a way to maybe defend the choices I made in life. But I want other people to know.

And so we have our team talks about it every week. What are we doing to develop our staff accountants to controllers to CFOs, to CEOs. And that magic happens when we just have one of our partners, who’s been a great CFO for us for about five years, come to me and say, Okay, I just got involved in the sales team. And I, you know, I got him to do these following things. And I changed this and I did that. And I’m like, Okay, you got it. That’s exactly what a great CFO does. He didn’t care that CF sales have the report to him, he cares that they’re not getting the job done, that they need to be successful and moves in there. And he figures it out.

 

Damon Pistulka  37:22

Yeah, that’s awesome. Because you’re you are teaching people critical skills, finance people critical skills, because I used to be the CEO when you had to do what you’re teaching CFOs to do. From haphazardly, because I don’t have the financial background, I can see what the real world is, or what’s happening on the factory floor and connect that back to the numbers. But the CFO has different unique when they see that they can translate that into financial results, so much easier than a CEO. Right.

And that is what’s critical in companies, especially, you know, if you’re investor owned, or your, God forbid, publicly traded or something like that, you know, you’d live and die by the numbers. And that CFO can be a tremendous help in that this is really cool. It’s great. Great to understand. And so do you. Do you then help other companies develop their controllers into those people as well? Yes. That’s awesome.

 

Alan Chafee  38:29

Often we get hired this okay. We don’t want you here forever. Yeah. What do we have the right person yesterday? Oh, could be either. Yeah. If we don’t have the right person? Can you help us get it? Get that person? Yes. And then once we have them, can you help them along their journey? To be a CFO in the middle market? Yeah, I’m like, Yes, we do that.

 

Damon Pistulka  38:48

That’s awesome. That’s awesome. Because you are really that is really a when you can connect the numbers to the what’s happening in the business. It’s like, I don’t even know I’m sure it’s been in a movie where you’re just sitting there and all of a sudden the lights turn on matrix. The media Yeah, matrix. Exactly.

There you go. That’s it. The Matrix, you know what he’s when he sees the matrix, it’s, it’s just like, the world becomes so much clearer because you can then you can begin to see if we do this, it does that. And it is and you can start to really not only visualize, but then execute those things that can make a tremendous difference in the businesses. Yep. Yeah. Ah, cool stuff, man. I didn’t even realize we were gonna get to talk about that. So that’s cool.

Well, it’s been awesome getting to talk to you, Alan. And I’m so glad we were able to talk about some of these COVID programs and again, people if you’ve got that Main Street loan, go study the terms on that thing, because next year, you could be in for and beyond, you could be in for smuggling prizes. If you are having trouble and don’t know where to turn, it may be worth giving the people here at Turning Point A shout. Their website is turning hyphen. point.com. Right? And, Alan, what’s the best way for people to get a hold of you if they need to?

 

Alan Chafee  40:24

Well, you can always reach out to me on LinkedIn, I can give you my email. It’s pretty simple. Alan C, as in cat Alici at turning dash point.com

 

Damon Pistulka  40:33

There we go. There we go. Well, it’s great having you here today. Alan, we’re talking from turning point strategic advisors, having you here talking about the repercussions of the COVID relief programs. Thanks so much. Everyone’s listening. And I appreciate you being here today. Alan, thank you so much.

 

Alan Chafee  40:52

Thank you for the opportunity, and it was great fun.

 

Damon Pistulka  40:54

You bet. We’ll be back again on Thursday with another show. Thanks, everybody for stopping by. Have a great day.

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