Turnaround Case Study - Eight Ingredients for Success

The Background:

(For the purpose of this case study, the company will be referred to as Med_Dev.)

Located in the western United States, Med_Dev is medical device company that was run by a father/son team, where the father was the founder and CEO and the son served as president.

After 18 years in business, management and employees had an average tenure of nine years. The company also reported sales of over $165 million. Gross profit margins were 42% and the EBITDA was +10% of the revenue. However, shareholders were concerned the company wasn’t growing externally and that their intellectual property was nearing its expiration.

Med_Dev had five major products – primarily used in surgery applications – that accounted for 90% of their total business. In year 16, Med_Dev had acquired a “strategic” entity. This was a highly engineered medical device firm utilizing stainless steel for medical surgery. The cost for the purchase was $80 million and had been financed mainly through short-term cash.

The Problem:

The acquisition of the entity was a disaster. Synergies were never developed, which absorbed the time, focus, capital and energy of the executive team.

Med_Dev hired a non-expert attorney, who also happened to be a friend of the founder. After a review of the due diligence process it was noted that a host of issues had not been identified. There were multiple challenges in the agreement that caused significant legal issues along with a major misunderstanding of all parties as to the structure of the new entity. Examples of the challenges included, but were not limited to, employment contracts, tax issues and intellectual property disputes.

By the second year after the merger, the consolidated entity was breaking even. However, they had significant debt and had lost several key employees of both entities.

Management, although dedicated and experienced in the industry, had reached a point where their level of expertise and knowledge was being challenged. For example, the controller had no experience with international operations and 65% of the acquired company’s business was international.

The investors, who in the past had received nice, consistent dividends, were beginning to demand their regular dividends. After year two, they lost patience and saw no end to the challenges, which is when they contacted Lakelet Advisory Group (“LAG”).

The Solution:

LAG’s solution involved the “Eight Ingredients for Success” methodology:

 #1. Benchmarking. Within 72 hours of initial conversations with the investors and financial institutions, LAG was working to benchmark Med_Dev against others in the industry and against themselves. The benchmarking process drills down not only into financial results, but also into production/manufacturing metrics that show where profitability is being lost.

For the Med_Dev engagement, LAG focused on:

  • Quality indicators. These had once been the pride of the company, but were now steadily plummeting. Quality is paramount in all production – and even more so in medical industries. Unfortunately, cash was tight and key suppliers had left due to inconsistencies in pricing. Another challenge was team morale, which was also impacting quality (see below). 
  • Very high turnover. LAG met with three managers who left Med_Dev post acquisition. They were asked why they left and what they saw. All three had been with Med_Dev for over five years. All responses were similar; there was a lack of “long-term direction.” Med_Dev was described as constantly “fire-fighting.” In addition, the present management of the company was causing most of the problems. Also, the management from the acquired company had a one-year commitment to stay with the combined company. One year and one day after the merger, the President, CFO and Chief Medical Officer left.

#2. Site Visits. By the third week of the engagement all of the facilities had been visited. These visits included more than just a walk-through; LAG listened to what each department had to say and what the team’s concerns were. This provided key insight; after all, the team members know the business and deal with the challenges first hand.

During the initial phases of the engagement, LAG utilized an amnesty program. In other words, any “bad news” or issues brought to the attention of the team were not held against the messenger or their performance.

Mid-level managers were interviewed first; they generally see problems before they hit the executive level. The next set of visits included prior employees, current employees, vendors, investors and customers.

This was the most informative step because it would either confirm LAG’s suspicions or allow LAG to refocus on the cumulative knowledge of the stakeholders.

#3. Company Assessment. Based on the information collected during the site visits, LAG performed a “deep dive” into the challenging areas of operations. This is where it is determined what caused the problem and involves sifting through the symptoms down to the actual root. This is the most important and intensive step.

The assessment revealed that these were two dysfunctional organizations that had a few customers in common. The common customers were becoming frustrated due to the inconsistent, confusing and erroneous messages presented by the new consolidated team.

#4. The Strategic Plan. With the buy-in of all stakeholders, LAG developed a comprehensive plan that attacked the challenges and opportunities from operational, marketing and financial perspectives with responsibilities and an aggressive time-table included. It was determined that Med_Dev had to relieve themselves of the acquisition with the realistic goal of minimizing loss.

#5. GAP Analysis. Using the results from steps #3 and #4, a GAP analysis was prepared. Key areas found during the analysis included:

  • Too many key players had left; those key players and employees who remained could not accept the change or reality of what Med_Dev had become
  • Executives with international experience were needed
  • Those with hands-on experience with the acquired entity were needed
  • There was an immediate need for a COO and CFO

#6. Roadmap. It is important to attack the current problem in a way that does not jeopardize or limit long-term development. The roadmap LAG developed, outlined not only what was missing to achieve a profitable and manageable entity, but also the key fundamentals that would help take the company to the “next level” post-turnaround as well.

#7. Execution. Not more than one week should go by without an all-team meeting. It is at this meeting that what has been done, by whom, the results and how we can confirm this will be discussed. For this engagement and all others, LAG sets an agenda and follows a basic format. The meeting will not last more than one hour; understandings and commitments are wrapped up during the last five minutes; each item has an “owner” and a timetable associated with completion; the concept of “blocking and tackling” is incorporated; and meeting minutes are distributed within 24 hours. This execution approach allows us to focus on CI – Continuous Improvement.

#8. Follow Up. The success of a turnaround engagement is based on follow up. Once an item is completed from Step #7 above, it should be readdressed every month for a three-month period to:

  • Ensure the item is truly optimized
  • Ensure it’s generating the results expected
  • See if the solution can be improved upon
  • Confirm the root cause and corrective measures
  • Determine any known or unforeseen ramifications in the corrected items

The Results:

Within nine months, Lakelet Advisory Group was able to find a buyer for the acquisition. The COO that was hired has since become the CEO and the family, who originally ran Med_Dev, has taken a “back seat” to the new management. The bank refinanced the short-term debt into an achievable financial package. Although Med_Dev lost 15% of its sales volume, it is now back to its core business.

Looking for Strategic Partners and Capital? Lakelet Capital LLC >>