MICHAEL CIAMPA
Owner, CFO Partner – The Delta Group. Michael is an expert at managing financial complexity in all types of businesses. As a former banker, he has over 20 years’ experience working for and with entrepreneurial owners who require insight and assistance in navigating through challenging times. He focuses on the financial well-being and health of each business. Drawing from the history and collective experiences of the Delta Consulting Group he ensures that every consultant’s time is leveraged to add the greatest value for the client. Past engagements have included business acquisitions, asset divestitures, company turnarounds, orderly liquidations, growth and downsizing plans.
LEO CORREIA
CPA, CFO Partner
Leo has over 20 years of accounting, finance and operational experience in a variety of industries including manufacturing, construction, distribution and service industries. During the past 10 years, Leo has worked with Delta, helping companies through turnarounds, restructurings, acquisitions, downsizings and growth cycle management. Leo is a specialist in cost analysis reporting systems and computer modeling. He has developed customized computer models and cost systems to help companies navigate through transitions and growth stages to reach their goals. Leo has also been an auditor and tax advisor to a variety of companies in the manufacturing, construction, distribution and service industries.
July 16th, 2017
31 Comments
1. Wachusett44 July 17, 2017 at 8:43 am – Reply
Michael, Leo-Having read both your bios above, can you please clarify what your firm does? Do you provide interim CFO services? What are your sweet spots(i.e. turnarounds, restructuring, distressed)? Thank you
o mciampa July 17, 2017 at 5:50 pm – Reply
Hi Wachusett44
This is Mike
we do provide interim and permanent part time CFO services – our tag line is – we bring discipline to your vision – we provide forward looking financial business models to small to medium sized companies (our clients range between $4mm – 40mm in annual revenues – have between 25-300 employees – borrow between $2mm and 10mm in total debt
I am an ex- banker who has developed an expertise at helping clients who have strained banking relations – sometimes its only a matter of assisting a company with some debt restructuring – others we provide ongoing advisory support with business management with a focus on the financial performance of the business over time
most of our clients (presently have 30+ active clients) are financially healthy businesses who have had some type of financial difficulty at one time – we also actively look for prospective clients who are growing and need leadership support in their CFO role
Hope this helps
2. terra July 17, 2017 at 8:45 am – Reply
Michael, what role does your firm play in acquisitions? Are you involved in the due diligence? Please provide specific answers. Thank you
o mciampa July 17, 2017 at 6:08 pm – Reply
We provide due diligence as well as advisory support throughout the negotiations with Buyer or Seller – depending on what side of the transaction our client is on – we generally have an existing relationship with our clients before we get involved in this type of service – because their has to be a level of trust already in place to be open and effective when assisting anyone or entity that is considering this type of risk taking – it generally costs more than anyone can anticipate – when we do this for clients we assume some risk in the form of a success fee because the process can take on a life of its own (another reason we only do this for existing clients)
Am personally supporting one clients opportunity at acquiring a division from a customer that they presently do work for
Helped define and facilitate the valuation model for acquisition (we have a strong understanding of their business model because we have been modeling their company for many years) – the required funding need (as well as arranging bank approval in case acquisition is successful) and helped with the refining of the letter of intent – and will be involved in any further diligence if it moves forward – this client is a long term client – we know the players well and they trust us – when we did the top down analysis – it was within $40k of their bottom up analysis on a forecast of cash flow for year 1 – just lucky – but it helped reinforce the proposed acquisition structure and valuation and increased our confidence that we had valued the prospective asset well – it also provided a baseline for us to find flexible options between front end and back end cash paid for asset – a big part of the proposed value for the asset was in the form of an earn out – it will net the selling company approximately $2.5mm in cash over 3 years – on a division that they are losing money on
this is something that is still in process
each engagement of this type has its own uniqueness – the process can be as detailed as the client wants – we tend to keep a view on the big picture through the financial analysis lens – and only get detailed with the due diligence after an LOI is agreed to
Hope this helped
Mike
3. Wachusett44 July 18, 2017 at 7:15 am – Reply
Leo, how important is cost analysis for a middle market company? What are the misses that you see companies repeat across industries?
o mciampa July 18, 2017 at 10:18 am – Reply
Cost analysis is one of the components used in pricing your product or service, defining your break-even point, and forecasting your cash strategy. Your pricing strategy starts with understanding your costs of your product or service, both direct and indirect, and identifying the value in the marketplace. Your margin and volume will define the contribution to covering your operating expenses. Calculating the break-even point is an easy process, the most common problem is not properly defining the break-even point. We like to define the break-even point at the 1.2 to 1 debt service coverage ratio (DSC ratio) (common ratio in banking situations). This is the point where you are generating enough cash flow to cover your debt service. Cash flow above this level is the cash flow that you can create a strategy around. We define free cash flow as the cash flow above the 1.2 DSC level. Uses of the free cash flow generally fall into three categories, revitalization, growth and ROI (distributions to owners). Now that you have a break-even cash flow level, you need a cash flow forecasting process that will accurately define your free cash flow (cash flow above the 1.2 debt service coverage) and how to utilize it. Understanding your cost structure is critical to forecasting the income statement but forecasting the balance sheet will define your future cash flow availability or constraints. Understanding and defining metrics of the behavior pattern of the items on your balance sheet coincides with the cost analysis. An example of this is Days Sales Outstanding in Accounts Receivable (DSO in AR). A growing company that creates good cash flow (EBIDA) can still have limited cash availability because of the growth growth of their AR.
The biggest “misses” we see across industries are forecasting the balance sheet to understand cash constraints, defined metrics in the company that measure performance and roll up into the forecasted financials and incorrect financing structures. It’s common to see debt structures that cater more towards a bank’s needs or comfort zone rather than the company’s needs. When you understand the risk drivers for banks, you can better negotiate and structure a financing package that will fit their risk tolerance and, more importantly, your company.
Please let me know if you would like me to expand the discussion on any particular area.
Thanks for the question.
Leo
4. Tiger111 July 18, 2017 at 7:18 am – Reply
Mike, in your bio you mention leveraging the consultants time to achieve the greatest value for your clients. Can you explain what this means? I interpret this more as an internal capability.
o mciampa July 18, 2017 at 8:01 am – Reply
Hi Tiger
we have always felt that the most cost effective solution for our clients is to ensure that as much of what a Controller or CFO’s role in a small to medium sized business should and can be done with internal resources
sometimes that can be the owner or someone in the business who needs a modeling or reporting tool to assist them in their ongoing roles – helping train an internal accounting resource to extend their sphere of influence, insight and abilities or understanding of changes in critical business model metrics that need to be monitored
being available to provide insight to complex situations that require financial management expertise – sometimes solving a tough internal problem that management sees as daunting can be done with limited assistance from an outside resource that just requires a call and some insight into what has management stuck
Mike
5. ohio July 18, 2017 at 7:53 am – Reply
What are the top 3 mistakes companies make that results in them being in a turnaround situation?
o mciampa July 18, 2017 at 9:51 am – Reply
In real estate its location location location
In business planning planning planning
Most small and medium sized businesses underestimate the cost of growth or significant risk taking over time
This generally leads to funding investment costs from working capital or short term funding
As the investment in growth occurs results from these activities and investments generally take longer than management anticipated – many times leading to compromised liquidity events – if your financial institution gets impatient it can lead to a bank wanting to limit their risk and compounding this problem – this can result in pressures the company and management did not plan for and when we would likely get involved
This is one example of how companies can find themselves in a perceived turnaround
Not reserving sufficient retained earnings can be a mistake
Not planning for company renewal
Not paying close enough attention to customer needs
Having disruptive technology impact ones industry
We focus on controllable aspects of a business model with robust planning tools (models) to help understand and mitigate business risks over time and help to assure a sound financing structure that reflects the type of risks being undertaken by management over time to limit any effects of a business turnaround
6. turkeyslr July 18, 2017 at 4:51 pm – Reply
Mike or Leo, for turnarounds does the question really start with the strategy-does the company have a reason to exist and then dives into the financials. To be swimming upstream in an industry where the pie is growing smaller and all the competitors are bleeding money has never made sense to me. you mention in your previous response about “controllable aspects” but what is happening outside of your company-trends, industry, competitors is not necessarily controllable. Your thoughts?
o mciampa July 18, 2017 at 9:38 pm – Reply
Many of the turnarounds we have been involved with are in a critical state. They have suffered substantial losses that have depleted their cash and other resources and usually management has exhausted most of their options along the way. The first question is, can the company get to a positive cash flow in some form (usually a scaled down version of itself). This is a mathematical view of the business to see what makes sense. If there is no path to positive cash flow, then sale or liquidation are likely the only options.
If there is a path to positive cash flow, what is the cost of capital and does this make sense. Examples of this include an orderly sale at a price higher than the liquidation or does the new scaled down version of the company position it to move into other markets that are not shrinking.
The entrepreneurial vision (and strategy) of the company’s leadership is a critical component of this evaluation. Without a good entrepreneurial vision and innovation, the company will likely die in the shrinking market. Usually, fighting to get to positive cash flow only makes sense if there is a way the company can innovate if it were to get to a stable state where you can evolve the company into something new like reducing the dependency on its current shrinking market and grow in new markets.
I don’t believe it is either numbers or strategy, it’s both at the same time.
Leo
7. mciampa July 18, 2017 at 5:11 pm – Reply
Hi Turkeyslr
The focus for a turnaround – in some instances is survival – many times emotionally its difficult to address the idea that their business is going the way of the buggy whip
in general I agree with you – if the underlying strategy is bankrupt – so soon will the business be – sometimes if you can remove the short term financial constraints – management can then reconsider what an appropriate strategy for their business should be – we help listen and constructively add value where we can in these situations – some declining industries have long term purpose
we do our best to be seekers of truth and reflect back to management what their options are – sometimes an orderly transition is best for all parties
Thankfully this only happens in a very few circumstances – in my career I have helped business owners transition their business assets (not as a going concern) 5 times – have worked for over 100 businesses
I discourage the referral sources from sending these our way (because these situations impact me emotionally in ways that age me faster than I would like)
Helping growing businesses that have a purpose in life and a dynamic leader who understands their customers and markets well – and who has a vision that aligns with a business model that makes sense – is where we always would like to be
my career started with difficult situations that require immediate urgency – something that I like when as you say the underlying business strategy makes sense – and somehow the business lost their way because of ownership transition or too much leverage or taking risks that did not work out as expected – these are clients we generally end up with and hope to serve for some period of time – generally it comes back to supporting financial planning and providing advisory services that complements senior management skills – with financial leadership skills
8. wooster July 19, 2017 at 8:33 am – Reply
Mike, Leo – is there typically a turning point in distressed situations? What are the typical triggers? Thank you
o mciampa July 19, 2017 at 9:10 am – Reply
I assume by a turning point you mean liquidation vs recovery. Yes, the first test is to see if the company can get to a positive cash flow. We have a proprietary modeling system in Excel which allows us to to see the performance drivers in the company and measure the company’s future performance. By adjusting the drivers, we can accurately project the company’s future cash flow. At this point, we can measure the capital it would take to achieve this stabilization point and explore what options are available to the company once it gets to stabilization. At this point, we make an assessment of the overall situation and see if it makes sense to go through the process of recovery.
If you’re looking for one metric that will define the tipping point, there is none. Our method of determining the tipping point is mathematical based on our forward looking finance model, this tells us what the possibilities are before any action is taken. The model is also flexible, so if new information becomes available that would change the conclusions, we can act on it.
Leo
9. wingsb July 19, 2017 at 8:57 am – Reply
For cost analysis, how do you not throw out the good with the bad. For example, we were engaged in a SKU analysis where we decided to discontinue 10% of our bottom SKUS. The issue is we didn’t realize the impact of doing this on our other orders. In other words, when our customers were placing orders they were looking at some of the bottom SKUS as an integral part of their order even though from our perspective, the numbers didn’t justify carrying them. How do you avoid this?
o mciampa July 19, 2017 at 4:59 pm – Reply
You really shouldn’t look at a product cost analysis alone. This should be done in coordination with a customer profitability analysis. It’s very common to have a few customers that have low or no profitability and you will need to make a decision to increase prices or terminate these customers. Once you are done here, now look at the profitability by SKU (reducing the units sold by terminated customers). If you have SKUs that have little or no margin, then you need to look at which customers are buying these SKUs and what is their overall customer profitability. You also need to consider if you will lose the customer if you either raise the price on these items to a profitable level or discontinue the items. Sometimes the result is that you can’t raise prices, now you are left with the decision to keep the products as an opportunity cost of keeping a mid to high margin customer. You may also want to consider if discontinuing the SKUs will limit your customer acquisition opportunities in the future. Sometimes these lost leaders can be very useful in acquiring high margin customers in the future. Product pricing is a strategy, not just a numbers decision.
10. FlavorFL July 19, 2017 at 2:00 pm – Reply
Can you clarify who you typically represent-is it the bank who brings you in, creditors committee or the company? Isn’t it true that there is a shift in obligations once a company is in a distressed situation?
o mciampa July 19, 2017 at 5:31 pm – Reply
We represent the company. We get referrals from banks to help companies, both profitable and distressed, that are struggling through some challenges. Most of our referrals are profitable companies but when we are involved with a distressed company, our engagement and obligation is with the company. There have been times when we were referred to a company from one bank and the end result was refinancing with a different bank because it wasn’t a good fit for the company or the bank.
Even in a distressed situation, our obligation is to the company. The company is the one that engages us to represent them. A creditor committee only exists in bankruptcy. We try to use bankruptcy techniques outside of bankruptcy.
11. Brookline777 July 20, 2017 at 7:04 am – Reply
Can you share an “aha” moment st a turnaround?
o mciampa July 20, 2017 at 10:39 am – Reply
There are very few aha moments in a true turnaround
its generally a stress filled situation where a company and management are in a fight for their life
Our first endeavor is to reduce the level of anxiety – look for a path toward liquidity – determine if a plan can be generated that would allow the banks and creditors to have patience so the business can assess and plan quickly what it needs to do to become profitable as well as understand what makes it successful with its customers
Many times it requires some restructuring of the business model to regain profitability
The AHA moment comes when the business becomes stable enough to start the process of operating under more normal conditions
Focused on customer needs, wants, demands – ensuring that a fulfillment model exists that can meet those demands as required -as well as having an efficient and capable administrative process – all of these functions ensuring a sustained cash profit over time – ideally generating enough cash to work out of the hole on the balance sheet that has been created as well as providing some cash for investing activities – generally getting into a new lending institution can help during this process
it sounds easy but when there is emotional pressure throughout the business – getting to a sense of normalcy is critical
Someone I respect who is an industry expert at helping businesses in general defines it as helping businesses become unstuck – staying in the moment is helpful and doing your best not to project what will or will not happens helps – but somehow finding the space to figure out a path forward that makes the most sense and is acceptable to key constituents of the business – sometimes Luck has to be with you as well as the good will of your key employees, customers, vendors and financing partners
12. ohio July 20, 2017 at 8:00 am – Reply
In turnaround situations, how do you deal with negotiations with vendors? Are you able to convince them to take haircuts? If so, how?
o mciampa July 20, 2017 at 10:44 am – Reply
Honestly – sometimes there has to be a story that helps convince them that abandoning the situation is not in anyone’s best interest – and especially there own
we endeavor to use transparency as a way to build trust between parties – we like to provide vendors options – certainly the company has to be able to perform to these options if it wants to have the support of any of there creditors (secured or unsecured) over time
There is no convincing anyone of doing anything – unless they believe it is in their best interest (someone’s perceived best interest can change over time and as conditions change)
13. Gator82 July 20, 2017 at 9:45 pm – Reply
Across different sectors, manufacturers, distributors etc.., do you find there are more similarities or differences when it comes to cost accounting?
o mciampa July 21, 2017 at 8:30 am – Reply
Cost accounting has a set of very distinct principles that should be followed. These principles are based in accounting theory and have many variations that adapt to different industries and individual circumstances within an industry. An example of this is activity based costing in applying overhead (OH) in a manufacturing environment. If you divide the total annual manufacturing overhead by the estimated direct labor hours, you will arrive at an overhead rate per direct labor (DL) hour that can be applied to the product cost.
OH costs / DL hours = OH rate per hour
Variations of this include breaking the OH and DL into departments and determining a rate per department or using machine hours as an activity base instead of DL hours. In most situations, it’s not a matter of right or wrong application of the cost accounting principles, it’s the difference between good, better, and best.
What’s interesting is that you can also apply these cost accounting principles to a service based business. Obviously, there is no direct materials involved like there would be in a manufacturing environment, but the rest of the cost accounting principles apply. I have actually applied these principles to a CPA firm’s services.
The most interesting part is that when you use these cost accounting principles properly (the “best” way), you end up generating cool data that will help you develop metrics that drive you business. You can use these metrics weekly, or even daily, to measure and control your business performance, rather than waiting until the end of the month financials to be published to measure your performance.
To answer the question, there are similarities and differences, but the one common factor we see is the need to develop better systems that create more quality data. Now we see the need for dashboards. Dashboards are the ability to quickly understand large amounts of data with the ability to drill down into data that is in question. Pivot tables in Excel are a great tool for this.
Thanks for the question.
Leo
14. Brighton2222 July 21, 2017 at 8:04 am – Reply
Michael, in your response to Ohio you answered that perceived best interests can change over time and as conditions change. Would you provide an example of this?
o mciampa July 21, 2017 at 9:46 am – Reply
once a creditor of any kind starts thinking the likely hood of being paid back is diminishing they can become defensive (this I think is natural)
Many things can lead to a business condition to change – technology, general economic conditions, competition, key member of management leave (gets sick or dies suddenly), key supplier goes out of business, key customer goes bankrupt etc. etc.
most businesses are unable to have mitigating strategies to deal with all possibilities – but when ever something happens that shocks a business – creditors will react in ways that require proactive measures – sometimes its just communications – sometimes it requires significant changes on behalf of the business itself
generally what is in best interest of business is also in best interests of major stakeholders (which include customers, vendors (of which the bank is one) employees) – although planning can not solve all these issues – it helps put things in context and provides for more objective insight into how severe the short to medium financial future looks like for the business – and is the basis for discussing things with stakeholders
I am out of my office for the balance of the day – and Leo will be answering ?’s today – I can look at ?’s later on in morning to provide a ? directed at me
Best Regards
15. StoweVT July 21, 2017 at 8:10 am – Reply
Michael you mention about being an ex-banker are you typically negotiating with the banks or other creditors? How does your background aid you in negotiations?
o mciampa July 21, 2017 at 9:25 am – Reply
Knowing bankers personally helps in a couple of ways – most bankers have large portfolio of borrowers which limits their ability to stay on top of every client company’s needs – sometimes a loan officer is aware that a company is taking on additional risk that they want to have underwritten – but is not sure they have sufficient insight into the risk taking the business is planning to do
we can help put the banker and the bank at ease if we help with some due diligence and assure the bank that management understands the risks they are undertaking in ways that the bank might be uncomfortable with and that there are mitigation strategies to limit this risk
as an example – company wants to take on new customer – customer requires company to stretch itself on payment terms, make large investments in capital and create a revenue concentration in business above a level that bank may be comfortable with underwriting, and the start up costs of taking on this new customer will likely prevent the business from showing profits during the next 2-3 months
because of our track record with the bank’s management (not the banker alone) – we can help get a loan structure approved that may be more suitable to the client business requirement given what is likely to occur during the next 6-12 months not the next 3-6 months – business management may not ask for the right loan structure and the bank may be unwilling to provide it without an intensive planning model that the bank is used to seeing and believing in
banks have a risk aversion profile – businesses have a risk taking profile – by utilizing a forward looking modeling approaches that provides for insight into financial risks for both business management and banks – we do our best to assure a loan structure that reflects the clients need to take risk balanced with the banks desire to limit risk – but always encourage the bank to do what we and management believe is in best interest of business – which ultimately is in best interest of bank
