Five Ways To Create Value In A Downturn

Altus Capital Partners, a small and mid-market buyout shop investing in manufacturing companies, has focused on five main ways to add value to its portfolio companies in this downturn. While it is easy for management teams to retrench in this downturn and simply wait for the economy to improve, a lack of action does not create long-term value. Our firm is taking advantage of the widespread downturn in the following ways:

1. Market Share Gains: Given the lack of financing that many companies face, coupled with weakness in overall demand, competitors are weakened, or in bankruptcy or simply going out of business. We are redoubling the focus of our portfolio companies to gain market share by calling on both our current customers and prospective customers to take on additional business. While it should be self-evident to become proactive, many companies are simply waiting for the economy to improve before committing to take on new business. This is a function of acting out of fear. Taking on new business may require additional capital but in many cases it simply requires a commitment to better service customers. Customers who are left with suppliers that do not have the human resources to tackle engineering challenges and delivery requirements due to the downsizing of their own businesses are more open to transfer their business to another supplier. Also, making small monetary commitments upfront to support new customers may reap considerable long-term benefits. Since our focus is on growing unique manufacturing companies, we require that our companies have the engineering talent coupled with sales capabilities to seek out new business. We have seen the benefit of this strategy as several of our companies are winning additional business.

2. Executive Talent: As a manager of private-equity-owned businesses serving the lower middle market, we are cognizant that executive talent is critical to the success of businesses as well as expensive. In the boom times of 2005 to 2007, executives would demand and often receive compensation increases and large equity packages to move to a private-equity funded company. However, the weak economy offers companies the ability to hire talented executives who have either lost their position due to downsizing or are in companies that no longer have the ability to grow. While it is difficult to bring on added managerial expenses at this time, it may be the critical factor necessary to upgrade a business.

3. Reorganization of the Business: What may have been a less than optimal organizational structure but workable during an expanding economy is no longer acceptable during this period of recession. Resources that are not contributing to growth and new product development should be eliminated in order to better focus the business on serving its customers and expanding market share. For example, if the business has multiple plants running at less than full capacity, it is incumbent to analyze the situation and take action to consolidate plants to strengthen the company and increase EBITDA, even if this means providing new capital to make the consolidation happen.

4. Add-On Acquisitions: We have recently seen businesses that were good strategic fits for the portfolio six months ago that were not available or were too pricey that are now becoming available at fair prices. Sellers realize that smaller companies simply do not command the same level of valuation in 2009 as they did prior to the summer of 2008. Again, the lack of available credit is forcing the sale of smaller businesses to their larger competitors. To execute on these bolt-on opportunities, Altus Capital and our respective portfolio companies are proactively calling on these identified companies.

5. Cost-Savings Ideas: While managers are always looking for cost savings and productivity improvement ideas, the recession has provided an increased incentive to go back and review every expense item on the income statement. Some expenses that were cut in 2006 and 2007 can be cut further in 2009. This applies more than ever to S,G & A expenses. We have seen, and continue to see, dramatic savings in areas such as payroll processing, freight, telecom and other utility costs, as well as a variety of different insurance products. Numerous small savings add up to big numbers. Inventory and accounts receivables management is another area of focus in order to manage cash and increase liquidity as well as avoid costly bad debt expenses. As part of this effort, we have implemented factory floor suppliers stores to reduce inventory.

We believe that the downturn will turn out to have a silver lining for our businesses. The portfolio companies will emerge stronger with more product lines and be more productive during 2010 as a result of many of the efforts listed above.

Russell J. Greenberg is the managing partner of Altus Capital Partners Inc. which manages the $80 million Altus Capital Partners SBIC L P.