When I think about my client Norman at Arche Plastics, the best way I can describe it is that he was running a long distance race on an unfamiliar course, without the benefit of knowing what barriers the course will pose.  When one has to judge risk and reward on a new and unknown course, it is helpful to be facing this with someone who has been on similar courses in the past.  Norman and I now know that when the course is more challenging, the satisfaction of having the finish line in sight is even more rewarding.

Arche Plastics is certainly a story of risk, running a competitive race and striving for the reward - with help from an experienced team.

Arche was founded in 2003 when the new owner, Norman, acquired the operating assets of a predecessor company from its secured lender after it had been foreclosed.  At that time, Arche’s customer base was 95 percent automotive.  Consequently, Norman’s seven-figure personal investment in the company was an acknowledgement both of high risk as well as the possibility of an even greater reward.

Norman is a person of great vision.  He saw that the company could serve other industries without major retooling.  With the can-do attitude of a former sales professional, he saw an opportunity to turn around a downward spiral and create a profitable enterprise.  He recognized the opportunity to inject seasoned management talent into this rural Michigan operation and improve operating efficiency.  In addition, while he may not think of it this way, he took significant financial risk that will help protect the livelihood of his 200+ employees and the economy of their town.

It is also fair to say that Norman has been in stress mode since acquiring the company.  It is not an exaggeration to characterize it as a daily struggle for Norman to keep the company alive long enough to turn it around, see results from the new contracts he signed with   non-automotive   customers,   make   a profit, and position the company for the handsome return Norman envisions.

O’Keefe was asked to get involved in 2007 by Arche’s secured lender.  By that time, Norman had made significant progress in migrating his customer base from 95 percent to less than three percent automotive; testimony to his determination.  However, the lender had made advances of $350,000 in excess of collateral value, and it had mounting concerns about the company’s cash flow.  The relationship with the lender was growing increasingly strained.

We were there to generate a 13-week cash flow statement in order to determine how to resolve the cash deficiency.  Within two and a half weeks, we were able to produce a cash forecast using our often-applied forecasting methodology.  Our logical and substantiated forecast was sufficient reassurance for the bank to continue to fund the company’s cash needs.  Yet, it was apparent to all that the company needed to secure another lender within a quarter or so.

At the end of 2007, the company was unprofitable and nearly insolvent.  However, production volumes during 2008 were estimated to be 150 to 175 percent over prior monthly production levels, to be accomplished by doubling the company’s production lines for an existing customer and by the introduction of two new product lines in the spring of 2008.  The latter alone was expected to add $12 to $15 million in incremental annual sales.

As part of the preparation to seek a new lender, we suggested that Arche increase the level of its accounts receivable insurance, and we were successful in getting proposals from four insurance companies with whom we had worked successfully in the past.  The added insurance would improve the company’s financial risk profile in the eyes of a potential lender.  With this is place, we turned our focus to finding a new lender by creating a financing request package which replicates the underwriting process lenders use internally when deciding whether to extend credit.  Since we complete much of the upfront financial analysis work, our proposals typically go right to the top of the stack.

However, it turned out that there were other issues roiling.  A group of minority shareholders grew more and more anxious, making noise about taking over the company.  We took on the unexpected assignment of substantiating the company’s financials and valuation and of developing a six-month plan of structured payments to eliminate their share ownership positions.

At the same time we were dealing with contentious shareholders, Arche’s new business was coming online rapidly, causing accounts receivable levels to nearly triple in only two months time.  This staggering growth in accounts receivables posed yet another serious threat to the company when the existing lender decided not to advance additional funding against the higher level of accounts receivable.  Norman had no choice but to finance 100 percent of the growth with company resources.  We recommended that Arche factor several million dollars of the new accounts receivable to generate the inflow of cash necessary to keep the company afloat.  We contacted a dozen factoring groups we had worked with in the past, and within two weeks, Arche closed on the transaction.

With that problem handled, we turned back to seeking a new lender, and contacted a number with whom we had worked in the past.  We were successful in securing an asset-based lender for Arche, allowing the company to entirely refinance and remove the first secured lender from the picture.  Banks making asset-based loans are more experienced in manufacturers’ financials, and they place more emphasis on the quality of a company’s assets than on short-term profit.  This was a much better long-term solution for Arche.

In the midst of the 2008 year of angst, Arche turned marginally profitable, but profitable all the same.  The financials substantiated a 2009 forecast of comfortably increased profits and far less risk than in the past several years.  The company is now well poised to be an attractive asset for purchase.  Norman told me the finish line is now in sight.

While not one to heap effusive praise, Norman regularly praises our work.  I appreciate his compliments, but the reward for me is the relationship that develops among the partners we work with—clients, bankers, and all kinds of other service providers.  Once we understand the client’s capabilities and business goals, we can offer them the right solution at the right time.  That is when we all cross the finish line together.