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Featured Insight


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Ben T. Nicholson

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At a Glance

The following presentation was first delivered at the national conference for America's Small Business Development Centers.

Given the current economic volatility being driven by interest rate adjustments, wage pressures and other business challenges, many small business will fall into distress. If the right strategy is employed, some will be able to turn around.

But before a turnaround can happen, the causes of distress must be understood with tools to help quantify the situation and the path forward. Or if it is too late, what to expect from a liquidation. 

I just hope I never get this far. Thank you. :)    -Attendee 


Welcome everyone and thank you for taking a look at the following presentation. It was first delivered during Webinar Wednesday for the California State University in Bakersfield Small Business Development Center.

As many of you may be experiencing in the world around you, economic conditions are causing some distress, especially for small businesses. For those of us who fight for a knife in the mud, the narratives that say things are going great and the near future is bright may be contrary to what reality is feeling like. For anyone watching who may be experiencing a more challenging reality, you are not alone.

What we are going to talk about today is identifying and quantifying challenges small businesses face, and steps towards taking corrective measures. Some of this information may be things you have never seen before. That’s ok.

You have access to help and feel free to ask questions. However, no matter how technical this can get, what I am going to present are standard tools professionals who help distressed businesses use, and perhaps more importantly, much of this information is what lenders may be asking for depending on the type of loan you have. Either way, an understanding of what is being presented will help your business, both in healthy or distressed situations.


Quick bio about myself – You will find plenty of information about me and the work I do at Fortis Business Advisors on the website,, but in short, I come from the small business and startup world. My first company was a gourmet food store on Madison Avenue in New York City. It was an 180sqft space that generated over $550k in revenue per year. And more recently, I developed 4 temporary “Pop-Up” stores from Atlanta across to Dallas liquidating the inventory from a defaulted apparel company. If you annualized the revenue from all 4 stores, my team and I built a $3.5mm revenue company in 3.5 months.

I have owned or been a partner in multiple businesses in multiple verticals that include food service, publishing and marketing, multiple retail stores, and advisory firms.

Among the services that I provide clients, I am most recognized as a turnaround management and liquidation advisor focused on helping small businesses in distressed situations find a path forward or an exit with the least amount of collateral damage and the highest possible level of capital preservation. Collateral, of course, has some ambiguity to it, especially for a bank.


I am a champion for small businesses and maintain a belief that many are lost that could have been saved if the opportunity to help had come sooner.


I would bet that everyone watching has dealt with clients who are masters of their craft, but they have little to no formal or informal training on how to run a business.

For some, the lack of knowledge can work itself out as the business becomes one of the 25% of new businesses that make it to 15 years or even becomes one of the 4% of businesses that sell or get acquired.

However, that is not the fate for most businesses. While each situation that leads a business to close is unique, for situations where small businesses fall into distress, if the right mix of timing and complete buy-in towards correcting the situation occurs, the business can undergo a turnaround and ultimately emerge as a healthier, more robust company with a better understanding of the causes of distress and how to prevent it in the future.


So, let’s talk about what turnaround management is…


Put simply, turnaround management is about finding profit in a failing business.


It is about presenting knowledgeable and predictable answers to a small business’s fear of the unknown by focusing attention on internal and external challenges and providing time-tested solutions to solve them.


Causes and symptoms that lead a business to a turnaround situation are countless, but commonalities include:

  • Customers changing their relationships with the business,

  • Vendors cutting off product lines,

  • A current one many deal with today is increased debt service on variable-rate loans

  • And many others


This can lead to some of the points you see here:

  • Declining profitability

  • Tightening cash flow

  • Pressure from a lender to find a new bank

  • Expensive or unavailable access to credit

  • And debts that exceed the value of the Assets


And if a turnaround is an option, fundamental concepts requisite to each situation that will determine if a small business can survive include:

  • Incredible dedication to change and becoming efficient

  • Setting realistic and achievable goals

  • A reliable financial reporting system – even if a new one has to be developed

  • Opportunities to increase revenues

  • Improved cost efficiency

  • Cash flow management

  • A sell-off of non-performing assets to raise quick cash

  • Working capital performance optimization

  • If it can be, restructured debt

  • Continuous improvement towards break even


When we normally think of strategy consulting, perhaps an easy way to think of it is by looking at a business from where it currently is, imagining what it can become, and implementing action plans to reach those goals:

  • Business and model planning

  • New product, service, or market launches

  • Executing an effective marketing strategy

  • Team development

  • Strategic Management Strategies

  • And more


Alternatively, Turnaround Consulting looks at a business from where it is today, analyzes where it has been to identify the challenges, then looks backward to better understand where the business could go in the worst-case scenario – otherwise known as a liquidation valuation - then from there, project where it could be in the near future, particularly over 13-weeks.


In this gap is where a turnaround is found!


Covid was the largest shock we have had to the way we live since WWII. After WWII, the economy was undergoing a rapid change as soldiers who had been overseas returned home to their families that had been managing without them. The US had effectively become the last economy standing, and post-Bretton Woods, the economic leader of the world. As the Baby Boomer generation quite literally came to life, families expanded into the suburbs leading to new and different business opportunities.  This period was unsettling and led well into the 1950s.

Fast forward to today, we have an immensely large generation of retirees, many of whom are Baby Boomers, who are looking to sell their businesses – some stats say 40% of the businesses out there are owned by baby boomers and 30% want the sale of their business to fund their retirement.


When you look at demographics, the challenge is further shifting. By 2034, there will be more Americans over 65 than children. 

Let’s apply that shift to what we could anticipate with the tech sector. If you want to do tech at scale you need people in their 20s and 30s to imagine the future, develop and prototype the tech, and then bring its operalization to mass manufacturing before going to market. To do this, you need a huge amount of cheap capital because operating expenses need to be paid until when, and if, the company takes off. But the days of cheap capital are over. Baby boomers are retiring and shifting focus, the oldest millennials are approaching their mid-40s, people in their 20s and 30s are demographically shrinking, and GenZ is the most educated but smallest generation we have ever had. Demographically speaking, if you are a tech company and aren’t at operalization today, you may be too late.

Now let’s touch on inflation and interest rates. The US response to Covid authorized $5t in govt spending. This coupled with rising commodity prices and supply chain disruptions were the principal triggers of the burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increases.


In February of 2021, CPI was 1.7% but rose to 5% in June 2021 to peak at 9% in June 2022. Or viewed differently since May 2020 our currency has lost 19.7% of its purchasing power with potentially more to come.


Historically, and these days this is potentially subject to adjustment, the Fed aims to have inflation at 2% and short-term interest rates 2%-3% above inflation for an extended period. Once there, then and only then will the Fed decrease rates if necessary. Unless a crisis strikes, don’t expect rates to be lowered anytime soon.

And speaking of crisis, consider this - the Fed stopped raising rates in July 2006. Then they held rates steady until August 2007. New Century Financial declared bankruptcy in April 2007. Bear Sterns collapsed in March 2008. The entire financial industry collapsed in September 2008 – There was a 2-year lag in rate adjustments.

Also, historically speaking, one can argue we are actually returning to normal rates. Over the last 700+ years, average global nominal interest rates clocked in at 5.98% with inflation at 1.59%. For comparison, the current risk-free rate is 5.3% with inflation at 3.18%.

Now going back to today, when you consider the $5t plugged into the economy coupled with access to cheap capital, you can see the link that has led to massive malinvestments in unhealthy businesses fast now approaching distress.


One of the things that makes the US economy so vibrant is what you could theorize as viewing it from the Edge of the Cliff. What I mean by this is that when you think about business, risk leads to growth. You try new things, some of which the market accepts, and others of which are rejected.


As more and more risk is taken, the proverbial edge of the cliff gets pushed out.


This gap from where the edge was to where it goes is where innovation, efficiency, and improvement that leads to better living standards lie. We all benefit from the edge being pushed.

Now, some companies will fall off. And that’s OK. The turnaround management and liquidation industries are there to catch those who fall and help them get back up.

But also, a big cushion at the bottom is our Bankruptcy system, which is one of the main drivers that separates us from every other country in the world. Because of our bankruptcy system, people can fall then get back up and try again.


And another analogy to consider is that sometimes getting a cold is not so bad when you think of it as a means of cleansing the system. It is all part of the process that pushes the edge.


This is largely what ties this theme together.

Cheap credit, while beneficial for rapid growth, has also led to malinvestment over a long period of time. Now rates are returning to normal levels with realistic risk-free rates.

This will be a period where businesses with little market share, tight cash flow, and low margins will not have an easy time, but it also allows for risk-averse people to have a place to park money that earns interest.

And look businesses, nor economies, nor much of anything for that matter, flows in a singular direction. Science tells us this. Another analogy I like to use is the science of how water freezes. As water gets colder, it becomes more dense, yet at the very moment before it freezes, for a split moment, water actually becomes less dense. Think of a frozen lake - although the deeper you go, the colder it gets, a lake clearly freezes from the top, not the bottom. If it froze from the bottom, life would effectively cease. My point with the analogy is that no matter how much we favor predictability, nothing moves in a singular direction, including and especially business.


These are the three main drivers.

Recessions are out of small businesses’ control. All management can do is be aware of the conditions that lead to them, and, while they should be doing this anyways, prepare by

  • building robustness

  • understanding operational efficiencies and working towards those goals

  • optimizing cash flow and working capital

  • and ensuring liquidity and access to capital


Fraud is a different animal that can catch even the most well-intentioned.

  • Of course, some people are outright fraudulent and intend to rob the bank or their investors – these are the bad actors.

  • Others start making bad decisions in a moment of desperation.

  • And unbeknownst to an owner, other employees could be engaging in fraudulent activity.


And the third one can colloquially be called stupidity. This can happen to anyone, especially in desperation when destructive decisions can be made. The list can be endless:

  • Taking on debt the business cannot afford.

  • Running up high-interest credit cards to fund losses.

  • Not keeping taxes or retirement plans paid.

  • Not acknowledging limitations and taking on a sale that cannot be fulfilled under the current structure.

  • Letting an ego and pride bury a business.


While rewarding at times, owning a business is not easy, and there are plenty of opportunities business owners unnecessarily engage in that make it even more difficult.


And the only way to control it is to:

  • Take massive action and change how the business is being run.

  • Grab the reins to reestablish control.

  • But get ready for a very bumpy ride.


Depending on the level of desperation, the list can grow.

  • Smaller Creditors

  • Payroll and Sales Taxes

  • Retirement Plans

  • Seller Notes

  • Lines of Credit

  • And others



When you think of a distressed business analysis, consider it a Quality Test of the Cash as it flows through the Cash Cycle

  • If there are losses in profitability, then there is a good chance there are even more problems with cash; this is a gut check to the quality of a P&L - think booking a sale on account that never gets paid and the company does not have a bad debt policy to write off the receivables that were not collected.

  • A distressed business analysis forces the business to not only see the problem but know and understand the effect the problem is causing on cash flow. The results can give a better understanding of if a business can be resuscitated, sold, or refinanced.


There are countless businesses with strong revenue and healthy margins, but the business comes up short on cash month after month.

Yes, sales are necessary to survive – without them, there is no cash flow to manage - but if the cash necessary to complete the transaction is not managed properly, sales can’t fix the issue.

Imagine taking a large order from Home Depot.

  • The business may not have enough cash for supplies and needs to find financing to help – this can be expensive and not always easily accessible.

  • Home Depot may have 90-day terms, so the business needs the cash to pay operating expenses tied to the sale until they get paid.


These are the types of issues a business not properly managing cash flow can face that can result in a distressed situation.


Or consider something worse - imagine being an unsecured vendor with 60-day terms delivering merchandise to Bed Bath and Beyond 2 weeks before they declared bankruptcy.


Let’s say hypothetically the revenue stream for a small business has been flat, and while sales are still coming in a confluence of internal and external compressions are affecting the business, most of which are out of the business's control:

  • Sales are distorted because inflation is driving price increases.

  • Cash conversion cycles have lengthened due to increased material lead times, production line labor shortages, and A/R stretched by other customers facing the same issues.

  • Increased finished goods costs are hitting core business products, lead times are disrupted, and as consumer demand changes, inventory management is challenged.

  • Wage pressure is increasing as businesses pay more to incentivize retention.

  • And as interest rates adjust, interest coverage is challenged.


As these issues, and more, arise and build, the business Debt Service Coverage – the available cash to cover debt payments – can drop, potentially sending the company into the eponymous Zombie status.

In an analysis, if you are looking at a business through the Debt Coverage ratio, most lenders consider 1.2 to 1.25 to be a healthy ratio, but this may be rising as lending standards tighten. SBA has been known to originate loans with a ratio as low as 1.15. I know one lender that will still go down to 1.1.


But here’s the reality - if the ratio drops below 1.0, the business is looking to other sources of cash to pay their note which means someone else is not going to get paid - see the list above.

What is driving this challenge? If a business took out a floating rate loan in March 2020 at 7%, the interest rate is now upwards of 11.25%. And if a business is looking to get a loan today, some lenders are already rate sensitivity testing up to 14%. The simple fact is that cash flow has to come from somewhere to service debt.


Most people think of B/E as the point where all expenses are paid and everything else is profit.


That is correct, but another way to look at break-even is by considering it the point where all fixed expenses are paid for the period, and all variable expenses have been paid up to that point.


Think of it on a calendar – It is the day of the year that a business could effectively shut its doors and upon return on January 1, no additional expenses will have been incurred while the door was shut.


For retailers, this was traditionally known as black Friday. Or for Walmart, who understands their line-item break even, it is the little yellow character buzzing around slashing prices below all their competitors as they turn their inventory into profit quickly.


It is important to understand break even and how a business can use it because cost containment measures can be executed that create a buffer when margin compressions are having an impact.


It is prudent for a small business to understand its larger competitor’s operating ratios – time-tested models can help the business set a target to achieve while improving efficiency. If I am a Pizza Shop, by knowing the operating ratios for Dominos or Papa Johns, I can implement action plans towards achieving those goals. When available these ratios can also help guide a turnaround.


Additionally, some of the key ratios perhaps more focused on in a turnaround  include:

  • Growth Ratios – Revenue; Gross Profit; EBITDA; Total Asset Growth; Total Liability Growth

  • Liquidity Ratios – Working Capital; Current Ratio; Days Working Capital

  • Leverage Ratios – Debt to Equity; Debt to Asset

  • Coverage Ratios – Debt Service Coverage; Interest Coverage Ratio (Zombie Ratio)

  • Efficiency Ratios – Asset Turnover; Inventory Turnover (Including Optimal Inventory Turnover); A/R Turnover; A/P Turnover

  • Return on Assets

  • Return on Equity

  • Operating Cash Flow


The Cash Conversion Cycle is the metric that expresses in days the time it takes for a company to convert its investments in inventory and resources into cash flow from sales. The formula is Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payables Outstanding (DPO).


If a business understands its Cash Conversion Cycle and how cash flows through each component, it can identify where changes can be made to optimize the cash cycle and ensure access to capital in times of need. This touches on preventing the selling to Home Depot problem from earlier.


When optimizing the cycle, strategies include

  • Eliminating obsolete inventory to ensure optimized inventory turnover.

  • Cleaning up aging A/R, liquidating bad debt or writing it off, and making sure payment policy is in place.

  • Paying payables at the time they are due while meeting vendor payment policies to ensure there are no disruptions.


Optimizing the cash conversion cycle will assist in ensuring that working capital requirements are met, or at the very least, working capital needs are understood so financing sources can be identified.


There is a link at the top of this page where you can download an example.


Compared to other types of financial statements, the 13-week cash flow statement presents the most granular view of the money moving in and out of a business. This model instills, in fact, forces, a sense of financial discipline when organizations need it most.


It is an objective, repeatable model that helps dispel false optimism.


What makes or breaks this model:

  • Ownership and management support – everyone must be involved, and everyone needs to buy in

  • Accuracy Control – use checks and balances to confirm accuracy. Test the model and adjust as necessary.

  • Actionable insights – businesses in distress can link assumptions in the model to tangible business decisions and contingency preparations. At 13 weeks, it is too short to see the effects of pricing adjustments, but it is long enough to see if a cash hole is on the horizon.


Consider some actionable steps to improve the cash flow in the model:

  • Every marketing channel needs to be reviewed and every opportunity to generate a sale uncovered.

  • Every expenditure should be utilized for the sole purpose of generating revenue.

  • Use purchase orders where possible.

  • Optimize inventory and assets– target the optimal inventory level, sell off the excess at a discount, buy only what is needed, and avoid large orders that may have a tempting discount attached.

  • Sell off any assets that are not being used.

  • When looking at new capital expenditures, target the payback at 3 years with a 30-45% Return on Investment projection to make it make sense.

  • With A/R, review delinquent accounts and customer relationships, and if accounts are simply never going to get paid, send them to collections. If not, propose discounts to pay off or increase payments to 110% on future orders until the delinquency is paid off.


Now let’s go through the model starting at the first column and going down…

  • Set a start date for the first week.

  • At the top line red number, enter the opening cash balance.

  • Enter sales projections for the week.

  • Next, enter how much cash is expected to be collected over the week, and if available funding sources need to be tapped, how much needs to be tapped.

  • Next, enter disbursements - for the cost of goods, how much inventory must be purchased that week COD, or how much is the payable that week for inventory already purchased.

  • Next up is payroll. If not paid weekly, enter it into the week it will be paid.

  • The same goes for each of the remaining categories with the intent being first to identify what must be paid and when, and if there is a problem, can the payment be moved around and to where.

  • The next category is other disbursements, which include interest that must be paid during the period. If rates go up, make the adjustments.

  • And finally, principal payments on any short or long-term liabilities.

  • When all these inputs are entered, the total disbursements are subtracted from the total cash available to arrive at the cash on hand at the end of the week.

  • That cash on hand will start the cash on hand at the beginning of the following week and the cycle starts again.


As the inputs build, and the cycle develops, cash holes will reveal themselves at the end of each week that can be addressed to determine if the business can be turned around, what adjustments must be made to do so, and if outside or additional sources of capital need to be tapped, how much and what are the options.


Before we get into capital for a business in distress, let’s go through reasons why a business has challenges with securing financing in the first place. It would not be unusual to discover a direct path to distress linked to why a lender would not originate a loan.


There is a name for people who simply walk into a bank and ask for money – they are called bank robbers.


In today’s environment, business owners and bankers find themselves in agreement less and less about what is bankable.


Business owners rightfully believe in their business, but they often can’t get into the mind of a lender and overcome challenges like:

  • An overleveraged balance sheet

  • Working capital issues

  • Tightening coverage and operating ratios

  • Industry turmoil

  • Market share erosion

  • Tech advancements that haven’t been adopted

  • And more


And finally, there is always a belief that a banker can be “convinced” that the business is credit-worthy because projections are “always accurate” even if they are clearly unrealistic when compared to previous years.


The fact is, while there is a symbiotic relationship, entrepreneurs should recognize that lenders simply do not operate the same in risky business environments. Although entrepreneurs put everything on the line, literally, lenders invariably have more skin in the game, and while they are not looking to knock one out of the park, they do want their money back, with interest and fees.


Fortis Business Advisors was started because there is limited access to affordable help for small businesses in distress situations – most small businesses are simply dead on arrival, and unwinding the situation can be very challenging. But as mentioned in the beginning, there are a number of small businesses that if help comes in time, can be saved, or at a minimum, the maximum amount of capital can be recovered.


Also as mentioned before, my belief is that SBDCs will see a lot of distress in the near future, and while you will no doubt do what you can to help, I would like the opportunity to support you when, where, and if I can. Or if the business is too far gone, I am a resource you can access to help monetize assets when liquidation is the last and best option.


Speaking for myself, I am going to try and help as many small businesses as possible survive as economic volatility continues through the near and potentially not-so-near future.


Fortis Business Advisors specializes in helping small businesses with $500k-$20mm in revenue in healthy or distressed situations directly or through their lenders and professional service advisors.


We operate in 3 different verticals:

  • Performance Advisory which includes Turnaround Management and Restructuring, Performance Improvement, M&A and Transaction Advisory, and Valuation Validation

  • Retail Solutions and Asset Maximization, which includes promotional services, asset monetization, and liquidation services

  • And we are pioneers in the “Pop-Up” liquidation concept, creating unique selling environments to liquidate inventory assets.


Each service specializes in achieving a distinct outcome but is wholly integrable given the nature of the complexity being addressed.


And perhaps most importantly, we approach challenges from an owner’s perspective, which drives our uniqueness.

SLIDE 23 – Q&A

If you have any questions about the information presented, please contact Ben Nicholson at, or feel free to call or text directly at 321-948-9615.

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