Case Study: When the Bank Called In a Loan, Larry Cohen Had to Act Fast to Save the Family Business

Was replacing his nephew with a more seasoned executive the answer?

Larry Cohen had an unsettling meeting with his bankers at the Chicago headquarters of Cole Taylor Bank in December 2003. Accurate Perforating, the Chicago-based metal company owned by Cohen's family, had run out of operating capital. The bank, which had loaned Accurate $1.5 million two years earlier, gave Cohen, the company's president, two choices: Liquidate the business or find a new lender. Cohen was shocked by the ultimatum. "They were basically going to put us out of business," he says.

For decades, Cohen and his father, Ralph, who founded Accurate in 1940, had focused on one thing: putting as many holes in as many sheets of metal as possible. They bought the metal from steel mills in the Chicago region, perforated it, and sold it in bulk to distributors, which then sold it to metal workshops. There the metal was fabricated and finished--that is, cut, folded to specification, and painted--and sold to manufacturers of products like speaker grilles and ceiling tiles. "We were really just selling tonnage," Cohen says. "We stayed away from sophisticated products, and as a result we wound up in a very competitive situation where the only thing we were selling was price."

When a global steel surplus held down prices in the 1980s and 1990s, Accurate's business model became increasingly unsustainable. The company's manufacturing costs climbed while its prices stayed flat, squeezing its once healthy margins. Rather than switch to the more profitable niche of fabricating, finishing, and selling metal directly to manufacturers, as had many of Accurate's rivals, the company survived through militant budgeting. "If we couldn't pay cash, we didn't do it," recalls Cohen, who was unwilling to invest in the equipment required to become a fabricator. During those lean years, Accurate's employees built perforating machines from scratch--repairing them only when absolutely necessary--and used outmoded manufacturing processes developed by Ralph Cohen in the 1940s. Sales hovered between $10 million and $15 million for more than 20 years.

Accurate was decades behind the competition in terms of both technology and business strategy by the time Cohen's 36-year-old nephew, Aaron Kamins--the only member of the family's younger generation working at the company--took over day-to-day operations as general manager in 2001. "There was a culture here that resisted change," Kamins says. "Everyone was comfortable with what they were doing. We were making a living and that was that." Kamins, who had worked on Accurate's factory floor since graduating from college, hoped to steer the company in a new direction. In 2002, with Cohen's approval, he borrowed $1.5 million from Cole Taylor Bank to purchase Semrow Perforated & Expanded Metals, a business in Des Plaines, Illinois, that produced and sold fabricated products. He hired two of the company's top executives, Mike Beck and Mike Zarnott, to oversee the division, along with 10 of Semrow's 40 factory workers.

In 2002, the small division sold $1.5 million worth of fabricated metal directly to manufacturers. But Beck, Accurate's director of new product development and engineering, and Zarnott, the company's director of sales and marketing, had bigger aspirations. They begged Kamins to revamp Accurate's website and invest in e-mail marketing to promote sales of finished metal, but Kamins worried about diverting too much time and money away from the core commodity business, and Cohen agreed. "Everything I said about marketing Aaron thought was rubbish," says Zarnott, who struggled with a marketing budget of $15,000 a year. "The people running this company didn't have enough skills or education to run a modern manufacturing outfit."

The situation became dire after the invasion of Iraq in March 2003. That spring, Accurate's customers became skittish and orders fell by 50 percent. The bank "strongly recommended" that the company hire a consultant, recalls Kamins, who retained the Stonegate Group, a turnaround firm in Deerfield, Illinois, that the bank recommended. Stonegate advised him to renegotiate payment schedules with vendors. Meanwhile, Cohen liquidated half a million dollars in personal real estate to pay overdue bills. To cut costs, the company laid off 13 of its 85 employees.

Despite the turnaround efforts, Accurate lost more than $500,000 in 2003. During the fateful meeting with Cole Taylor that December, the bank agreed to give Cohen a few weeks to devise a plan, and he immediately began looking for a new lender. Meanwhile, he bought some more time by rounding up an additional $400,000 in loans from friends--just enough to purchase three months' worth of steel. He had 90 days to make some serious decisions about Accurate's future.

Cohen was convinced that Accurate could thrive with the right business model, so liquidation seemed too dramatic. Another alternative was to continue cutting costs and hope for a rebound in steel prices, which was a strong possibility due to growing demand from China. Beck and Zarnott's idea--scaling back the commodity business to focus on selling finished metal--seemed like the smartest long-term strategy. But it would take huge amounts of time and money to perfect the new manufacturing process, retrain factory workers, cultivate new clients, and revamp Accurate's nuts-and-bolts image.

The most difficult question Cohen faced was whether to replace his nephew with a more seasoned executive. He wondered if Kamins, whom he had groomed but who had little formal business training, could lead a turnaround. "I worried that we would just continue repeating all the mistakes that we had made," Cohen says. An outsider would offer a fresh perspective, but hiring a CEO would be expensive and time-consuming. Cohen felt like the owner of a baseball team with a losing manager. "I didn't know if a new guy would do a better job," he says. "I just knew the old guy wasn't doing a good job."

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