Case Study: When the Bank Called In a Loan, Larry Cohen Had to Act Fast to Save the Family Business
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."
In early January 2004, Cohen called Kamins into his office and gave him 90 days to prove that he could save the business. If not, family or no family, he would be replaced. Cohen disliked threatening his own nephew, but, he says, "it was the only thing I had left to motivate him" to make big changes.
Rather than feeling ambushed, Kamins was relieved. He had spent the previous year expecting to be fired, so the 90-day trial felt like a vote of confidence. With the help of a new consultant, Irwin Friedman, who replaced the turnaround firm recommended by the bank, Kamins moved quickly to assert himself as Accurate's leader. He called a meeting of his top five executives and announced across-the-board salary cuts of as much as 50 percent. Kamins took a 50 percent pay cut, and Cohen agreed to work unpaid. "We had to move from being a family business to a more corporate one," Kamins says.
Kamins warned his executives that they were likely to be fired if things didn't improve quickly. But the person most in need of improvement, Kamins realized, was himself. In the spring of 2004, he enrolled in an executive education course at Chicago's Loyola University. "It was inspirational," he says. "The most valuable thing was being in a room with people and getting outside input on how things are done." Kamins also began working closely with Friedman, who helped him develop a strategy for the business, as well as for his personal life. Thanks, in part, to Friedman's mentoring, Kamins lost 80 pounds in one year.
Kamins's business classes prompted him to embrace many of the changes Zarnott and Beck had been advocating for years. Friedman leveraged his connections, and Accurate's revamped business plan, to help the company land a line of credit from Bank One, now part of JP Morgan Chase. In March, Kamins used the line of credit to pay off Accurate's loan from Cole Taylor (which declined to comment for this story). Next, Kamins invested in new computer systems, high-tech machinery, and training for factory workers. He hired 20 part-time salespeople and increased Accurate's marketing budget to $200,000 a year. Zarnott hired a Chicago marketing firm called Symmetri to develop a new website and glossy brochure that emphasized the beauty of Accurate's products, rather than low prices. Symmetri changed Accurate's slogan from "Quality workmanship makes us Accurate" to "We teach light to dance." The new focus, Zarnott says, has helped attract architects and other high-end clients. "American catalogs were all geared to technical aspects," he says. "We thought, here's a way we can set ourselves apart."
The marketing push represented "the rebirth of the company," says Kamins. Accurate's architectural sales soared from $300,000 in 2004 to $2.5 million last year, boosting overall profit margins to 16 percent. In 2005, Accurate's revenue increased 70 percent, to $25.5 million, 40 percent of which was generated by sales of fabricated metal. On the commodity side, improved efficiency, an expanded sales force, and demand from China increased sales and bumped up profit margins to 5 percent.
Back in 2004, Cohen allowed the 90-day deadline to come and go, confident that his nephew was up to the task. Kamins officially became Accurate's president early last year. Though the company is back on track, Kamins has sworn not to let himself--or his employees--revert to the just-collecting-a-paycheck mentality. "The memory of where we were a very short time ago pushes me to move this place further," Kamins says. "I'm still not satisfied."
The Experts Weigh In
The right move
As the third generation in a family-owned business that has faced many of the same issues, I think Cohen was right to offer his nephew the 90-day ultimatum. Growing up in the shadow of the guy who starts the business is debilitating, and I don't think Kamins felt that he had a mandate until that point. However, it was a bad mistake for him to ignore Mike Zarnott and Mike Beck. If he had taken their advice, Accurate could have had a gradual reinvention.
Rockmount Ranch Wear Mfg. Denver
Succession plan needed
Kamins wasn't prepared to take over Accurate. Sometimes a family member will have a real belief in what's being created, which can help lead a company through hard times, but that person must also have good business skills. Years before handing over control of the company, Cohen should have considered who was most qualified to be the next leader, regardless of family. At that point, he should have begun to develop that person professionally with formal training. Succession should be a nonevent.
Family Business Center
University of Wisconsin
A risky step
Cohen did the right thing when he looked internally to find the right person to lead Accurate's turnaround, but he should not have selected his nephew. Kamins's record didn't demonstrate that he was ready for bold actions. That said, Accurate's problems started way before Kamins took the reins. The company should have updated its business model long ago. It sounds as if Accurate was trying to be the last manufacturer of the buggy whip. It is exceptional that Kamins was able to reinvent the company and himself at the same time.
JC Jones & Associates
Rochester, New York
What do you think? Did Aaron Kamins deserve one last chance to save the company? Sound off at firstname.lastname@example.org.
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