Before buying a company of his own, Michael Kramer steered two businesses to successful buyouts, accumulating deep experience -- from the triumphant to the traumatic -- along the way. A master of the exit strategy explains how finance leaders can learn to thrive on panic.

Steve Player: When we first met, you had just joined Arthur Andersen. What led you to work there?
Michael Kramer: Andersen was an opportunity to see as much as possible in the shortest amount of time. I spent 4 years there and probably worked on 45 different projects over that period, so it was great exposure to a variety of industries and businesses in different kinds of circumstances.

I was in the operations consulting group. We worked mainly in the manufacturing and distribution industries on projects such as restructuring projects for clients with credit challenges, redesigning manufacturing floors, retail strategy projects ... a number of different things, and that's what was so appealing about the Andersen experience.

SP: What's your undergraduate degree in?
Kramer: I have an undergraduate degree in civil engineering from Georgia Tech and a master of science in structural engineering from Georgia Tech. I received my master's in business administration from the University of Texas in 1992.

SP: Coming out of an engineering background, how much work did you do in finance?
Kramer: Actually, very little. I was much more focused on clients' operations. Obviously, that's closely tied to finance. Some of the companies were in trouble, which is often measured by the finance departments, and many of our projects were initiated by CFOs. But those decisions and projects had implications for different parts of the organization, whether it was shipping, warehouse design, manufacturing, or sales strategy.

SP: I remember one project in particular that we worked on together for a home improvement company ...
Kramer: They had sales all over the country, and they were trying to manage their leads. The challenge was always in trying to make quarterly income numbers. Management would wake up in the middle of the quarter and realize that they were not going to make it, and then they would try to invest a lot of money really quickly to turn it around, but inevitably it didn't work out.

That was a corporation driven largely by salespeople. Those guys tend to be eternal optimists, and finance was always behind the eight ball trying to hit the numbers that they had already communicated. It's important to be a realist when you're working with projections and salespeople. Often, I found, the CFO is the guy who's communicating to the owners, the industry, and the marketplace what's going to happen, even though they're not his numbers. You have to have a really good understanding of your numbers, the credibility of those numbers, and where they come from, before you share them with others.

SP: I remember that this project resulted in what I call a predictive logic diagram, which shows what you have to do in order to make revenue happen.
Kramer: Yes, we backed it all the way up to how many calls the call center had to connect each night in order to set up leads for a salesman the next day. If they didn't make 44 calls the day before or two days before the guy was supposed to be on that route, they couldn't hit their goal no matter what happened, based on their experience.

SP: In these tough times, people are starting to understand that the velocity of the cash cycle is critical. It's really important to understand how much time it takes from when you invest a dollar to when you see that dollar coming back in ...
Kramer: Right. And obviously what's happening in the marketplace is that folks are shelving projects with a longer cash cycle.

SP: What happened after you left Andersen?
Kramer: I was hired as the CFO at Super Lube, which had 30 fast-oil-change stores, which made us the largest private operator in the country at the time. I was hired to help grow the company. We had a corporate staff of 9 or 10 people and roughly 100 hundred employees. The challenge was how to grow this thing and how fast we could get it done.

Over the next 4 years, we built it from 30 to 72 stores. We were building stores and buying stores. There were a remarkable number of transactions. Every store was effectively its own transaction in the way things were done. And then, in the latter part of 1999, we sold 52 out-of-town stores at a very attractive multiple for our industry.

SP: Did going to Super Lube, a smaller company, make it easier to achieve the CFO title?
Kramer: I think that the reason it was given to me was because nobody else had it -- or wanted it! And this is one of the things I've found in my career: It pays to be willing to get involved in finance and legal initiatives.

Especially in smaller or medium-sized businesses, most folks are very uncomfortable in both of these areas. In my experience with small businesses, the founders are often sales- or operations-minded individuals with a relatively unsophisticated background in finance or law, so if you're willing to dig in and take over these areas, they'll let you. And it's a great way to learn the levers of the business. You get to see how operational transactions flow through to the financial statements, banking relationships, cash flow, dividends ...

SP: How do you handle it when you find yourself overwhelmed?
Kramer: Maybe this is an awful thing to say, but fortunately I had worked with enough CFOs who were certainly very competent, but who I didn't think were any smarter than me -- they just had more experience. I figured that if that person can get to where he is and the only difference is experience, then these overwhelming times are to be considered my experience. This is what everybody has to go through to learn the job.

In addition, I always had colleagues at Andersen, and some past clients, whom I could call on after I left the firm. The biggest challenge most people have, whether they're in finance or any other function, is admitting, "I don't know what to do here."

SP: I've heard CFOs say that they sometimes feel more like the OFC: the Only Financial Officer!
Kramer: For most of what I've done, that's certainly been the case.

SP: What was your next stop after Super Lube?
Kramer: A friend called me up and asked me to help him sell a company called Walls Industries; they made, and still make, insulated clothing, primarily jackets, coats, and coveralls for workers and hunters. It was an LBO that had been purchased in 1997 by a company out of Dallas.

SP: This was in the early days of private equity?
Kramer: Yes. In 1997, bank money was very cheap, and purchase prices were largely a function of what the banks would loan. This was a very highly leveraged acquisition. In '97, the plan was to do several more acquisitions, eliminate the overhead, and sell again in a few years. We were trying to sell it in late 2000, as we believed that the market was positive and the credit markets at that time were still such that you could find a buyer and close a deal. We were looking for a strategic buyer, a billion-dollar player.

SP: Sounds like a pretty clean, simple plan. How did it work out?
Kramer: Unfortunately, in 2000 a couple of things happened: The economy started to slow toward the end of the year with the Internet bubble burst, and the credit markets dried up. Lots of people got spooked off doing deals; it was nearly impossible to get new deals done at prices that made sense for the seller. Banks would still fund, but they would loan only three or four times EBITDA instead of seven or eight times.

The company traditionally used a revolver to fund its operations in the off-season. Seventy-five percent of our sales occurred between August and November. During the rest of the year, of course, we were still buying fabric and paying salaries and health insurance for our 2,500 employees, who were sewing up clothing all year long at our eight plants across Texas.

Well, 2000 was a very warm season -- and we had produced for a record year. The economy was slow, so our retailers didn't buy as much as the year before. As a result, we found ourselves at the end of that season with almost $60 million in inventory. We had product that was obsolete and that we had borrowed money to pay for, which now we couldn't pay back. We had an average revolver balance of $50 million that year, in addition to our leveraged capital structure.

SP: So just at the time you're getting ready to sell the company, everything bad is happening ...
Kramer: That's right. We realized that we were not going to sell the company at the price our owners wanted. We were really cash-constrained. That year, we were unable to pay down the revolver to zero, which the company had been able to do for the previous 5 years. In addition, we had to start buying fabric for the next year. So we really had to look at the business differently.

One of the first initiatives was to move some production to Mexico so that we could go from labor rates of $10 an hour to rates of $2 an hour. It sounded logical at the time, and we realized some savings, but we also recognized that 70 percent of the cost was in the fabric. When we added in transportation costs, we could see that the Mexico move helped, but it didn't solve very much of the liquidity problem.

Soon after, we decided to move almost 100 percent of our production offshore, using letters of credit. Under this scenario, we didn't have to buy the materials, and we didn't have to have the labor or the factories. If a vendor didn't get us the product in time, we didn't buy it.

In the old model, if we built a jacket but didn't finish it in time, the customer could say "You're late; I don't want it," and our company would be stuck with the inventory. In the new model, if we didn't get the product to the customer in time they might not be happy with us, but we were off the hook for the production risk because we hadn't paid for the product yet. Our sourcing partners were great about delivering product on time.

SP: You've got two things working together: an understanding of the cost model and an awareness of the risks ...
Kramer: That's right. The first full year we did this, we went from an average revolver of $55 million to less than $5 million for the year. We were getting paid for our product literally 6 weeks after we purchased it. We also went from 2,500 employees to fewer than 150. We eliminated our purchasing department, the factories, the real estate. We ended up putting a small staff of quality control people overseas. Their job was to visit factories to make sure that the quality met our requirements.

The reality was, we couldn't survive if we had to provide the physical labor. Everybody knew at the time that you could manufacture in China, Sri Lanka, or Bangladesh for cheaper than we were doing it.

There was a time when manufacturing was a competitive advantage, when nobody else could build the factories or finance the inventory. These things were barriers to entry. But once you've got the world as your option, a fixed manufacturing base becomes a disadvantage because of the cost. It had really become an anchor around the company.

SP: It's typical of the kinds of disruptive factors that are with us today.
Kramer: The company was 75 years old, and it had had terrific success in doing things the same way for years. There were many 30-, 40-year veterans who thought that the way we did it last year was the way we should do it tomorrow.

Obviously, the change came at a serious individual cost for all of the folks who lost their jobs. The way I think of it is: Had we not done it, all 2,500 employees would have lost their jobs.

SP: It was that dire?
Kramer: It was. The company had always incentivized the management teams on EBITDA. Now, as anybody who has been around EBITDA long enough knows, it's just a number; it's a calculation, and it can be manipulated.

I'll give you an example that shows why it's so important for financial officers to understand incentives, sales, and manufacturing. A salesperson would call up production or sourcing and say, "I've got a buyer who wants a thousand jackets, but they'll pay only $21 per jacket." Manufacturing calls the salesman back and says, "Look, the only way they can get jackets for $21 is if we make 10,000." The salesman says, "Fine, make 10,000, and I'll sell the rest to someone else!"

So now manufacturing has met their objectives, they can make their numbers, and they think they've done a fantastic job. The salesman sells his jackets and shows a 30 percent margin, so the profit and loss statement for that transaction looks very successful. Unfortunately, all of the profits and then some are tied up in the inventory -- the 9,000 jackets I've still got.

At my first meeting with the executive team, 6 months after I got there, big bonuses were paid out to seven or eight people. And I said, "Guys, another record year like this and we are out of business." I had to delay the bonuses because we couldn't afford to pay them; the revolver was maxed out.

SP: Nobody was working on cash flow?
Kramer: Everybody was worried about EBITDA, and nobody was worried about the balance sheet, which had this massive $65 million in inventory, when on a right-sized balance sheet we should have had around $15 million at the end of the season.

SP: How did you work through the problem?
Kramer: The first thing was the overseas sourcing, which allowed us to manufacture what we needed closer to delivery rather than all year long. Reducing the cash requirements associated with raw materials, labor, and factory costs helped to relieve some of our liquidity issues.

We also opened up some outlets stores and started making deals with some liquidators of product. The company culture was never to sell anything at a loss, which was a major obstacle, but fortunately we were able to get past that and move some product. We recognized that it might take 2 years, but we were going to get rid of as much of the stuff as we could.

And we put a lot of product in the market. I knew that if I pulled the market down 15, 20 percent we'd be able to deal with it because we would be a much lower fixed-cost enterprise, and we could just reduce our production requirements the next year. We created a remarkable amount of cash, and we got rid of two warehouses we were renting to store inventory.

There was a huge amount of pricing pressure while this was all happening because fabrics were getting cheaper. The mills that historically manufactured products on the eastern seaboard of the U.S. were closing, and all of the production was taking place in China. So by the end of 2003 you had to be in China anyway, because this was the only place you could get the fabric. By 2004, we were actually moving out of China to cheaper countries in Africa -- Lesotho, Swaziland -- and to South Vietnam and Bangladesh.

SP: How hard was it to find vendors in those locations?
Kramer: We had people traveling internationally every week. We used brokers and agents; they're a great resource. You can send a jacket to an agent and say, "This is what I need to make," and they can point you toward half a dozen factories to visit.

It's worth noting that during all of this we were in hot water with our lender group. Remember, the private equity deal had been put together in 1997, and from there to 2003 is a long horizon for an LBO that didn't look like it had much of an exit plan. The fact that we couldn't refinance it resulted in a fairly hostile bank group. In fact, we threatened a prepackaged bankruptcy to get the bank group to work together and protect the company from a major liquidity problem.

SP: Did you get close to bankruptcy?
Kramer: We never got to the courthouse, but we were ready, because the bank group was divided. We had 16 banks, and there was a lot of infighting. Some of them didn't want to be in that kind of lending anymore. Some of them had their own problems. There were a number of instances of the banks threatening each other, buying each other out, and so on. We were trying to run our business, trying to get our letters of credit done, and all this was going on at the same time.

In 2004, we went back to some of the folks who had expressed interest in buying the company, and we ultimately sold it in July of that year. All in all, it was a terrific experience; I jammed 5 or 6 years of experience into those 3 or 4 years.

SP: That's an unusual attitude for what sounds like a very stressful situation.
Kramer: It certainly was stressful. It was always a case of going either through the roof or off the cliff!

SP: What was your next move after Walls Industries?
Kramer: I still owned a part of Super Lube, and we decided to sell the remaining stores in 2006. We found a buyer and were able to do a deal at an attractive EBITDA multiple for that industry. With a couple of those same partners, I bought a little company that provides home oxygen and medical equipment, including hospital beds, wheelchairs, and respiratory equipment. We've doubled the size of the business.

SP: Still under a lot of pressure?
Kramer: Yes, but a smaller business is easier to move and make changes to. We get to decide, "This is what we're going to do." And then I spend time getting the puzzle pieces into place with a lot of folks who actually go out and make it work.

SP: What's next on your agenda?
Kramer: I don't know. I'm actually able to work a little shorter day. I'm on the boards of a couple of companies. And people still come to me once or twice a year and ask me to help them buy or sell a company, which is really what I like more than anything.

SP: Sounds like you're having fun.
Kramer: Most days. Some days, it still feels like work.

SP: What advice would you have for people just getting started in finance?
Kramer: I would say, Get experience outside of finance. And this is an awful thing to say, but one of the best things I learned from my experience with Andersen and Walls was this: The more challenged the business is, the better, in terms of personal development and experience. Where there's panic, there's so much opportunity to learn. If a company is in a mess -- whether it's struggling financially or operationally or the problems are industrywide -- you can learn so much. You don't have the blinders of "this is how it was done yesterday, so this is how it works today." In times of trouble, I've found that people are more receptive to trying new things.

You also get so much more opportunity. The most important thing, when times are bad, is leadership. As I mentioned earlier, what I usually found was that nobody wanted to touch the legal issues, the HR issues, the banking issues, the cash flow issues; everybody was afraid of them. But you can create a lot of value for yourself if you grab that responsibility. You may end up as the last guy standing or the most valuable member of the management team.

I've often had the luxury of looking for those opportunities -- or the stupidity to look for them! If I go into a company that's struggling, it can only get better, and then I'll get far more credit than I deserve and more education than I expected. So I would tell folks, Go find something about which you have no idea; the more out of your comfort zone, the better. I don't think that any of this is rocket science.