Ask yourself these questions . . . 1. Are your bank covenants trending up or down? 2. Are you paying more cash out weekly than you receive? 3. Does your family really agree with your business plans? 4. Why are you taking this test? These and the following questions are a self diagnosis test of your business health. Take the test in the privacy of your own office and see how you rate on these critical risk factors.

1. The Business Health Test
Presented by Dorset Partners LLC, a professional business
revitalization firm specializing in helping businesses reco-
gize and avoid a crisis, turning around troubled businesses,
developing business plans and navigating through the
unfortunate liquidation.
Ask yourself these questions . . .
Are your bank covenants trending up or
down?
Are you paying more cash out weekly than
you receive?
Does your family really agree with your
business plans?
Why are you taking this test?
These and the following questions are a self
diagnosis test of your business health. Take the
test in the privacy of your own office and see
how you rate on these critical risk factors.
www.dorsetpartners.com

2. Business in 2010
Operating without a Safety Net
Section 1: Background and Overview
Things have changed. As a business owner, you know that better than anyone. Additionally, things are
unlikely to get back to normal any time soon (if ever).
Although everything seems to have changed no one understands the full global extent of the global
economic meltdown. I certainly don’t. Like you, I understand my little world and am an expert on my
business and the trends in my industry. You, I’m sure, are an expert in your business and your industry.
But, if you are like me, you are likely not an expert on all parts of the economy.
The purpose of this report is to help illuminate the many changes we see taking place in the world of
small and mid-sized businesses. In short, banking has been the traditional business safety net for small
and mid-sized businesses. The banking options which have existed for hundreds of years, have greatly
diminished. Many businesses these days, unfortunately, are going straight to liquidation without even a
fair chance at a Turnaround.
Our team has been fixing businesses since the mid-70’s and we’ve never seen such perilous business
conditions.
We are in the business of saving businesses. We work directly with and for companies. We also work
with banks, asset based lenders, private equity and hedge funds and have a unique perspective on the
challenges of funding business transactions. We also work closely with the accounting and legal com-
munity and see their evolving perspective in these troubled times. More than ever, we are working with
auctioneers, liquidators and bankruptcy trustees because too many businesses are going into liquida-
tion.
For decades (centuries?) there have been six ways to exit a distressed business situation.
In order of preference they are;
1. Turnaround. Fixing the business, usually by restructuring.
2. Re-Finance. This involves moving your loan to another friendly neighborhood bank
down the street. Usually this is a false hope for the business owner but it allows the banker
to “kick the can” down the road. Unfortunately, this is not happening anymore because, as
you know, many banks are not about to take on another troubled loan.
3. Re-Equitizing. This involves bringing in equity partners to provide a fresh shot of (sub-
ordinated) cash, and another party who can exert influence on the CEO.
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3. 4. Re-Amortizing. This would include your friendly neighborhood banker extending the
terms of your loan, lowering payments, etc. Now that banks are stuck with you, they are
unlikely to weaken their position without a substantial future benefit.
5. Sale as a Going Concern. This was always an appealing option with the rise of private
equity and hedge funds but they too have lost their appetite for risk in the past few years.
Other potential buyers include industry players or private investors but one look at the re-
cent M&A activity and we know that this is a long-shot option at best.
6. Liquidation. Values are in the tank but this remains the most solid and likely option for a
bank to exit a troubled loan.
Today there are only two viable options; #1 and #6. As you will see later in this report, the one exit strat-
egy which remains fully intact is liquidation. The one we like best is fixing the business. There used to
be four excellent options between these two extremes but they have melted away with restricted credit.
What does trouble look like?
The graph below shows a former client’s sales. You can see the precipitous drop and imagine trying to
manage your way through that.
The green dot shows when the bank and accounting staff took notice. The red dot when the owner in-
jected a large sum of money. The yellow dot shows when the CFO started creatively reporting the Income
Statement (ignoring cash). The blue dot when Dorset Partners was engaged.
SALES BY MONTH
1400
1200
1000
800
$ Series1
600
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14
MONTHS
Those eleven months of decline burned cash and options for a wonderful group of people trying their
hardest to manage through a once-in-a-lifetime downturn.
There is simply no place to learn the art of managinging a declining business in advance. Careers and ed-
ucation do not train business people for dealing with rapid decline. Further, trade publications and our
culture only glorify the upside of the natural business cycle and blind us for what is the natural balance of
things. When someone is going through a turnaround for the first time, the world seems horribly unfair.
All the rules have changed and you have no idea of where to go for help. But there are specific skills and
knowledge available that are critical in a Turnaround.
www.dorsetpartners.com

4. U.S. Business Outlook
The company above is just one situation and I don’t want to make broad generalizations from one com-
pany situation.
For that broad perspective, let’s look at feedback from a November 2009 TMA (Turnaround Manage-
ment Association) survey. The members are best described as short-term realists and long-term opti-
mists.
“More companies are likely to be liquidated than reorganized than ever before”
“65% of TMA Members expect corporate defaults to peak in 2010”.
Another 20% expect defaults and failures to peak in 2011, the remaining thought
2009 would be the peak.
“Companies in early decline have risen from 12% to 16%. Companies in mid-decline have risen
from 31% to 45%”.
These are small percentage points but the rate of increase is a whopping 33% in one
year. Not the sort of trend you can feel confident in.
“Spending is still very restricted, asset values have not improved, credit markets are still tight and
there is a tremendous amount of high-yield debt coming due over the next 3 – 5 years”.
Actually, in US private equity alone, the next 2-1/2 years will see debt the size of Ire-
land’s GDP coming due.
“Companies have been cutting costs sharply but not fast enough to assure long-term viability.”
And most have missed the chance to hoard cash and invest in the recovery.
“You can’t buy your way out of a recession. You need to earn your way out. What we have seen
so far are short-term Hail-Mary fixes to a long-term problem.”
“Default rates are expected to rise to record levels of 12% - 14% after years of record low interest
rates aided by easy money”.
“Today banks seem to be holding on to troubled middle-market credits longer before moving
them to workout. This is largely because there is limited opportunity to exit a credit in the middle
market via a refinance with a new lender”.
So at best, we have two options, the two ends of our spectrum of possibility; Turnaround and Liquida-
tion .
www.dorsetpartners.com

5. #6 - Liquidation.
Recently I received a call from a well functioning bank with the request to meet a business owner and
manage the liquidation of all his assets. It was made clear to me that this was not a Turnaround. It was
a simple liquidation. “Sell everything in 90 days, tie up the loose ends and send us the money” was the
gist of our call.
These liquidations are happening too often these days And , when the banks can move on a credit, they
should. What the business owner must do is move first!
There is hope! We had another client who had blown covenants consistently for six months and let
some loan payments slip from time to time. In this situation the bank never called. Our client was
driving full throttle towards the cliff’s edge and the bank never called. I suspect that had we not gotten
involved, one day the bank would have called and found the phone disconnected.
Instead, we are helping the family members fix the business and re-take control of their financial des-
tiny. And we’re doing this in advance of the meeting that we requested with the bank. By being proac-
tive, these owners are now protected from the worst case scenario of an expedited liquidation.
#1 - Turnaround
Obviously this is the preferred solution, but even in the best circumstances, a Turnaround is only
possible with time and money.
So if you do get help, what does it look like? In a few short months , working with the company in the
above graph ,we accomplished as a team the following;
- Grew Backlog 42%
- Shrunk Breakeven 25%
- Restructured to become Profitable.
- Negotiated a 6-Month Forbearance of interest and principal payments
- Generated $200,000 of excess Cashflow.
- Doubled Quote Volume.
But, because the owner waited too long, cash flow is still critical and we still may have
to liquidate.
That’s how tough things are these days. Six months earlier, we could have preserved cash and halted
the decline. Had we started six months earlier, we could now be enjoying stability instead of fighting
for our lives.
www.dorsetpartners.com

6. The Business Health Test
Where am I? (The Signs of Distress)
Take our Business Health test (at the end of this report) and see for yourself. Print out the
test, be honest with your answers and share them with people you respect. Look beyond the
questions for trends, not just static answers. The results are only an indicator of your business
health but as an indicator they are like taking a stress test before it’s too late and you get a
heart attack.
OK . . . you didn’t score as well as you would have liked . . . now what? A Turnaround or restruc-
turing may be your best option.
Unfortunately, many businesses taking this diagnostic assessment in 2010 will show signs of trouble
and the need to address these issues. Knowing that a troubled business has only two realistic options
in today’s economy, the Turnaround option is much preferred by all parties.
But what does a Turnaround look like? Have no doubt that a Turnaround is as much an art form as a
science. A spreadsheet jockey can perform every step but may miss all the subtle nuances of being
able to gain support from shareholders, creditors, suppliers and employees. This is why banks often
turn to professional Turnaround firms (like Dorset Partners) with experience and expertise. A critical
business situation is not the place for a general business consultant to “give it a go”.
Although there is no substitute for experience and wisdom in a Turnaround, there is a general format
that most specialists follow. Dorset Partners’ 7-step process has been used for decades in hundreds of
businesses with great success. This process was explained in great detail in our booklet, the Turnaround
Roadmap™ as recapped below:
The Turnaround Roadmap™ Method
The Turnaround Roadmap™ method is straightforward and guides you through:
1. Stabilizing the business and creating cash. Here we stop digging a deeper hole
and get control of the cash cycle. This involves getting breathing room from creditors and
vendors.
2. Diagnosing what is causing the problems. Often an experienced nose for trouble
can find the issues faster than a team of analysts. By the time a Turnaround specialist is
called in, the owner and bank have both failed to uncover the major problems with cer-
tainty. They are relying on our experience and our technical skills to quickly identify and
start triaging the issues.
www.dorsetpartners.com

7. 3. Reorganizing your business and finances around a profitable “core”. Somewhere
amongst the rubble of nearly every business there is a profitable core glowing like an
ember. We have to protect and tend to that core. This is where life and profits flow from
and the center of our new universe. Everything that is unprofitable (everything) is up for
discussion and likely to be eliminated.
4. Preparing a realistic Turnaround plan your creditors will believe. They’ve heard the
promises and have lost faith. Only a new plan with new leadership will get them back on
board. They want to save you as a customer, but they need a chance at maximum recov-
ery. Like the employees of a troubled company, the creditors want to believe and they
want to be led out of the fog. We help CEO’s become that leader – and we build a plan
that is not based on hope, but based on what can be executed.
5. Negotiating the restructuring of your debts and obligations. Some holes are too
deep to climb out of without some help. Your creditors understand this. They won’t act
like it, but they understand that sometimes taking a hit to ensure long-term viability is the
best solution. Helping your creditors understand this situation is an important part of any
Turnaround effort.
6. Executing the Turnaround with precision and consistency. “Three yards and a
cloud of dust”. Turnarounds are like the style of old-time football. The glory and magic
was getting to where we are today, now we must grind it out day-after-day to get the
business growing again.
7. Growing (or selling) the business when the Turnaround is complete. When the
business is healthy again, the owner can step back and plan his/her future. Is this still a
business you are passionate about and want to grow into the future? Or has the Turn-
around sapped your enthusiasm, and perhaps it’s time to do something else. It’s nice to
have the option again.
We can help but only with your acceptance/acknowledgement of the facts surrounding your decision
to consult our website and take our Business Health Test. Call us today for a Free phone consultation to
assess the viability of a return to business (and personal) health. Our office # is 802- 867- 2456.
Regards,
Jeff Sands
www.dorsetpartners.com

8. The Business Health Test
TRUE FALSE
Liquidity (circle one)
Collection agencies are filing or have threatened lawsuits against our firm. T F
We are facing tax liens. T F
We often use the “float” in our checking account to cover cash shortfalls. T F
Our Controller is spending more than 2 hours per week dealing with vendors who are T F
requesting payment.
We are less-than-current in withholdings and sales taxes. T F
Our collections are slow. Our average collection period is more than 50% longer than T F
the standard credit terms we offer.
Our allowance for bad debt has increased to reflect market dynamics. T F
We are paying our bills more than 50% past due. T F
Monthly Financial Statements are published later than the 15th of every month. This T F
includes at least a Balance Sheet, Income Statement and AR + AP Aging Statement.
Annual inventory variance between physical and perpetual is more than 3% T F
Inventory valuation procedures are rarely verified at month-end. T F
The Accounts Receivable total on our Balance Sheet is not accurate and reasonable. Un- T F
collectable or disputed sums are not included in our A/R balance.
We do not run a rolling 13 week “cash-flow” report weekly. T F
Our “cash account” balance does not match the true balance of funds after all checks T F
have been written and mailed.
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9. Growth & Profitability TRUE FALSE
(circle one)
Our Unit-Sales-Volume is decreasing. Less hours/widgets/tons are shipped every month T F
We have not made a profit in each of the last two years. T F
Our profit this year has declined as a % of sales. T F
Our Selling and General Administrative costs are not holding steady as a percentage of T F
sales
The Gross Profit margin for our core products has declined over prior years. T F
Our inventory turns are less than last year. T F
Control Systems
Our big initiatives into new products, new markets or acquisitions do not reflect our stra-
tegic plan T F
We do not have an updated Strategic Plan
T F
We do not have an annual Operating Plan which documents our objectives for the com-
ing year. T F
Our company operates without a budget and cash management plan.
T F
Our key managers are not compensated based upon individual and company results.
T F
The Sales and Marketing leaders provide best guess forecasts and are not compensated
by their ability to perform against these forecasts. T F
Cash, Inventory and Personnel needs are not derived from these sales forecasts T F
We do not measure and track our customer’s satisfaction on a monthly basis. T F
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10. Management TRUE FALSE
CEO Leadership (circle one)
Our company does not have a well-defined mission and set of goals which are frequent- T F
ly communicated to our employees.
T F
The CEO rarely interacts with employees at all levels of our organization
T F
The CEO rarely meets with major customers.
Employees are not informed as to how well or poorly the company is meeting its stated T F
goals
Our company does not have sufficient resources (money, equipment, space, talent) to T F
fulfill our contractual obligations and meet our SHORT-term objectives.
Our company does not have sufficient resources (money, equipment, space, talent) to T F
fulfill our contractual obligations and meet our LONG-term objectives.
We do not have a formal and well-defined process to evaluate major changes within our T F
business
No one single individual has ultimate responsibility for our company’s daily operating T F
decisions.
Key Managers
Not all of our company’s managers are qualified by experience, education, loyalty, moti- T F
vation and competence
Our Management staff turnover has recently been over 20% annually.
T F
Our business is a for profit organization. Some of our employees are “carried” due to fam-
ily relationships, emotional ties, longevity of service, or other non-economic reasons. T F
I believe that the peformance of our firm could be improved by replacing one or more of
our key managers. T F
Management / Board Relationship
We do not hold frequent (at least 3x/year) Board meetings. T F
We do not have a Board of Directors/Advisors whose members are all independent-
minded and intelligent business people who have the education and experience to lead T F
our company in this industry.
Our Board consists solely of shareholders. T F
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11. TRUE FALSE
(circle one)
There is a lack of respect and trust between our CEO and the Board of Directors (or Board T F
of Advisors).
T F
Directors/Advisors do not come to meetings prepared and engaged to discuss the issues
which are most important to our business.
T F
Family members who hold active management roles within the company often do not
work well together. They may have open and respectful communication but do not put
the company’s needs ahead of their own.
Business meetings are rarely productive with key issues discussed professionally, timely
T F
decisions made and all with a reliance on quantitative data.
Risks
T F
Key Managers are not able to get all of their work done in a normal 50 hour week.
T F
Key funtions of the business are rarely completed on-time and accurately.
T F
The company’s Debt-to-Equity ratio is increasing.
T F
Debt Service (interest plus principle) as a percentage of gross profits are increasing.
T F
The Key Manaagers and/or the CEO have serious health issues.
T F
The Key Managers and/or CEO do not have stable personal lives
T F
A “crisis” plan has never been adequately formalized.
External Factors
Banking Relationship
We do not provide quarterly financial information to our primary lender. T F
We are frequently overdrawn on our account. T F
We are not current on all of our interest payments and within all of our loan covenants. T F
Our banker has been friendly and cordial over the years. The relationship has recently
T F
soured.
T F
There have been conversations or requests from our banker to pledge additional collat-
eral (personal or corporate).
The terms of our loans have recently been changed for the worse. T F
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12. TRUE FALSE
Legal Affairs (circle one)
If, the company is a defendant in a law-suit, it could not comfortably pay all judgments in T F
a worst-case scenario.
T F
If the company is a plaintiff in a lawsuit, it is not actively managing the Cost:Benefit analy-
sis between legal expenses and reasonable judgment awards.
T F
The CEO spends more than 5% of his/her time dealing with legal, regulation and litiga-
tion affairs.
Dependency
More than 1/3 of the company’s sales, inventory or recievables are associated with any T F
one customer.
The company could not be quickly reorganized to protect profitability if any one custom- T F
er were to leave.
If the company’s largest customer were to file for bankruptcy, the company could not T F
survive the write-off of all associated receivables and inventory.
If any of the company’s material or support vendors was to suddenly shut down, the
company could not quickly replace that vendor without damage to their customer rela- T F
tionships or profitability.
Not all of the company’s existing suppliers are providing a level of service consistent with
what we provide to our customers. T F
Markets and Technology
Industry demand and profitability has weakened.
T F
Our company is not one of the Top-4 suppliers in our marketplace.
T F
Our pricing does not reflect the true value we deliver. We are neither setting industry
price nor closely following its fluctuations.
T F
We have discontinued the development of new and/or improved products.
T F
Our information systems are not adequate to run the business into the near term future.
T F
We are “hostage” to our IT dept.
T F
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13. TRUE FALSE
(circle one)
Sales
T F
Our salespeople are compensated on tenure, not results
T F
Our # of “new” accounts annually is less than our accounts that go “inactive”.
T F
We rarely invest in sales training
T F
We are dependent on “outside” sales reps.
TOTAL
TOTAL SCORE (TRUE is not good!)
A score of 45 or more TRUE indicates a company in or approaching “Crisis” stage
A score of 30-45 TRUE indicates a company of moderate health that needs to seriously
address issues that have been highlighted
A score of 20-30 TRUE indicates a moderately healthy company that needs to constantly
review it’s position.
A score of 20 or less TRUE indicates a healthy company
All companies by their nature are at risk. Recognizing and managing that risk is the job of
the CEO. The key is being able to see trends so as not to be surprised. Take control of the
future by taking action now before a crisis occurs. If you are uncomfortable making hard
decisions or just want an experienced ear, call a professional Turnaround Consultant. The
bottom line is . . . it is time to address all those questions marked as TRUE!
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