Restructuring firms hit paydirt in lousy economy

Good news for EM Capital Inc. is bad news for the economy.

The San Francisco-based consultancy is one of those companies called in by creditors, courts and boards of directors to advise and restructure companies in financial peril.

“Our specialization and expertise is in extremely high demand now,” says Seth Freeman, EM’s CEO. “We are, in that sense, counter-cyclical. In many ways the worse the economy is, the more we’re needed.”

He expects business to be two or three times better than last year when it grew by 50 percent. EM Capital has 22 employees and partners in North America, Europe, Asia and Latin America. The company opened a Detroit office four months ago and plans a Miami office by September to focus on the downturn in the hospitality industry and serve as a gateway to its Latin American operations.

Bill Tulin, a San Jose partner at Ernst & Young Group Ltd., which also advises restructuring companies, says the economy is a factor, but a new federal law also plays a role in the rise in restructuring activity. The Sarbanes-Oxley Act of 2002 requires company officials to take legal responsibility for their company’s accounting practices.

“So part of it is the economy and part of it is that in the past controls were not put in place,” Tulin says. “People are just more aware, much more concerned. If nothing else, it’s that now the CFO and CEO will have to certify the accuracy of their financial statements.”

That new accountability may be the final straw for some creditors and boards of directors who increasingly call upon restructuring firms to rescue their troubled charges.

“Companies and stakeholders are finally being pressed to make decisions,” EM Capital’s Freeman says.”It’s funny, people tend to lose their shirt and spend a lot of energy avoiding [the] remorse of admitting the need for help.”

Tulin says since Sarbanes-Oxley became the law, companies are forced into action.

“The ball game has changed dramatically,” Tulin says. “I think this is one of those times where federal regulation is producing some good things. There is no question about it.”