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September 2014:

Heed Early Warning Signs of Business Trouble, Act Decisively

By John M. Collard

September 2, 2014

Posted in: Focus on Business Growth Strategies & Women in Business

Whether you are an investor, serve on a board of directors or own or manage a company, you face business risks. And all stakeholders accept additional risk when a company is heading for trouble.

Business trouble means different things to each of us at different times. The perception differs depending on the stakeholder, but the fear is always the same — loss of investment (money, time, energy, good will, reputation). The anticipation of loss is unacceptable. No one likes to lose — anything.

Lenders, creditors and shareholders may lose their investment. Owners can face financial ruin, disgrace or humiliation. But worst of all, the employees can lose their livelihood, and have little to say over the decisions that impacted that loss.

Top management is often aware that problems exist. The “trouble” is, they wait too long to do anything about them.

Perhaps the reason is hope: “Things will get better soon.” Perchance it’s naiveté: “Management doesn’t know how to manage in this situation.” Maybe it’s guilt: “If I’d been a better manager, I wouldn’t be facing failure in the first place.” Or it could be “founder’s syndrome”: The owner believes that only s/he can run the company.

But the most dangerous reason of all is denial (not the river in Egypt). Denial makes owners or managers unwilling to admit that problems even exist. The longer it takes to get necessary help, the harder it will be to relieve the trouble and the more risk that is assumed.

When a company is in trouble, the rules change. Management is often out of its element; it is entering untrodden ground. People haven’t had to manage in this environment before. The odds are that they will have difficulty.

The obvious signs of business trouble are rarely its root causes. Losing money, for example, isn’t the problem. Rather, it could be the result of diminishing sales, declining profits, mass employee exit, creditor suits or the threat of bank foreclosure. These problems can be repaired. The true dilemma becomes: Who can handle the crisis management role?

All Leaders Are Not Created Equal

To save the company, the style of leadership must change. Clear thinking must prevail, and a special set of skills must be applied.

If there is a qualified leader within the company, then delegate the job of turnaround to that person, and provide proper support. If a qualified leader cannot be identified, don’t hesitate to locate a professional for this type of work.

Leadership requirements differ between those for healthy, growing companies and those in a troubled situation. The CEO that managed the company into trouble most likely lacks the skills to doctor it back to health.

Differences in style are a key to success. In the growth scenario, team building and coaching are buzzwords. But in the initial crisis and subsequent turnaround situation, time is an enemy. Decisive action is required.

The focus is dramatically different. This is one reason why the troubled environment is so foreign to many managers, thus the difficulty in finding qualified talent from within the company. The stable environment allows for mistakes and longer lead cycles to achieve goals. Troubled companies have one goal — to survive and get well.

Credibility With Lenders

If the leaders who were in power while the company’s position was allowed to deteriorate are still there, why should the lender believe that they would now be instrumental in correcting the situation? To make matters worse, in the eyes of management, the lender is often viewed as an enemy instead of a key part of the turnaround equation.

It is important that trust be re-established with the bank. Credibility with the lenders is mandatory to success — and to keeping that cash flow, well, flowing. Since the bank holds the trump card, the institution must feel comfortable working with the turnaround leader.

The ability to deal with change at a rapid pace is essential. This is why a seasoned practitioner can be the answer to a successful turnaround plan.

The Process

Along with specific skills and an understanding of troubled situations, the specialist offers a new perspective from which to independently evaluate the company’s circumstances. The process will focus on several issues.

• Is the business viable?

• What is the purpose of the business?

• Should it be saved? Why?

• Is there a core business that can be the source for the emerging business?

• Are there sufficient cash resources to fuel the recovery?

• Which existing managers are capable of leading parts of the company?

The fact-finding must proceed as quickly as possible so that a realistic assessment of the current state of the company can be prepared. The specialist’s first priority will be to manage cash flow. Analysis of sales and profit centers and asset utilization should indicate where the real problems — not the symptoms — are located. Next, a business plan outlining and suggesting possible courses of action will be prepared.

Following this diagnostic stage, the transition can begin towards a turnaround. Most importantly, the leader needs to get things moving again. The specialist should remain involved at least until the business is stabilized, and preferably until the transformation is complete and a new “marquis” leader is found.

Who Can Help?

Turnaround specialists generally are either interim managers or consultants. These leaders didn’t start out as such — they often were managers that worked their way up the corporate ladder through hard work and (hopefully) fair play to build a solid management reputation. They have developed a set of skills to handle problem solving, getting results with minimal resources, (tight) cash flow management, negotiating and dealing with bankers, investors and creditors.

These are hands-on decision-makers who actually take control — often as CEO — for a period of time. They take the decision-making reins, plot the course, and steer the company through troubled waters. They must have an active line manager orientation, be decisive, isolate problems and find solutions quickly.

Here are some things to consider when hiring a turnaround specialist.

• Check references.

• Review proposals versus what can realistically be accomplished.

• Require engagement agreements.

• Hire an individual, not the firm — personal chemistry with the managers is critical.

Lessons to Learn

Too often, companies die unnecessarily because the leaders haven’t learned to recognize the symptoms of oncoming business illness. It’s the astute leader or manager that recognizes fallibility and has the foresight to ask for help before serious trouble sets in.

Effecting a turnaround takes an array of skills. Specialists and outside independent directors are hired for their management ability, the ability to bring order out of chaos and the ability to marshal resources and maximize value from them.

One thing’s sure: The longer you wait to admit that the company is heading for trouble, the more difficult the resulting problems will be to solve. Getting to the real issues is the catalyst toward change — and recovery.

John Collard is a Certified Turnaround Professional and a Certified International Turnaround Manager who is chairman of Strategic Management Partners Inc., in Annapolis. He can be reached at 410-263-9100.

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