Few industries have been spared hardship in today’s troubled economy. The process for turning around troubled companies is easy to understand, yet challenging to implement; it’s complex and made difficult by the multiple constituencies involved, all having different agendas.
But let’s address the turnaround process as if all constituents favor proceeding to the end, when the restructured entity emerges.
High Cost of Mismanagement
Many causes contribute to business failure. According to a study conducted by the Association of Insolvency and Restructuring Advisors, only 9% of failures are due to influences beyond management’s control. The remaining 91% of failures are related to influences that management could control; 52% are rooted in internally generated problems that management didn’t control.
Businesses fail because of mismanagement, which is sometimes due to denial and sometimes negligence. But it always results in loss.
Will Rogers once said, “If you find yourself in a hole, stop digging.” That’s good advice for directors and managers with responsibility for leading a company, and for lenders and investors contemplating investing more capital into a troubled entity.
To engineer a successful turnaround, a company needs someone with clear thinking to quickly assess opportunities, determine what is wrong, develop strategies that no one has tried before and implement plans to restructure the company.
The problems are rarely what management indicates they are, but rather are usually two or three underlying, systemic ills that often can be fixed. You can’t focus on the symptoms; you must find the real causes. Remember, management has allowed these problems to exist and bring the company down to its depressed state.
When these circumstances are present, turnaround specialists often are an excellent choice. They bring a new set of eyes trained in managing and advising in troubled situations. These experts are either practitioners, who take management and decision-making control as the chief executive officer, or consultants, who can advise management, perhaps the same management that failed before.
The key to turnarounds is building enterprises in which future buyers want to invest.
Stages in the Process
The turnaround process has five stages.
1. Management change
2. Situation analysis
3. Emergency action
4. Business restructuring
5. Return to normal
The process is designed to first stabilize the situation by addressing management issues, assessing the situation and implementing emergency actions; the restructuring process begins with preparations during the emergency action phase.
Positioning for growth starts with restructuring and grows when the normal stage is reached.
Changes at the Top
It is very important to select a CEO who can successfully lead the turnaround. This individual must have a proven track record and the ability to assemble a management team that can implement turnaround strategies.
The best candidate most often comes from outside the company and brings a special set of skills to deal with crisis and change. His or her job will be to stabilize the situation, implement plans to transform the company and then hire a replacement.
Communication with all stakeholders is paramount throughout the process. Set goals that achieve stakeholder objectives, then apply incentive-based management to motivate the proper results. Tie everyone to the same broad set of goals and emphasize how functions can complement the performance of related departments.
The objective is to determine the severity of the situation and whether it can be turned around. Be sure to ask the following questions.
• Is the business viable?
• Can it survive?
• Should it be saved?
• Are there sufficient cash resources to fuel the turnaround?
Prepare a preliminary action plan stating what is wrong, how to fix it and which key strategies can turn the entity in a positive direction. Utilize a cash flow forecast (at least 13 weeks) to understand cash usage.
Identify effective turnaround strategies. Operational strategies should increase revenue, reduce costs, sell and redeploy assets and establish competitive repositioning. Strategic initiatives will adopt sound business strategies/tactics and set specific goals and objectives that align with stakeholder goals.
Also, understand that many good employees already have left the company. Management must work with the “second string” in the interest of time and build as they go. Document key issues so that all parties will understand what you are trying to accomplish and will pull in the same direction.
The idea is to identify which product and business segments are most profitable at the gross margin level, then eliminate weak performers and non-performers.
The objective is to gain control of the cash and establish a break-even point. If you stop the cash bleed, you enable the entity to survive; but time is your enemy. Protect asset value by demonstrating that the business is viable and in transition.
You also must raise cash immediately. Review the balance sheet for internal sources of cash, such as collecting accounts receivable and renegotiating payments against accounts payable. Sell unprofitable business units, real estate and unutilized assets, then secure asset-based loans if needed. And restructure debt to balance the amount of interest payments with the level the company can afford.
The next step is to lay off employees quickly, but fairly. It is much better to cut deep all at once than to make small cuts repeatedly. Remaining employees are more likely to focus if they believe their jobs are secure.
The objective is to create profitable operations. Stress product line pricing and profitability and restructure the business for return on assets and investments. This is the point at which the focus should change from cash flow crisis to profitability — fix the capital structure and renegotiate the long- and short-term debt.
Next, ensure that reporting systems are in place to show profitability at each revenue center, cost center, profit center, cash center and incentive center. If employees can’t see it, they can’t manage it.
There are only two ways to increase sales. One is to sell existing product to new customers, and the other is to sell new products to existing customers. For growth, do both.
Return to Normal
Now the goal is to institutionalize the changes into corporate culture to emphasize profitability and return on investment, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships.
The odds of a successful turnaround are increased dramatically if a turnaround phase and action plan is implemented and followed. This plan can certainly be adapted to unique situations when required.
John Collard is chairman of Strategic Management Partners in Annapolis. He can be contacted at 410-263-9100 and John@StrategicMgtPartners.com.