The process of turning around a troubled entity is complex, due to multiple constituencies, usually including lenders, creditors, investors, owners and employees. All have different agendas. In my work I address the turnaround process as if all constituents are in favor of proceeding to the end, when a restructured entity emerges. Nothing about a turnaround is simple, but that approach at least clarifies the forward movement.
Above all, focus on the management team. Businesses fail because of mismanagement. According to a study conducted by the Association of Insolvency and Restructuring Advisors, only 9 percent of failures are due to influences beyond management’s control. Mismanagement is most often seen in more than one of these multiple areas: autocratic style, ineffective personnel management, vague goals, lack of new customers, inadequate strategic analysis, and mismanaged growth.
So, as Will Rogers said, “If you find yourself in a hole, stop digging.” Good advice for directors with responsibility to lead a company.
Turnaround specialists are often an excellent choice. They bring a new set of eyes, trained in managing and advising in troubled situations. These experts are either practitioners or consultants. Turnaround practitioners take management and decision-making control as the chief executive officer or chief restructuring officer. Turnaround consultants on the other hand advise management, perhaps the same management that failed before.
The key is to build enterprises that future buyers want to invest in. That’s what turnaround professionals do.
Here are the five major stages in the turnaround process:
Stage 1: Management Change
It is 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 the strategies to turn the company around. This individual most often comes from outside the company and brings a special set of skills to deal with crisis and change. She will stabilize the situation, implement plans to transform the company, and then hire a replacement.
It is essential to eliminate obstructionists who may hamper the process. This could require replacing some or all of top management. This will undoubtedly mean also replacing some of the board members who did not keep a watchful eye.
Stage 2: Situation Analysis
Your objective is to determine the severity of the situation. Is the business viable? Can it survive? Should it be saved? Are there sufficient cash resources to fuel the turnaround? This analysis should culminate in formulating a preliminary action plan that shows what is wrong, what potential solutions exist, key strategies to turn the entity in a positive direction, and a cash flow forecast (at least 13 weeks) to understand cash usage.
Important steps at this stage: Identify what product and business segments are most profitable, particularly at the gross margin level, and eliminate weak and nonperformers. Make certain that all functional areas (sales, production) are working to support the goals of their counterparts.
Stage 3: Emergency Action
You have to gain control of the situation, particularly cash, and establish breakeven. Centralize cash management to ensure control. If you stop cash bleed, you enable the entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition.
Usually you have to 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. Secure asset-based loans if needed. Restructure debt to balance the amount of interest payments with a level a company can afford.
Lay off employees quickly and fairly. It is much better to cut deeply all at once, than to make small cuts repeatedly. Remaining employees can focus on work if they have (relative) job security.
Stage 4: Business Restructuring
The goal is to create profitability through remaining operations. Stress product line pricing and profitability. Restructure the business for increased profitability and return on assets and investments. At this stage your focus should change from cash flow crisis to profitability. Fix the capital structure and renegotiate the long and short term debt.
Incentive-based management will drive employees to get involved smartly. Create teams of employees to identify and rework inefficiencies and promote profitability. There are only two ways to increase sales. Sell existing product to new customers. Sell new products to existing customers. Do both if you want growth.
Stage 5: Return to Normal
Now its time to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.
This could be time to restructure long term-financing at more reasonable rates now that the company is stable and on a growth path.
The odds of success increase dramatically if a turnaround plan including these stages (see below) is implemented and followed.