Yesterday, we briefly touched on three different types of turnarounds–strategic, operational, and financial. The point was also made that many successful turnarounds are a combination of more than one type. If you have never had experience determining which type fits a given situation, chances are high that you will make some mistakes than could prevent the company’s successful recovery. There are at least two other reasons the desired recovery may never be seen–procrastination and delusion. We aim to explore both of these mindsets, but first want to dive deeper into our definitions of turnaround types.
- Strategic – the changing of markets and products, for instance going after new segments of the market.To do so would require new strategies and tactics with regards to promotions, pricing, design features that would need to be scheduled in the turnaround plan to guide management through the remarketing of the company.
- Operational – transforms the cost structure of the operations. Unloading aged inventory and increasing sales efforts are two examples of use of this method. The operations section of a turnaround plan discusses schedules, budgets, estimating, purchase orders, direct costs, work in process, customer service, and time and dollars to get profitable work out the door.
- Financial – this section of the turnaround plan ordinarily addresses debt structure, debt payment, accounts payable aging, accounts receivable strategy, cash flow, inventory turns, revenue projections, and general and administrative cost structures (among other things). The costs recorded are actual, rather than accrual or standard, due to the time constraints of a crisis situation.
The Danger of Procrastination
Too many companies decide to “ride it out” -like a foolish person in a coastal area with a category 5 hurricane approaching. Staying in the bad situation and only wringing one’s hands about lurking danger is NOT a solution! Management paralysis extends into business operations in the form of delayed strategic decisions. Those who refuse to admit that a problem actually exists do themselves, their employees, creditors, and customer a huge disservice.
The business continues to lose credibility and money, and the loss of credibility can incapacitate a leader’s ability to pursue many options. Teams must, therefore, avoid any procrastination and make the decisions necessary to initiate immediate action. Any delay simply makes the turnaround that much more difficult to accomplish.
The Investor Delusion
At this point, another common delusion is that a “white knight” investor exists who will swoop in and save the company with a cash infusion. Turnaround funds are only available when a credible turnaround exists, a plan that, not surprisingly, must include a substantial return for the turnaround investor. A desirable return normally includes the following:
- Origination fees for fund placements: 2 to 10 percent
- Management fees for recovery oversight: 5 percent
- Equity positions (transfer of ownership via stock): 25 percent or more
- Redemption based on retained earnings: 3 to 4 times retained earnings
As one can see…seeking the outside investor can make an imbalanced balance sheet much worse in a hurry. Instead, it’s wiser to work with existing stakeholders: vendors, lenders, (employees) and stockholders. Focus on management–not miracles!
Facing the Problem
When the executive team owns the fact that they must find a new, viable solution and they are willing to do “whatever it takes,” a new course of action must be chosen. Three distinct options should be considered:
- A complete and comprehensive change in modus operandi–and the implementation of accountability and controls. This almost always is a shift to more team involvement in making decisions to counteract traditional one-man rule.
- Pursuit of a bankruptcy procedure, led by attorneys, accountants, and others to protect the company assets and try to buy time. The turnaround plan is drafted in legal and accounting language and creditors are put at bay temporarily. Everything then hinges, however, on profitable growth moving forward.
- Retaining a turnaround advisor who has significant experience in crisis situations is often the best choice. Often, bankruptcy filings can be avoided and the cash saved used to fuel a quicker recovery.
Your choice of option must be agreed upon by the entire management team if you plan to emerge with momentum. Greater transparency than ever before will win morale points with the team and the employees, plus help restore credibility with outsiders. With hard work, tighter controls, and improved leadership, you an “right the ship!”
Reblogged this on Bridging the GAAP and commented:
I liked this article…I feel like hippotential did a good job pointing out the reasons businesses who are struggling financially will or will not turn around their business. The one take away for me was that we can often get so focused on solutions, without truly understanding the problem first. I know that I often jump after “White Knights” to come save me, before I truly inspect what the root cause of the problem is. It is only in finding the root problem that we are then able to make that turn and bring financial success to our organization.