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Turnarounds: Don’t Keep Bad News to Yourself

A panel of turnaround experts at the recent CFO Rising West conference in San Diego shared insights of value to top execs at any company, but particularly CFOs who see the handwriting on the wall while their colleagues are in denial.
 
It’s important for the CFO to be forceful, said Ken Sanginario, principal with turnaround firm NorthStar Management Partners, as reported on www.cfo.com. He advocates broaching a problem early and often, “because it’s probably going to be easier to get the CEO to solve one problem with you than to face the notion that the company is in crisis.”

Harold Earley, CFO of FXI Inc. (formerly Foamex), shared his personal experience with conference attendees.  The article quotes Earley: “What I’ve found very, very useful is that when you see things getting bad, get out to the field, to the manufacturing plants.”

Back at the corporate office, “you’ll hear a million excuses” about why the company can’t raise prices or stretch out terms with suppliers, he said. “It’s when you get out to the plants where line people will tell you how far you can really push the envelope.”

Panelists supported the idea of having a solid cash flow forecast.  “You’ve got to have the best information you have flowing into a cash-flow forecast that goes out several months, so you know what kind of runway you’re looking at,” Sanginario told attendees. Too often, management teams “think they have a plan, but run out of time” to execute it when the cash dries up sooner than expected, he added.

Plan in hand, it’s time to fess up to suppliers and customers, who are likely already worried. The worst scenario is when customers and suppliers “know what’s going on and you deny it. That’s when people panic and you start losing them,” said Sanginario. “Develop a plan and communicate it — but don’t sugarcoat it.”

Indeed, if at any point in the process a finance executive tries to back away from the direness of the situation, it is only likely to get worse, panelists said. “Where I’ve seen it go wrong is when a CFO buckles to pressure from a private-equity or other investor group to make [projections] look rosier for valuation purposes,” said Amit Patel, a managing director with Houlihan Lokey. “Then, when a customer or supplier who knows what is really happening comes in, the CFO loses credibility.”

Simple miscalculations and blind optimism are also credibility-killers. “As bad as it seems, the only thing that makes it worse is to have to go back [to lenders] six months later and say we need more money or need to amend covenants,” said Earley. “Going back to the well a second time is usually very, very painful.”

When all is said and done, though, CFOs who are able to nurse a sick company back to health may soon find the urge to do it again. “The thing I love the most is to go to a place that’s ‘broken,’ financially or operationally, because it allows you to bring in the biggest, most creative toolbox,” said Earley, who had worked on turnarounds prior to Foamex. “Everything is on the table.”

“It gets in your blood,” added Sanginario. “To have all those jobs saved when they might have been lost: that’s a really fulfilling result.” I couldn’t agree more.

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