Turnarounds: Where does it hurt?

A diagnostic review or business assessment is the first step in the turnaround process, whether you are dealing with a global enterprise, a struggling division or moribund product line.  After all, the company doctor cannot cure the patient unless he or she knows what is wrong.  Note that this diagnostic review often must take place in parallel with other activities, such as managing an immediate cash crisis or settling down a skittish board or other stakeholders.  Early initiatives, such as meetings with the board, key shareholders or creditors, will begin to rebuild confidence and demonstrate that management has control of the situation.

The analysis phase typically lasts between one week and three months, depending on the size and scope of the problem.  During the latter phases of the analysis, basic ingredients of a detailed business plan will begin to take shape.  It should include specific actions needed to return the business to profitability, together with “what-if” scenarios and financial projections.

Here again, implementation can (and should) begin even before the overall strategic plan is in final form, because of the need for speed and to demonstrate “quick wins” that build confidence. Some of the early steps are “no brainers” that you can take while more complex actions, such as refinancing of debt, are worked out with banks or other lenders.  The diagnostic review itself will:

  • Establish the true position of the company from a strategic, operational and financial point of view.
  • Assess the options available to the company and determine whether or not it can, in fact, be turned around.
  • Determine whether the business can survive in the short term.
  • Establish the stakeholders’ positions and their level of support for various “what-if” options.  “Stakeholders” means shareholders, lenders, creditors and employees.
  • Assess the management team and any need for changes, from the top down.

Because the company may be rapidly running short of cash it is essential to move quickly through this phase.  A “quick and dirty” analysis will be broad in scope and detailed only when it comes to the key issues. Of course, the value of such an analysis hinges on who does it.  It is best to use an experienced and objective turnaround professional when an entire company is at stake. A troubled division or product line can be examined by a cross-functional team of company executives, provided they can remain dispassionate and objective.

The consulting approach

A well-thought-out assessment includes a traditional strategic and operational review along with a corporate recovery or insolvency analysis.  A classic consulting approach is best, covering both the internal and external business environment.  Root causes of the business decline need to be identified, as well as potential recovery strategies.  Of course, a crucial ingredient is rigorous financial review to establish the current financial position.

Various options need to be considered, based on a “what-if” analysis and evaluation of the outcome for stakeholders under each of the following scenarios:

  • Sale of some or all of the business.
  • Turnaround.
  • Filing for bankruptcy protection.
  • Closing down/liquidating.

Techniques used during the review follow a consulting approach, including: financial analysis; interviews with management and staff; discussions with key suppliers and customers, and industry experts (including trade press editors).A thorough job should include analysis of the industry and key competitors as well.

At the end of this process the turnaround manager will have concluded whether turnaround is a viable option, and the outlines of a turnaround plan should be in place. You will also know, at least in round numbers, how much money you will need in order to execute the turnaround properly.

Crisis Management

Assuming a turnaround gets the green light, it’s time to begin crisis management. In many cases, the cash situation has deteriorated and there’s some doubt about whether fundamental expenses like wages or rent can be paid.  You need to establish the kind of “triage” method hospital use in their emergency rooms: Some payments need to be made immediately to keep the company afloat, while others can wait.  At the same time, look at available cash, short-term receivables (collections) and existing bank credit lines.  If you see a gap between critical payments and available funds, the shortfall needs to be addressed quickly.  It may be possible to arrange additional short-term bridge funding from lenders or investors. Alternatively you can pursue more aggressive collection of accounts receivable, or restructure critical payments wherever possible.

While that is going on, it’s equally important to limit the continuing decline by focusing on the most serious and urgent problems. The key is to determine what factors, if any, threaten survival of the business in the short term.

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