The following article has been updated from an article published in the May, 2006 editions of the Orlando, Tampa Bay and South Florida Business Journals.
Selecting a Turnaround Professional
Even the most realistic, savvy business people underestimate the difficult challenges of successfully managing a troubled business.
In most instances, changes in both the internal and external business environments that bring a company to a crisis situation do not happen overnight.
Typically, many subtle warnings occur well before the business crisis occurs.
Initially, pricing leverage shifts heavily to the customer, margins are squeezed, a key customer duel sources its needs with a competitor, internal business processes begin to falter, underlying assumptions on optimistic financial budgets are unrealistic or sales personnel lower pricing to meet the competition.
Generally, as sales decrease or pricing decreases the situation worsens.
CASH MUST BE MANAGED
The stories are all different, but remarkably similar. Cash must be managed closely. Management hopes begin to hinge on increased volume, a strengthened economy or a competitor’s failure. The independent auditors “qualify” their opinion on the company’s financial statements, citing “going concern” considerations.
As a crisis deepens, liquidity often becomes a day-to-day consideration. Payments to vendors are stretched. Financial covenants under existing financing facilities are breached. The industry rumor mill questions the company’s continued viability. Lenders and customers grow anxious about the company’s future. Employee morale begins to falter. Key employees leave for greener pastures.
In today’s business climate, the turnaround professional that can focus on rapidly creating “internal liquidity” can have a significant impact on the ultimate outcome of the crisis.
DECISION-MAKING PARALYSIS …
Like a deer caught in the headlights of an oncoming car, most incumbent management teams suffer some degree of decision-making paralysis. They have never been down this road.
In extreme cases, senior management retreats into a “bunker” and refuses to face reality. Ultimately, the company, its shareholders, employees and creditors all suffer.
Action to save a troubled company must be prompt and decisive. The window of opportunity is often limited and the task at hand is generally difficult. All situations are unique and generally require difficult decisions.
The management skills that are often required to deal effectively with a crisis situation are usually different than what is required when the company is profitable and thriving.
It is difficult for senior management to accept that different skills and outside help are necessary in a crisis situation. Even sophisticated businessmen decide not to hire turnaround professionals where they are necessary. They often conclude that there is no money to pay a turnaround professional. In many of these situations, the reality is they cannot afford NOT to hire a turnaround professional.
The sooner the company accepts the reality of the crisis and seeks help from a turnaround professional, the more likely effective help can be provided. Much like oncologists, the turnaround professional often gets a client visits after it is too late. In those situations, the troubled business becomes a broken business and it is ultimately liquidated – all stakeholders are harmed.
BRING SPECIALIZED SKILLS…
Quality turnaround professionals bring specialized crisis management experience and an objective, unemotional assessment of the reality of the situation, outlook and potential solutions, if any. In many situations, an experienced turnaround specialist is able to alter the status quo and renew employee and stakeholder expectations with fresh, disciplined processes to address the ills of a financially distressed business.
Once the decision to hire a turnaround professional is made, business people usually view industry experience as the most important factor. While specific industry experience may in limited circumstances be helpful, this qualification should generally rank low on the list of decision making criteria.
Generally, the Company’s officers, directors, managers and employees possess all the needed industry experience. A turnaround professional manager without preconceived notions about the industry often adds more value by addressing and considering all viable alternatives, not just those which have been employed in one particular industry. In this fashion, the turnaround manager brings something unique to the situation – – a fresh perspective.
In selecting a turnaround professional, the company should be extremely careful not all “Turnaround Specialist” are the same. The term “turnaround managers” can cover professionals with a variety of different skills sets, business experiences and abilities.
OPERATIONAL ISSUES vs. CAPITAL STRUCTURE
Turnaround efforts are often directed at fixing underlying functional operational problems such as production inefficiencies, organizational structure, sales policies, product cost, etc. In other situations, the immediate concern is maintaining the operational and financial integrity of the business intact through tight cash management and cash forecasting, negotiations with vendors, lenders, unions and other stakeholders, or instituting emergency cost reduction/ cash saving measures.
With other companies many of these issues must be addressed simultaneously. There are major differences between the activities and expected outcome of fixing the operational aspects of the business and fixing the overall capital structure. They both generally involve different skill sets.
Not all professionals who consult and advise with troubled companies possess all the skills and experience to deal effectively with all of the necessary issues. While some turnaround and restructuring professional are adept at both fixing underlying operational problems and managing a severe crisis, other consultants skills, experience are only suited for specific operational issues (e.g., supply chain management, logistics, production efficiency, etc.)
DIFFERENT SKILLS FOR DIFFERENT AREAS …
In many instances, it is advisable to hire a turnaround firm with which has different individuals addressing different areas, thereby maximizing the strengths of all of the professionals.
When a business’s survival is on the line, it is extremely important to select a turnaround professional that can alter the outcome. Find a turnaround manager that has actually “been there and done that,” i.e., actually turned around troubled businesses and/or restructured their capital structures. Conduct an extensive interview process to assess both qualifications and personal comfort with the individuals.
Once the decision is made, provide the specialist with full support to get the job done. Do not let egos block the path to a recovery. The stakes are too high.
