Many directors on company boards and their legal counsel often view a turnaround as the last resort for a business in distress. Everything needs fixing. Nothing is sure except the need to recover. The experience is intense as a turnaround specialist is brought in to lead the process.
However, having been engaged in these types of projects for more than two decades, I can assure you that the benefits of turnaround expertise are not limited to companies in trouble. Restructuring opportunities exist everywhere – in retail stores, product lines, corporate divisions and subsidiaries, as well as large and small companies – and, frankly, there is no need to wait until a company is on the brink of insolvency before the rigor begins.
In today’s world, you have to earn the right to compete every day. And the basics that help you do that are the very same skills that a restructuring expert uses to bring a company back to life.
It may sound counter intuitive, but the cause, prevention and cure of a turnaround are closely related. These situations are agnostic in terms of industry type or company size. The companies involved are not necessarily small nor do they come from the legacy oil, steel or smokestack industries that have invested in large internal legal teams as well as well-known law firms to protect their interests.
In today’s rapidly changing business and regulatory landscape, every company is vulnerable to market shocks. High-tech, low-tech, manufacturing, service, retail, large and small – all have varying degrees of risk exposure, with many being caught between the opposing forces of projected interest rate cuts and stricter borrowing controls.
The Liquidity Squeeze
Most business stakeholders find it hard to grasp the central role of cash. Nothing is more important to successful growth, sustainability, or a successful turnaround than cash. And cash is more important to managers in stable situations since any erosion in a comfortable cash position can quickly dump an otherwise untroubled company into near bankruptcy.
Many companies, especially smaller ones, do not make cash projections except when it is time to renew their lines of credit. But those CEOs that recognize the importance of operating cash not only create projections, but ask tough questions of those creating them. Are there any orders or contracts that are not in the projection? Are sales on plan? What is the financial condition of our biggest customers? Are they paying on time? Have we provided for increased cash expenses?
In addition to imposing stringent controls on capital and operating expenses, a turnaround specialist nearly always squeezes large amounts of cash from accounts receivable, inventory and accounts payable, thus reducing reliance on banks that given more stringent rules, may not make reliable partners. Reliable or not, banks and other sources of debt cannot be used casually. In almost every case, it is debt that pulls the string on a troubled company and its management.
Surprisingly, a large number of companies under stress have adequate working capital, but it is tied up in inventory and receivables. Converting this to cash requires a fine balance of managing customers and vendors while not risking the business. Lip service is easy. Performance, while balancing the variables, is hard and requires experience.
Bank Role
Lenders, especially in the world of rapidly changing government regulations, are important players in today’s environment. In some cases, the lack of understanding of their client company and their nervousness about their relationship with their regulators and marginally questionable loan portfolios have caused banks to destabilize their customers.
A decent loan, perhaps with a slight stumble, may not get the time and understanding it deserves, if the friendly banker has just experienced an unfriendly examination and resulting increase in reserves. Turnaround management works to not only explain what caused the hiccup, but what, when and how it is going to be dealt with before the bank even asks.
What a company does in the market is separate from what it does to get and stay there. The best opportunity is to access the experience of the experienced turnaround management to review finely tuned opportunities and problems in the business environment, a significant understanding of the competitive environment, religious attention to cash and cash projections and an organization in close contact with its customers, suppliers, and workforce.
Al Davis serves as Principal at Revitalization Partners LLC, a corporate and board advisory firm that specializes in restructuring and receiverships. He is a Court Appointed General Receiver in the State of Washington as well as an interim CEO and advisor to middle market companies. He can be reached at adavis@revitalizationpartners.com or (206) 903-1855.
