Turning around distressed companies (2/3)

In our last post on successful turnarounds we covered the first stage: establishing the facts about the company's performance, particularly the often-disregarded investigations of whether the market remains attractive, if the competitive position remains secure, and what customers plan to spend with the company next year.

Having established whether the business has potential worthy of continued investment of time and money, the next stage is to understand what went wrong to get the company into its current sorry predicament.

2. Understand what went wrong

Companies we support in turnaround find themselves there for two generic reasons: either something major went wrong for a short time, usually loss of a dominant customer or a dramatic market change; or something minor went wrong for a long time, usually poor understanding of customer or product profitability, that led to misguided allocation of capital and resources. Either way, the reason for the problem needs to be flushed out and addressed. Any recovery plan is simply not credible without this process. In our experience, the forensic exercise to find the source of the problem is rarely difficult for fresh eyes.

It is tempting to blame market changes when things go wrong, and we hear this all the time. Sometimes market downturns do happen unexpectedly and these can land the company in trouble. So the company was unlucky. That doesn’t matter – the turnaround doesn’t hang on whether anyone was to blame or whether they were battered by fortune. What matters is that we need to establish whatever went wrong and fix it.

3. Take control of time

Senior teams, and particularly CEOs and finance teams, in distressed or turnaround situations, experience relentless demands on their time from all sides: owners, owners’ advisors, banks, banks’ advisors, customers, creditors, worried employees, worried Board members; the list goes on. At the same time, management is constantly harried by a series of apparently urgent tasks, each of which appears to be critical in its own way.

Tempting though it may be to heroically charge from fire to fire, coming up occasionally for air to report to lenders or answer questions from advisors; the senior team cannot possibly effect any sort of successful turnaround in such a responsive way.

The CEO needs to create breathing space for the business.

From our observation, the first thing successful turnaround CEOs do to achieve this is take control of time. They understand the requirement to accommodate communication needs and put out the urgent fires; but they also recognise the crucial necessity to protect the time that they and their team need to think, understand the problems in the business, formulate the plan, delegate and implement it. This protection takes numerous forms, such as establishing regular update meetings with all parties to limit repetition, setting weekly time aside to plan or talk to key customers; whatever it takes to promote the important so it is on par with the urgent.

4. Take control of money

Equally important to taking control of time is taking control of money, understanding where every pound is going and coming from. It goes without saying that the CEO needs to take decisive action on business solvency and a plan to return to profitability, which most usually means addressing cost. Where successful turnarounds differ is in the management of details, and the corresponding flows of money. The most effective turnaround CEOs we know make a habit of establishing and monitoring a realistic pipeline, creating a bottom-up budget and making the team accountable for every pound of income and spend.

In addition to problems of solvency and profitability, most companies in turnaround situations have issues with liquidity. Whereas profitability can be addressed internally by sensible planning and performance management, liquidity usually requires external support from financiers, ranging from payment holidays through to cash injections.

This liquidity brings breathing space that allows management to make calm, rational decisions that support long term survival and profitability. Without it, the company can end up in a frenzied cash and business chasing environment, of constant triage with an eye only on today’s problems.

The senior team has numerous tools at its disposal to persuade financiers or creditors to extend liquidity: the CEO’s personal turnaround track record, the business pipeline, the bottom-up budget, evidence of future customer spend or market growth, a plan to address what went wrong. But management’s strongest card, and now a regular requirement from lenders, is to make the liquidity conditional, i.e. making continued or extended financing subject to hitting a number of agreed goals. We cover this in our next post.

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