Turning around distressed companies (1/3)

Turnarounds of distressed companies rarely succeed. Here are some observations of what I have seen to work.

First, to be clear, the common definition of a turnaround is very broad. It is basically about improving performance from bad to good. At one extreme, turnaround stories are about turning an under-performing company into a world-beater; using sports language, taking a regular team player and turning him into the world champion. This article is about the other extreme of getting the regular athlete out of intensive care: taking a company that will not survive in its current form to a position where it is profitable and sustainable.

Using this definition, most turnarounds do not succeed. The majority of respected surveys put the success rate of turnarounds between 20% and 35%, depending on the definition of underperformance and success. Those with turnaround experience know also that they are usually highly stressful and, if unsuccessful, very poorly rewarded.

We believe that it does not have to be this way. In our experience, there is almost always a decent business in amongst the detritus of a struggling company; which a smart CEO can rejuvenate with some tough decisions and a close eye on the business.

We work with some outstanding turnaround CEOs, whose success rate is close to 100%, and whose approaches share a series of common measures, which we summarise below. This list is not meant to represent a guaranteed recipe for turnaround success, it does not reflect the importance of addressing the specifics of each unique situation, and by definition it is incomplete. It is nevertheless a set of simple actions common to all the successful turnarounds we have witnessed and supported. We describe these measures in the broad order in which we observe them:

1. Establish the facts
2. Understand what went wrong
3. Take control of time
4. Take control of money
5. Make promises you can keep
6. Change the team
7. Simplify

We have written this article from the perspective of the new CEO. This is because we believe that a new CEO, brought in or promoted internally, is pre-requisite for getting a company out of intensive care or creating any step change in company performance.

1. Establish the facts

It is an almost universal practice and requirement for turnaround and recovery experts to establish the short term (three to six months) viability of the business. This is typically a rapid, internal exercise focused on contracts, commitments and cash flows. The exercise is absolutely necessary, but sufficiently well-understood and common that we will not cover it further.

Less common, but equally vital is ascertaining the one-year viability and two-year potential of the business.

This exercise is not a luxury: successful turnarounds almost always require liquidity from either debt or equity; and these sources will need to be reassured that there exists a viable business in the mid term, and that they are not throwing good money after bad.

The work requires an investigation of commercial reality, looking both inside and outside the business.

Externally, it requires interviews at a micro level to understand as clearly as possible customers’ budgets and spending intentions, and research at a macro level to garner the full facts of relevant market trends and competitive developments.

Internally, it requires a robust analysis and understanding of sources of profit and loss by either product, customer or market.

The entire exercise can take as little as two to three weeks for an experienced team, can be performed with minimal disruption to the business and if done well forms the basis of evidence for the recovery strategy. Armed with genuinely solid and accurate information about the external and internal business reality, the recovery strategy is rarely complex and generally obvious.

It is rare that we look beyond two years in distressed or turnaround situations. The time to look at outer years is when the fires are mostly out.

In our next post, we will look at the next three elements of the most successful turnarounds we have experienced: working out what went wrong, taking control of time, and taking control of money.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.