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Work with Turnaround Professionals to Preserve Value and Rebuild Your Company

Owners and Boards of Directors have worked hard to build a business, only to see it impacted by the Coronavirus pandemic. The last thing that they want is to close down the business permanently. Most owners want to rebuild and recover their investment.

A company's financial problems can be attributed to many reasons, among them is mismanagement during a crisis. When existing management doesn't possess skills to deal with crisis, a turnaround specialist may be needed. Clearly, leadership needs help.

Investors and lenders aren't in the business of closing down companies either — nor do they want to be. When an investment or credit becomes financially troubled, they often seek an alternative to closing down the business.

Some investors want to insert themselves as the CEO to determine what should be done. While many investors have run financial or investing institutions, few have run companies as well, and are often ill equipped to do so. They seek turnaround advisors, and investors should. Turnaround advisors can determine whether one strategy or another can affect revitalization, and why others didn’t work in the past.

Most lending institutions send troubled credits to the "work out" department. Make no mistake, this step is usually the first in a long legal process that ‘works the credit out of the bank’. The turnaround specialist can add value by stabilizing a situation and bringing credibility; thereby making the credit more desirable to the next tier lender with an appetite for more risk.

Foreclosure is painful for lender, borrower, and other stakeholders. At the very least there will be substantial legal fees, other costs, loan loss reserves, and perhaps a loss of principal. In many cases, it is in everyone's best interest to restore the company to financial health.

Leadership Styles

The management skills necessary to rescue or restart a troubled company are much different from those needed to manage operations and growth in a healthy company. In a healthy company, management focuses on long term objectives, coaching, and team building. With the luxury of time, the occasional mistake generally will not do lasting harm. However, in a financially distressed company, time becomes the enemy. As the company's problems compound and cash flow evaporates, it becomes critical for management to act quickly and decisively.

In a turnaround situation, management must focus on short-term survival. While a manager in a stable environment should be known among employees and shareholders for consistency in making decisions, a manager in a troubled company must be able to shift gears to deal with the daily crises that inevitably occur. It helps to have a trusted advisor nearby.

Existing management often goes through a "denial" phase. They tend to blame their situation on external factors, like Coronavirus shutdowns, or such as the lender's refusal to advance additional funds, rather than examining the way the company is managed. In the eyes of management, the lender becomes an enemy. If a negative view of the lender's role develops, the lender may need leverage (a condition of added financing, or threat of foreclosure) to recommend use of an outside advisor.

Contrasting Leadership Styles

 

Skill

Stable or Growth Scenario

Troubled or Turnaround Situation

Focus

On Objectives

Survival, action, problem-solving

Decision Making

Deliberate

Decisive, Immediate

Authority

Delegate

Direct Involvement

People

Develop

Recruit Talent
Communications

Respected for:

Management reputation

Financial credibility

Known for:

Consistency

Ability to shift gears

 

 

Liability

There can be personal liability associated with being on the Board of Directors, the leader or decision-maker. When the company is in trouble there are different reporting and response obligations that must be dealt with. For instance, in many states it is illegal to allow employees to work when the decision-maker knows that they will not be paid for that work. Taxing and labor regulation agencies will want to assure that reporting and employees respectively were handled properly. The potential for legal actions increases when trouble occurs.  Be assured that there is time required and potential liability, which you may not have planned for.

Finding the Right Turnaround Specialist

Turnaround specialists generally are either consultants or interim managers. Consultants and board advisors advise management in areas where they haven’t had experience before. Interim managers often replace the CEO, take the decision-making reins, and guide the company through troubled waters, hopefully to safety. Whether a consultant is effective depends on management's willingness to listen and to implement the specialist's recommendations.

The turnaround specialist must possess the skills to deal with a financially troubled company and have the ability to make or advise on the tough decisions needed during a recovery. Specialists are hired for their management ability; the ability to bring order out of chaos; the ability to marshal resources and maximize value from those diverse resources. If the company requires special expertise, then the specialist will find and/or attract that expertise. Remember, experience in dealing with crises and change may be more important than industry experience.

It is important that the turnaround professional be financially credible and honor commitments. The company, bank and other interested parties should be able to rely on the specialist to protect their interests while providing them with accurate information they need on a timely basis. The earlier trouble is detected, the more probability of turnaround success. Often, this credibility created with a turnaround specialist on board will positively affect capital raising to finance the restart. When hiring a turnaround specialist:

  • Review proposals versus what can realistically be accomplished.
  • Require engagement agreements.
  • Hire an individual, not the firm; personal chemistry with management is critical.

 

How the Specialist Operates

The specialist offers a new set of eyes, skills and understanding of troubled situations to independently evaluate the company's circumstances. Negotiate the role and deliverables of the specialist to define responsibilities. The process will focus on several issues:

  • Is the business still viable?
  • What is the purpose of the business?
  • Should it be saved? Why? Are those reasons valid?
  • Is there a core business which can be the source for the emerging business?
  • What strategies will be applied to execute the recovery?
  • Are there sufficient cash resources to fuel the recovery?
  • Which existing managers are capable of leading parts of the company?

Remember, not all companies are salvageable.

This fact-finding must occur as quickly as possible so that a realistic assessment of the current state of the company can be prepared. The specialist's first priority will be to manage cash flow, to stop the hemorrhage, and gain credibility with the bank. Analyzing sales and profit centers, and asset utilization should indicate where the real problems, not the symptoms, are located. Next a business plan outlining and suggesting possible courses of action will be prepared. Once the course of action is chosen, implementation and monitoring can occur. The specialist should remain involved at least until the business is stabilized, and preferably until the transformation is complete. An advisor can remain in that role for a long time if necessary.

A good turnaround specialist will develop a permanent management team within the company to preserve value, instead of hiring a large team of outsiders who, when they leave, take that value with them. The specialist should work themselves out of an interim job to be most effective, while leaving the company with the ability to grow and prosper as a stand-alone going concern.

A turnaround specialist in an outside director or advisory board role is adept at providing fresh thinking and improving value without taking away from management control.

 

About the Author

John M. Collard is Chairman of Strategic Management Partners, Inc. in Annapolis, Maryland, specializing in turnaround management, outside director leadership, Fed’l/Com’l/Int’l transition to new markets, new business development, investment and asset recovery, raising capital, and rebuilding underperforming distressed troubled companies.  John is inducted into the Turnaround Management, Restructuring, Distressed Investing Industry Hall of Fame. John is a Certified Turnaround Professional (CTP), Certified International Turnaround Manager (CITM), with 35+ years senior operating leadership, $85M+ asset and investment recovery, 45+ transactions worth $1.2B, and $80M fund management experience, and can account for $950M+ new business developed with a 3.5 of 5.0 Win Ratio. John is Past Chairman of the Turnaround Management Association, Past Chairman of the Association of Interim Executives, Senior Fellow of the Turnaround Management Society, serves on public and private boards of directors, and advisor to companies, private equity investors, and governments.  John is a Founder of TMA. John is honored as Prince Georges Business Leader of the Year. John is honored with the Interim Management Lifetime Achievement Award from the Association of Interim Executives. John is honored as Most Admired CEO in Maryland by Daily Record. John is honored with SmartCEO Distinguished Leadership Award. He can be reached at 410-263-9100, www.StrategicMgtPartners.com

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