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October 20, 2020
Developing a Successful Business Turnaround Plan
By Bill Patterson, CTP, CIRA, CPA , Erik White, CIRA , Gregory S. Milligan, CTP

This is the second installment of a three-part series co-authored by Bill Patterson, CTP, CPA, CIRA, Erik White, CIRA and Greg Milligan, CTP of Harney Partners.

A practical guide to pulling your company back from the brink.

Now that you’ve made the tough decision to try to save your troubled company, it’s time to roll up your sleeves and get to work on a plan of action. You’ll need to formulate clear goals for the turnaround, figure out what kind of cash flow will support those goals and map out a clear blueprint to follow. Taking these steps will give your company the best possible shot at survival.

STEP 1. Paving The Way: Set Appropriate Goals

You’ve likely spent the better part of your time with your company focused on finding ways to build value for shareholders and owners. But when your responsibility shifts from creating a business to saving a business, your fiduciary duty must encompass the corporation as a whole. That means making it your primary goal to deliver value not just for equity holders, but also for bondholders, lien holders and other creditors.

Preserving as much value as possible for as many stakeholders as possible is a goal that requires a much more conservative strategy than strictly building value for owners. For example, what if the opportunity arises to make an acquisition that has the potential for a huge gain – but also poses the risk of losing everything? Keeping in mind the goal of preserving value for all players, your decision-making will need to take into account the adverse impact on your creditors if that bet doesn’t pay off.

Having committed to the overall goal of preserving value, your next step is to determine a course of action to achieve that goal. Should the company be sold to new owners, or is restructuring under current ownership a possibility? Either way, is a Chapter 11 bankruptcy a possibility? If you pursue a sale, Chapter 11 has the benefit of enabling you to sell assets free and clear of liens or other encumbrances. If you’re hoping to keep the current ownership and management in place, Chapter 11 can relieve pressure from creditors, giving you more maneuverability to develop and execute your turnaround strategy.

STEP 2. Paying The Way: Forecast Cash Flow

Regardless of how you decide to turn the company around – sell, or keep current ownership in place – you will have to enter an emergency action phase that’s focused on stopping the bleeding and moving into positive cash flow. A 13-week cash flow forecast is essentially a way of attaching real numbers to your turnaround plan. As such, it’s essential for determining 1) whether your turnaround plan can actually produce cash-positive operations and 2) how much cash you will need before you reach a cash-positive state.

This isn’t a theoretical exercise; it’s a practical tool that you’ll use every day to make decisions. It’s therefore important to be as accurate and realistic as possible about what you expect to collect and spend. It’s also important to make cash flow easy to track, with weekly comparisons of budget against actual performance.

And while it’s called a 13-week forecast, working with it successfully means updating and changing it weekly based on performance – so that, in a very real sense, you’re reinventing the 13-weeks-out window every week as events dictate. You have to keep in mind the many variables that can affect cash flow and be prepared to reevaluate based on a multitude of factors. What if cash you believed to be available for cash flow turns out to be restricted? What if there are new cash requirements you couldn’t have anticipated? What if you lose a major customer? You can’t plan for every eventuality, but you can accept that the only constant is change and you must be ready to respond quickly and effectively when things shift.

STEP 3. Proving The Way: Outline The Objectives And Process

The cash flow forecast is a critical element of your turnaround plan, but it’s not the only element. Your business and all its stakeholders will be best served by a comprehensive, multi-component defined plan that can firmly guide your efforts during this critical and challenging time. The old adage that if you don’t know where you’re going, you may end up somewhere else is true – and doubly true in turnaround situations.

The defined turnaround plan should answer the critical questions: Who are we? How did we get into this situation? What are we going to do about it? How much will it cost?

Be sure yours includes all the following elements and focuses primarily on high-level salient points that doesn’t bog down in minutiae.

  • Company information. What does the company do? How long has it been in business? Who does it serve? Don’t worry that everyone already knows these things; redefining them will help ensure a clear understanding of the business on everyone’s part.
  • Financial history. Look back at what’s happened financially in the past to identify the causes of distress in the present. You need a clear understanding of the problems before you can address solutions.
  • Turnaround plan. Describe how you’re proposing to address the problems you’ve identified; go through the problems point by point, identifying opportunities as well as risks.
  • Financial snapshot. What does the cash flow forecast tell you? How much bridge financing will you need? What are you saving from actions you propose in the turnaround plan?
  • 13-week cash flow forecast. Be prepared to present your best expectations at the time but make it clear that this component of the plan is inevitably going to be subject to change and updates.
  • Supporting financial information. Evaluate corporate reporting and honestly determine if the data is useful and provides value to managing the business. If you don’t have the right data, it is difficult to execute, and you will end up repeating your mistakes of the past. Also evaluate the data available for your competitors and your industry and benchmark your company performance to your peers. Understanding your differences, as well as similarities, can help identify problem areas and potential improvements.
Wrap Up

The business turnaround plan needs to focus on a handful of major objectives that can be clearly and easily articulated and accomplished in a compressed or expedited time frame. Too many objectives or too long a time period are likely to lead to failure, or an inability to achieve adequate success. A company needing to implement a turnaround needs speed to value, and realistic, executable near term goals and objectives.

Developing a business turnaround plan for your business may be one of the hardest things you ever do. But following the steps described here will provide you with a strong framework to support a successful outcome. If you’re looking for assistance to help you navigate through these unprecedented times, Harney Partners can help. We are a national, corporate-advisory firm that provides independent, multi-disciplinary solutions for middle-market companies and their stakeholders to overcome financial and operational challenges, serving a wide array of industries. For more information, contact us at info@harneypartners.com, or call any of our offices.

 

Bill_Patterson
Bill Patterson, CTP, CIRA, CPA
Executive Vice President

Bill has 35 years of experience providing financial advisory services to business stakeholders of organizations – including ten years with Big Four firms, plus experience as the CFO of both early-stage and middle-market companies. He has extensive experience navigating the complexities of recapitalization, bankruptcy, reorganization, and litigation issues. Additionally, Bill has broad experience in organizational and corporate governance and risk in the U.S and abroad. His industry expertise includes manufacturing; construction; consumer products; distribution and transportation; services; E&P; oil field services; retail; renewable energy; medical devices and equipment; and financial services.

At Harney Partners, Bill is an advisor to corporate stakeholders and companies experiencing a complex transition that are seeking financial and operational stabilization.

Erik_White
Erik White, CIRA
Managing Director

Erik has amassed more than 14 years of experience in corporate finance, business restructuring, forensic consulting and asset management. He provides strategic advisory services, both financial and operational, to companies experiencing a complex transition.  From Fortune 500 to lower middle-market companies, Erik has the depth and breadth of knowledge and experience to support clients in distressed situations.

Greg_Milligan
Gregory S. Milligan, CTP
Executive Vice President

For more than 25 years, and with engagements involving onsite advisory to clients in more than 25 states and multiple foreign countries, Greg has maintained a practice surrounding troubled situations or situations that require fiduciary oversight. He joined Harney Partners in 1998 and opened the Austin office in 2001. Since that time, he has both led and collaborated on engagements with highly successful outcomes, meriting multiple peer-review awards from the Turnaround Management Association and the M&A Advisor.