Home News & Insights Unlock Success: Discover if Your Company Has What It Takes for a Business Turnaround
March 27, 2024
Unlock Success: Discover if Your Company Has What It Takes for a Business Turnaround
By Bill Patterson, CTP, CIRA, CPA

Developing a business turnaround strategy for your business may be one of the hardest things you ever do. The time has come to ask that critical question: can this business be saved, or is it time to let it go? Once you have assessed this, 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 to develop a business turnaround strategy will give your company the best possible shot at survival.

This post will ask the fundamental questions before proceeding with our strategy. We will develop a plan and show you step-by-step how to execute it. If you ever need help, our restructuring consulting services are available.

Ask yourself these fundamental questions before proceeding with your business turnaround:

1. “Do You Have One Or More Viable Core Businesses?”

This is your most urgent question, and you need to answer it as quickly as possible. Start by conducting a break-even analysis by product or service line, using activity-based costing rather than company financials. Then, determine whether activities below breakeven can be converted into ones with a positive margin. For example, are you providing services where labor and related direct costs cannot be recouped?  Are specific locations or business segments unprofitable? A “four-wall analysis” will assess the profitability of locations and illustrate problem areas, as well as which should be closed and which will require specific adjustments to remain open.

For a successful business turnaround strategy, outside forces that play a role in determining the viability of your business must also be examined. Conduct a market analysis of historical and projected market trends to determine if the business has a future and a price analysis to see if prices can be raised or are on the decline. Are there increasing government regulations? Could the business be impacted by current tariffs or other trade war activities?

The overall question to ask here is whether you can find an element of the company that can emerge as a profitable and sustainable business with the ability to finance its capital and liquidity needs.

2. “Can You Get Adequate Bridge Financing?”

Even if a company can demonstrate a viable core business, it may not have the liquidity it needs to restructure. The reasons vary: historical lending sources may have lost faith that the company or industry can generate a profit or sufficient returns in the long term, or assets used as collateral may have decreased in value. To survive, the company may need bridge financing until conditions improve.

To proceed along this path, you must get to cash flow neutrality and determine the cost of getting there. Assess your immediate liquidity by creating a weekly cash flow forecast. Evaluate each cash disbursement to identify areas where liquidity can be preserved. 

Look for supplemental sources of cash, such as the sale of non-core assets, including business divisions, owned real estate, planes or vehicles, surplus equipment, and excess inventory. 

To accelerate collection efforts, take a fresh look at accounts and notes receivable. Other cash flow options may include financing for a new lender or owner.

3. “Do You Have Sufficient People And Resources?” 

Just as important as assessing liquidity and financing resources is whether the company has the resources to assemble an internal Turnaround Management Team (TMT) capable of implementing a successful change in direction. There will be hard decisions to make, and having the discipline within the organization to adhere to changes in policies and procedures is critical. 

The TMT leader must look at senior and middle management and strategic or influential staff throughout the organization to help implement and enforce the new direction. 

The TMT must understand the problems and objectives, have the discipline and will to make tough decisions, and continually evaluate if the right people are on the team or if players need to be changed.

While people are a significant part of the turnaround assessment, the TMT must also evaluate the company’s processes, products, and financial systems. If systems, procedures, or policies could hamstring a turnaround effort, assess whether it will be possible to improve or replace them and the cost to do so.

4. “Do You Need To Call In Outside Help?”

The company may determine it doesn’t have the internal bandwidth or expertise to manage a turnaround, on top of the daily responsibilities necessary to keep the business operational. Therefore, it’s time to hire a professional Turnaround Management Team and seek restructuring consulting services

An outside manager or organization can be a valuable resource that can offer a fresh perspective and new discipline to the process and provide additional resources and skill sets. They will have experience with turnarounds and bankruptcy services  and know how to spot potential landmines, and be able to improve communications with all stakeholders.

Look for a partner with the background to fully understand and assess – and potentially manage – your organization, including interacting with the management, employees, vendors, customers, and Board of Directors. 

The turnaround manager should also have connections to and experience with lenders to distressed companies, negotiating forbearance agreements, credit agreement amendments, waivers, new financing terms, and related experiences. 

You should also look for someone your organization can trust. While it’s common for management to assume that employees will leave if they know the company is in trouble, employees are frequently relieved to learn that someone is taking responsibility for trying to fix the situation. However, to maintain their trust and cooperation in restructuring consulting, the turnaround professional must articulate a clear vision and communicate with staff regularly and openly.

What’s Next? 

If you’ve explored these questions and found that the answer to each is “yes,” and you’ve made the tough decision to try to save your troubled company with a business turnaround plan, it’s time to roll up your sleeves and get to work.

Here’s a step-by-step plan to get it done

1. Set Appropriate Goals

You’ve likely spent most of your time with your company focused on building value for shareholders and owners. But when your responsibility shifts from creating to saving a business, your fiduciary duty must encompass the whole corporation. 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. 

Keeping in mind the goal of preserving value for all players, your decision-making must consider the possibility of adverse impact on your creditors.

Having committed to the overall goal of preserving value, your next step is to determine a course of action to achieve that goal.

2. 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 focused on stopping the bleeding and moving into positive cash flow. 

A 13-week cash flow forecast is a way of attaching real numbers to your turnaround plan. As such, it’s essential to determine 1) whether your turnaround plan can 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 you’ll use daily to make decisions. Therefore, it’s 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 budget comparisons 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 genuine sense, you’re reinventing the 13-weeks-out window every week as events dictate. 

You have to remember the many variables that can affect cash flow and be prepared to reevaluate based on many factors. 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.

3. Outline The Objectives And Process

The cash flow forecast is a critical element of your business turnaround plan, but it is not the only element. Your business and all its stakeholders will be best served by a comprehensive, multi-component 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.

4. Write the strategy document and share it with all stakeholders

The defined business turnaround strategy 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 to fix? 

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

  • Company information. What does the company do? How long has it been in business? Who does it serve? Redefining this information will help ensure a clear understanding of the business on everyone’s part.
  • Financial history. Examine 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 propose to address the problems you’ve identified, going through them point by point and 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 the 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 plan component will inevitably be subject to change and updates. 
  • Supporting financial information. Evaluate corporate reporting and determine if the data is useful and provides value to business management. Without the correct data, it is difficult to execute, and you will end up repeating your past mistakes. 
  • Also, evaluate the data available for your competitors and your industry and benchmark your company’s performance against your peers. Understanding your differences and similarities can help identify problem areas and potential improvements.

After you have decided to do what it takes to turn around a troubled company and created a detailed plan to achieve your goal, it is now time to make sure all that strategic thinking pays off in the execution. Success often relies on bringing a few fundamental characteristics to the effort. Demonstrating these qualities makes you much more likely to reach your goal.

What To Focus On Next?

1. Visibility: Be An Engaged And Accessible Leader

As you face the pressure of forecasting cash flows accurately, answering key stakeholders, and addressing your organization’s financial and operational challenges, the temptation to shut the door, put your head down, and just power through decisions and actions will be strong. It will also be potentially one of the biggest mistakes you’ll ever make.

Remember that you need to cultivate the support and goodwill of the employees – and, to a degree, key customers and vendors – who are in this fight with you. Don’t sequester yourself in your office, hide behind emails, or limit meeting time to your senior team. This is the time to engage everyone.

Set the tone for the work by taking a practical, honest approach. Listen to the concerns of key employees and influencers, solicit their input about underlying issues and potential solutions, and let them know their perspectives are important as the company goes through the turnaround process.

 Doing these things can give you invaluable insight into the organization’s problems. It can boost their morale and galvanize them to lead employee support for the turnaround.

On a broader scale, across the organization, people are likely to feel uncertain and fearful about what is happening and what will happen. The best thing you can do for the company, for them, and yourself is to openly share your evaluation of the situation, be clear about the plan to address them and demonstrate your commitment to taking decisive action.

2. Transparency: Be A Strong Communicator (Even Better, Be An Over-communicator)

There’s no such thing as too much communication when working to turn around a business. Communication builds credibility. You can’t afford for anyone to view you as secretive or evasive at this sensitive time. Instead, you want to be seen as someone providing everyone with consistent information throughout the turnaround process. This will reinforce your strategy and vision for the future and instill confidence in your ability to lead the company into that future.

Remember that rumors and misinformation are likely to grow and spread when a company’s viability is in question.. Constant, clear, accurate communication is critical to getting the right message out and preventing erroneous beliefs from undermining your efforts. If anything, you should over-communicate important information.

On the other hand, while overcommunication does mean going above and beyond to ensure people understand everything they need to, it shouldn’t mean overwhelming them with information they don’t need. Take care to evaluate different stakeholder groups regarding what’s important to them.

 Use what you learn to develop a communications strategy that provides appropriate information to each type of stakeholder, whether it be employees, vendors, customers, lenders, or equity holders.

If there’s been a decision to turn around the company through Chapter 11 bankruptcy reorganization, that creates another level of  communication considerations. 

Bankruptcy is often a misunderstood process, and many people have their own perceptions of its impact on them. You’ll want to be sure all interested parties are clear that you are pursuing Chapter 11 bankruptcy and communicate the end goal of the bankruptcy. You’ll need to remember, too, that Chapter 11 bankruptcy requires your company to follow a highly structured process that includes requirements for confidentiality, reporting, and other aspects of communication.

3. Discipline: Be Unwavering In The Commitment To Move Forward

Much can potentially distract you from your mission in a business turnaround – incomplete information, imperfect data, and a seemingly endless list of things that must be accomplished, often against tough odds and within a tight timeframe.

 But even when it seems like you don’t have enough information to proceed or the information you do have is in flux, maintaining the status quo is not an option. To keep the organization on track and moving toward a successful turnaround, you must act decisively, sometimes even in the face of reservations or concerns. 

Inevitably, many tough decisions will need to be made to successfully complete your turnaround. You must be disciplined in making these decisions and then disciplined in communicating the decision across the organization and to impacted stakeholders in order to get complete buy-in.

You shouldn’t have to do it alone, though. Once the business turnaround strategy has been communicated through a detailed, written plan, everyone is accountable for what happens next. You are to lead the way in building momentum and keeping it going. Throughout the turnaround process, recognize and celebrate milestones along the way; it can snowball  your progress toward the ultimate goal.

You don’t have to do it alone, and you don’t have to do it all at once. If you have a list of 15 priorities, focus on the first three, then move on to the next three. If you try to do everything at the same time, you simply won’t be as effective, and you may, in fact, end up getting almost nothing done.

4. Agility: Be Ready To Turn On A Dime

Staying disciplined and focused is one thing; wearing blinders is another. You must remain alert to changing circumstances and how they affect your path to a successful turnaround. 

Just because you have a plan mapped out doesn’t mean you shouldn’t vary from it when a shift is warranted. If incomplete information leads to mistakes, that’s understandable. Incremental success with ongoing adjustments is preferable by far to no forward movement.

So be ready to pivot when necessary – not just in how you respond to change but also in how you react to other stakeholders. This is true even if (or especially if) their feedback is not what you were expecting.

And no matter what happens, always keep the big picture in mind. You and the other leaders of your organization have set appropriate goals, crafted a strategy, and developed forecasts to help guide your efforts. As you execute, spend time evaluating how things are going in the context of what you were expecting. Ask yourself:

  • How have the results compared to the forecast? What drove the variance from the forecast?
  • Do you need to adjust expectations?
  • Can you improve performance by renegotiating selected contracts or agreements?

Consider the answers, and then revise your forecast with any needed refinements in mind. In other words, strategize, execute, review, and repeat.

In Conclusion

There’s an old saying: “When you find yourself in a hole, the first step is to stop digging.” 

Taking the time to honestly and accurately assess your business, financing, and resources can give you the perspective you need to decide if a turnaround is the right choice for your company. The business turnaround plan needs to focus on a handful of significant objectives that can be clearly, easily articulated and accomplished in a compressed or expedited time frame. 

Following the steps and the four critical qualities described here will provide a solid framework to support a successful outcome. 

If you’re looking for assistance to help you navigate through these unprecedented times, Harney Partners can help with our restructuring consulting services. 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 various 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.