Home News & Insights The Elements of a Successful Business Turnaround
Blog
September 29, 2020
The Elements of a Successful Business Turnaround
By Bill Patterson, CTP, CIRA, CPA , Erik White, CIRA , Gregory S. Milligan, CTP

How to determine whether your company has what it takes to find a new way forward.

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

The time has come to ask that critical question: can this business be saved, or is it time to let it go? Getting to a realistic and actionable answer can seem like an overwhelming task. But there are really just four basic elements that determine whether you have what you need in place for a successful business turnaround: (1) a viable core business, (2) adequate financing, (3) the right resources within your company and (4) help from a professional turnaround manager if you need it.

If you’re working for or with a company that’s in distress and considering its options, begin by asking these four questions:

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 breakeven analysis by product or service line, using activity-based costing rather than company financials. Then determine whether activities currently 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 certain locations or business segments unprofitable? A “four-wall analysis” will assess profitability of locations and illustrate problem areas, as well as which should be closed, and which will require specific adjustments to remain open.

Outside forces which play a role in determining the viability of your business must also be examined. For instance, if you are in the pager business, will that business be impacted by dramatically increasing cell phone usage? 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. It doesn’t matter that a company can profitably sell laptop hardware next quarter if sales are declining 20% every year or manufacturing improvements are about to drop retail prices through the floor. 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: How critical is the use of cash? What would happen if the disbursement were delayed or eliminated? Then 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. Be sure to take a fresh look at accounts and notes receivable to accelerate collection efforts. Other cash flow options may include new lender or owner financing.

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 a 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. Has key talent already left the company? Is there someone still in place who has credibility with the remaining internal and external stakeholders? Are potential team members willing to follow a new direction, or will entrenched past practices impede progress? The TMT leader must look at senior and middle management as well as 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. Is the company relying on a dysfunctional enterprise resource planning system? Are there adequate controls in place? Can a low-margin, high-throughput business track costs and expenses well enough to spot the source of losses? Are financial reports useful, accurate and timely?  If there are systems, procedures or policies that 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 daily responsibilities necessary to keep the business operational, therefore it’s time to hire a professional Turnaround Management Team. An outside manager or organization can be a valuable resource that can offer a fresh perspective and new discipline to the process, as well as providing additional resources and skill sets. They will have experience with turnarounds, 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, it’s critical for the turnaround professional to be able to articulate a clear vision and to communicate with staff regularly and openly.

What’s Next?

If you’ve explored these four questions and found that the answer to each is “yes,” watch for our next article on how to develop a turnaround plan. If, on the other hand, you are not sure your organization is a reorganization candidate, here are additional points to consider:

  • Can you stabilize the company in order to find a strategic rather than financial buyer?
  • Is this a case for a sale in Chapter 11 to draw a line between assets and liabilities?
  • Is an orderly liquidation possible? Can you complete work in process and sell inventory, finish out projects, or conduct a going-out-of-business sale?
  • If other options aren’t feasible, is it best to just pull the plug?
Wrap Up

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. If so, a professional turnaround manager can expand that perspective, helping you to consider every angle and find a new business to create a healthy return going forward. 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.