Most troubled companies are distressed because of a lack of ongoing market analysis, business planning and execution, a failure to adopt to change and a management team that may be in denial. Having worked as a consultant with a number of troubled companies, I’ve developed my list of action steps to Fast Track getting to an operating plan that can determine if a company can be turned around and, if so, to Fast Track a return to positive cash flow. This is from an operational perspective as compared with a financial restructuring perspective. After all, if a company’s cash flow cannot be stabilized operationally, it may not be a candidate for a financial restructuring. Conversely, a company that has a sound operational turnaround plan could be attractive to investors or lenders. With that in mind, our action steps are oriented towards stabilizing a company’s cash flow.
- Determine if the business segments still make sense. Look at the various segments of the business and determine which represent the core profitable business versus non-essential or unprofitable business segments. Non-essential and unprofitable business lines or offices cause management to lose focus while draining off cash resources. Those business lines or offices should be jettisoned quickly.
- Review and revise the business strategy. Once you can focus on the remaining business segments review, revise and establish the strategic plan. Focus specifically on how the company goes to market to sell its goods or services by devising a data-inspired and capital-efficient strategy. Strategic planning is 90 percent perspiration and 10 percent inspiration. The strategic planning process starts with a great deal of market data analysis such as macroeconomic trend analysis, customer surveys, even internal surveys; i.e. the perspiration. Good data analysis leads to strategic inspiration. I’ve never met a good CEO who wasn’t data-driven in understanding the external factors that drives his or her business and didn’t take the pulse of those drivers on a continuous basis. The best CEOs are constantly working on their strategic plan and adapting to changing conditions.
- Assess the management team and the executive compensation structure. Let’s face it, some managers are good in stable situations but not with managing the change required in most turnarounds. Each member of the management team should be assessed for the contribution that he or she can make towards turning the company around, not the contribution made when the company was doing well. That should lead to an organizational realignment to make the best use of the talent pool. And, within the context of a turnaround situation, large base salaries are unacceptable. The management team’s compensation should reflect their confidence in turning around the business with a performance-based bonus that allows them to earn a greater amount of total opportunity dollars if they succeed. If the company and the investors do well, the management team should do well too. In that way everyone’s risk and reward profiles are aligned.
- Assess and right-size the business platform. The business platform will need to be rationalized anew from the perspective of the revised business segments and strategic plan. If business lines or offices are being closed to better focus on core profitable businesses, there should be opportunities to reduce the business platform footprint or fixed costs. As a starting point, the breakeven point of the company should be analyzed and reduced to the maximum extent possible. This may mean automating, outsourcing or eliminating business processes. This is one of the most difficult tasks to undertake and usually best done by someone emotionally detached from the company; e.g., a turnaround consultant.
- Forecast year-end cash results and establish monthly accountabilities. With turnarounds my favorite saying is “Cash is King”. I find myself constantly forecasting year-end cash results. Every idea for change is weighed against a cash flow forecast model I have built for that company. Either it has to improve the cash flow or the idea is discarded. The monthly forecasts are then compared to monthly actual results, holding people accountable for meeting the forecast. The forecast year-end cash results are constantly updated and communicated to the directors or lead investor. It’s important for them to know if they are going to have to raise capital or, hopefully, enjoy a cash surplus.
- Communicate honestly and often. Many CEOs simply can’t admit failure for fear of a loss of confidence by the people they lead or with their investors. Or, they are in a state of denial hoping things will come back on its own. They try to put a good game face on every day – fooling no one. The management team has probably already lost credibility with those who sense the real situation. Honesty is required when dealing with everyone from vendors, to creditors to employees. Credibility and trust must be earned every day. Never promise what you can’t deliver and always deliver what you promise. Once vendors, creditors and other stakeholders have regained a degree of trust, they will work with the company to help it get back on its feet. After all, it’s in their best interest to support the survival of the company. Communications with all stakeholders should occur often. No surprises should be the theme. Keep them in the loop at all times. They will cut more slack if they know what’s going on.
- Partner with the Accounting department. The CFO and the accounting staff are going to be key resources in any turnaround situation. There will be an increased need for special analyses and a heightened focus on controls. There is always the chance that someone will be tempted to cut expenses within the Accounting department – after all they are not viewed as revenue producers. Resist that effort. In fact, that department may need to be beefed up to support the turnaround efforts. Make sure everyone in the Accounting department feels appreciated. They will be the ones working late on decision-support analyses that will help guide the path forward.
- Involve the HR Director and General Counsel. Turnaround situations often involve some layoffs as overhead is reduced. It is important to make sure the rights of all parties are protected while not creating legal liability burdens on an already financially stressed company. Conversely, there may be a need to retain certain key employees. The HR Director and GC could be helpful in coming up with retention bonuses and contracts to ensure those people are kept in place. The HR Director and General Counsel should be brought into the conversation early on to help with both of these issues.
- Consult Subject Matter Experts when needed. No one has a depth of expertise in every area. Sometimes a limited scope and duration consultation with a Subject Matter Expert is required and can save time and set the right direction. For example, if establishing a performance-based executive compensation program, a one or two-day consultation with an Executive Compensation Consultant can be hugely value-added as compared with a failed rollout. The same is true with technical IT matters. It’s one thing to set high-level system architecture direction that defines the business needs, it’s another to try to play the role of software engineer.
- Be mindful of the investors’ risk appetite. It is important to understand the investors’ appetite for risk in a troubled-company situation. Are they willing to fund an endless stream of capital calls or have they reached the end of the line? If after all the foregoing steps are taken and there are no good long-term prospects, then the directors or lead investor should consider other alternatives, such as a pre-packaged Chapter 11 if the company has a viable future or a strategic sale if not. Often it’s either that or the Chinese water torture of throwing good money after bad so it’s best to face up to the facts quickly and move on with implementing any resulting decisions. On the other hand, if the above action steps result in an executable plan that has promise but the company needs funding to move forward, then consider step 9 from above and engage an investment banking firm to help raise capital.
© 2016, The Fast Track Group, LLC