Turnaround support may be required when previously stable and competitive company faces financial distress. Articles written by turnaround specialists often describe executives who encounter corporate distress as going through the same emotional stages as dying people: denial, anger, bargaining, depression, and finally acceptance. The last stage is when most corporations hire turnaround professionals, unless they are forced to do so earlier by a lender, equity investor, or bankruptcy court.
A turnaround specialist enters a company with a fresh eye and complete objectivity. This professional can spot problems that may not be visible to company insiders and implement solutions. Turnaround managers have no political agenda or other obligations to bias the decision-making process, allowing them to take sometimes unpopular, yet necessary, steps required for a company's survival.
A turnaround manager's experience within a particular industry is less important than experience in crisis situations when a company is facing bankruptcy or significant declines in revenue. Critical decisions must be made quickly to stop the financial bleeding and give the company a chance to recover.
Operating in the eye of the storm, a turnaround specialist must deal equitably with angry creditors, frightened employees, wary customers, and a nervous board of directors. Clearly this is no assignment for the faint-hearted.
The Turnaround Managers Association identifies 10 common characteristics of a troubled company:
Ineffective Management Style. A president or founder of a company often is reluctant to delegate authority or refuses to do so. No decision, big or small, can be made without this individual's blessing. As a result, the rest of the management staff gains no solid experience or feeling of vested ownership in the business. The board of directors may be non-participative and ineffective. In such situations, if the president suddenly becomes incapacitated or dies, the entire company is in danger of collapse due to the resulting leadership void.
Overdiversification. The business has yielded to pressure to diversify to reduce risk. However, too much diversification may cause a company to spread its managerial, financial, and competitive resources too thin. As a result, the business becomes vulnerable to loss of market share to better competition. (Being all things to all people and getting away from core competency)
Weak Financial Function. A company with excessive debt, stringent covenants, and inadequate equity capital is operating with little or no margin for error. Credit is overextended, inventories are accumulating, and fixed assets are underutilized. The introduction of better working capital policies and improved capacity utilization decisions are clearly warranted in such cases. Yet, incumbent management instead often engages in debilitating attempts to grow the company out of its problems.
Poor Lender Relationships. A weakened financial condition has led to the company developing an adversarial and unproductive relationship with its lending institution(s). Fearing that its loan relationships and facilities may be in jeopardy, the company tries to conceal financial information from its lenders. Telephone calls from the bank are not returned. Interim or periodic reports are not filed. Since money is the lifeblood of most any business, this kind of lender relationship only leads to more trouble and compounds the difficulty of managing the declining business operations.
Lack of Operating Controls. The company is operating without adequate reporting, accountability, and responsibility mechanisms. This is tantamount to flying an airplane without an instrument control panel. Management decisions based on inadequate, untimely, or inaccurate information can make a bad situation considerably worse.
Market Lag. Changes in the product and customer marketplace have bypassed the company, leaving it with sagging sales and declining market share. For some businesses, the source of the deficiency is technology; their equipment or products and services have become obsolete. For others, the problem lies in sales and marketing; the company hasn’t kept pace with the needs of the marketplace or the ability to distribute its products effectively to the customer base.
Explosive Growth. The business is growing rapidly. A business that is a success at $5 million in sales a year can become a dismal failure at $10 million. Companies achieving fast growth from concentrating on boosting sales often overlook the effects of that growth on the balance sheet and the cash requirements of funding it. Growth often carries very high capital investment requirements, including significant investments in R&D, capacity, and working capital. Leveraging a company to meet these increased funding needs typically means that management must operate with little or no margin for error.
In addition, growth has led to overwhelming the capabilities and effectiveness of management and employees alike. Staff is not able to work successfully at the new level. A company can grow beyond its ability to manage.
Precarious Customer Base. The business relies on a few big customers for most of its sales. If a manufacturer selling to large retail chains has two customers representing 60 percent of its business, the company obviously is vulnerable to the financial condition of its customer or the possibility of new suppliers displacing its relationship. The loss of just one of these key customers could put hundreds out of work and send the business into bankruptcy.
Family vs. Business Matters. Family issues can cause business decisions to be made on an emotional basis rather than on sound business principles. Sibling rivalry has ruined many privately held companies. Deciding which relative should run the business after the founder's retirement or death can be one of the most difficult challenges a business can face. Divorce can also shatter a business, leaving it in fragments. Nepotism can cause bright, skillful managers who aren't part of the family circle to take their talents elsewhere.
Operating without a Business Plan. Armed with 15 or 20 years in the business, management often operates a growing company by intuition or the seat of its pants. Its plan may change overnight because it is based on management's own "feel" for the market. In some cases, the business plan exists in everyone's head rather than in writing. The result is that plans are carried out according to individual interpretation. Moreover, plans are inadequately communicated to employees.