When a business is in difficulty the directors broadly have three options:
- to fix it, either outside an insolvency process or by taking advantage of the protection some processes offer;
- to sell it, normally to somebody who believes that they can fix it; or
- to shut it.
This article looks at the 'fix it option', and what turnaround firms or an individual turnaround business consultant do?
In essence, turning a business around involves reversing its decline and restoring firstly stability and then secondly to use this as a base from which to re-grow its value. But however good a turnaround consultant or a turnaround firm, while company doctors can try to heal the sick, they cannot raise the dead.
Conditions for a successful turnaround
The starting point for most turnarounds is therefore a brutal assessment as to whether they have the necessary seven factors in place to stand a realistic chance of success which are:
1 A viable core business (or businesses) that is, or can quickly be made, profitable to then act as the base from which future growth can be rebuilt.
2 Time to carry through the turnaround, if they are started too late they will either fail or require the protection of an insolvency process.
3 Funding, as it is usually cash that provides the business with time and it is also true that turnarounds need money to carry out as there are often costs associated with both the initial restructuring (such as redundancy costs) and then with financing the eventual regrowth of the business. This funding will need to be generated from either within the business's trading activities, or by selling surplus assets, or from outside through refinancing or attracting new investors.
4 A goal, a clear vision of what the business will look like once it has been changed to restore success, which then provides management with both a target and motivation.
5 Managers in the business with the belief and willingness to work to achieve the goal, who also have sufficient functional and situational skills to be able to achieve success, or access to external management resources to provide additional support when and where it is needed.
6 Support from the business's key stakeholders, of which the most important in the crisis stage is often the bank, but in truth the business's managers cannot do it on their own and they need to be able to take a wide range of people including suppliers, customers, staff, bankers, shareholders, and others with them.
7 Doing so requires giving these stakeholders confidence in the plan and the process, as they will need to be convinced that the business's management who were in charge as the business got into difficulty have the ability to get it out again, which usually requires a clear and structured plan and an active programme of communication to keep them advised of progress.
An appropriately qualified turnaround consultant, such as a member of the Institute for Turnaround, introduced as a Chief Restructuring Officer will bring critical situational skills to the process from an extensive experience of dealing with such situations before and will focus on leading the business through the restructuring process. They will be able to 'speak the bankers (and if necessary the insolvency practitioner's) language, and help give that vital credibility to the plan by driving communication with the key stakeholders.
Phases of a turnaround
Turnarounds normally go through three distinct phases and whilst finance, people and marketing issues need to be addressed in each phase, priorities usually shift from being financially to marketing orientated as the turnaround progresses.
Turnarounds normally start with a cash crisis, where the management priority focuses on the short-term survival of the business and solving the immediate financial crisis. This often involves slimming the business down to its viable core and reducing its portfolio of products and markets to only those that are clearly profitable. Cutting staff numbers is often needed at this time but it is crucial to ensure you keep the key staff who you want to retain committed to the business while you do so.
A period of stabilisation and preparation usually follows the end of the immediate crisis. This is the time to plan the regrowth of the business as you develop new products and markets. Ensure that you have the right management team in place to take the business forwards and take the steps needed tosecure the finance facilities you will need for increased levels of trading.
Finally, you then need to achieve the regrowth required to return value to the business based on achieving long term sustainable competitive advantage and financial stability.
The key tasks of a turnaround plan
A successful turnaround process therefore involves five key tasks:
1 Recognising the need, as to solve a problem you firstly have to realise you have one, what it is, and that you need to deal with it.
2 Surviving to do it, as to fix the problem you have to avoid being pulled down by the immediate cash crisis, and in doing so get a strong grip on your business's finances and what these tell you about its performance, problems, and potential solutions.
3 Deciding what to do, as you have to take an objective look at your business's internal strengths and weaknesses, as well as the external opportunities and threats presented by the environment within which it operates. Only then can you develop an appropriate strategy and short and long term priorities which then become detailed action plans showing who is going to do what, when, and what success looks like.
4 Making the plan happen by locking in the support you need from stakeholders and managing your people, keeping them and the stakeholders informed and motivated; managing the process, continually looking for the next quick win whilst also continually monitoring your plan against reality and changing circumstances; managing the business, keeping an eye on the numbers and the everyday activities of your business; managing the inherent insolvency risks of a turnaround situation; and lastly managing yourself as any turnaround activity will be stressful and challenging.
5 And finally, keep on succeeding as once your business has recovered you need to keep it going that way by using the skills and approaches you have developed during the turnaround to ensure it continues to succeed.
Of course the information contained in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and you should always seek appropriate professional advice on your own particular circumstances before taking any action.