Virtually all small and mid-size business owners and CEOs face the daunting task of managing the recovery of a highly distressed or dying business. Every business during the course of its existence will experience one or more near-death experiences. This is a period characterized by hard business conditions, low sales, low morale, low cash, low market share, and low innovation.
Some recover from this and bounce back stronger than before and others simply do not. It is very important to seek help, such as a business advisor, who can help you plan, make the extremely tough decisions and execute your plan to turn your company around.
There are many factors responsible for this near-death experience, including those that are self-inflicted like a major project failure, lack of information to manage the business or incompetent management, poor sales management, or poor financial controls. These are generally termed internal forces. While those that are not self-inflicted like government regulations, economic recessions, low-priced competitors or natural disasters are termed external forces.
Understanding some of the basic turnaround strategies used by crisis-management companies, you can pinpoint your company’s strategic problems and save your business.
If you are struggling with a failing or dying business, here are few turnaround strategies to help you resurrect your business.
Realization of the situation
First of all, you must face the fact that your company is failing and employees are getting jittery and distressed. Then you must identify the real problem(s) and realize there are issues that need addressing with a high sense of urgency. You need to get committed to making the needed changes and seeking the help you need from a seasoned advisor that will help you with the many extremely tough decisions that you will face.
a. Strategy – Look closely at your business strategy to ensure your business is relevant, focused and managed tightly.
b. People – Are the right people running the company? Are the right people in the right places? Are employees committed to organizational success? Are employees properly incentivized to share in the ongoing success of the firm?
c. Customers – Are customers satisfied? Do they know, like and trust your brand? Is the business focused on profitable customers versus unprofitable and difficult customers? Are you targeting the right customers?
d. Product – Are you offering high quality, innovative products and services? Can the business better utilize technology to create better products, reduce costs and improve competitive advantages?
e. Process – Is the company performance-driven and goal-oriented? Are there processes and procedures in writing to enable the business to improve?
f. Finance – Are cash flows sufficient to sustain ongoing commitments and operations? Does this business have excessive debt and why does it have excessive debt? Are gross margins and pricing proper to optimize profits? Do you know your break-even point? Is your sales team efficient with strong sales management?
Realizing your situation is a critical turnaround strategy; without it all other things are just frantic moves that will yield little results. Before you begin to act, know why, what and how distressed your business is, and get the help you need to “right the ship.”
Strategies
There are many different turnaround strategies. Regardless of the business, the Management Gurus say that these turnaround strategies fall into 2 types: Wishful thinking and Logical approach.
Wishful thinking – In this strategy, you search for conventional financing. You believe that just a little extra money will fix the problem. You start calling bankers, bridge financiers and other lending institutions trying to get extra financing at a “good price.” They spend months looking for the funds. But, funnily, the money never arrives and the financiers never offer a term sheet.
Why does the funding never come through? Because no financier in his or her right mind will invest in a troubled business with declining sales, profits and cash flow. The risk is too high.
Logical Approach - To achieve the objective of this approach, turnaround strategy must reverse causes of distress, resolve the financial crisis, achieve a rapid improvement in financial performance, regain stakeholder support, and overcome internal constraints and unfavourable industry characteristics.
Complexities
Execution of the turnaround strategy faces immense complexities, pressure of limited time, information and resources, as well as uncertainty about the future. To maintain control, the components of the turnaround plan across all the stages of the turnaround process need to be broken down into smaller manageable time-phased activities and each with associated costs and resources with allocated accountabilities. Meticulous project management is required to track turnaround performance against targets and timelines, and to reschedule and reallocate.
Issues
The distressed company under turnaround management typically faces any of a number of financial issues: It requires funding to meet both its short-term commitments during emergency management, and to cover turnaround restructuring costs. This may include: working capital for trade creditor and interest payments. Restructuring costs such as professional fees, closure and retrenchment costs. Investment in new technology and systems. The balance sheet has to be restored to solvency. Excessive gearing needs to be corrected.
A successful turnaround programme may often affect financial results on the operating profit. This requires the capital structure to be aligned with the projected level of operating profit and cash flow to avoid interest charges keeping the company in the red. The debt structure represents excessive short-term and insufficient long-term debt. Refinancing therefore involves not only the injection of new funds in the form of loan or equity finance, but also changing the existing capital structure per se.
Funding
Finding turnaround funding in the form of loan finance is difficult. Banks and other providers of loan capital invariably look for ways to safeguard and decrease rather than increase their exposure. If a workout is deemed feasible, lenders may in some cases provide a measure of additional finance, but against unencumbered assets or surety. The latter is something the distressed company can seldom offer.
Given the difficulties associated with loan finance, private equity should be the logical answer. The turnaround private equity market is well-developed overseas, but unfortunately not in Sri Lanka. There may be a number of high net worth individuals and organisations that will invest in distressed companies on a case-by-case basis.
Process
While each case is unique, the turnaround process frequently involves the following:
1. Management change - consultants may be called in to manage the turnaround of the firm.
2. Situation analysis - a situation analysis is performed to evaluate the prospects of survival. Assuming the firm is worth turning around, depending on the root causes of the distress one or more of the following turnaround strategies may be selected:
Redefine your strategy
After realization comes re-definition. Realization determines what’s wrong with your business and re-definition is putting the business back on track. This is when you go back to the drawing board to set the overall direction for the company. This is where you create the Turnaround Plan.
Be brutally honest with yourself and your advisors every step of the way. Failing in business is often a result of not having a clear direction or being highly diluted and inefficient so pinpoint the issues openly and honestly.
Re-engage people
You can’t turnaround a distressed or dying business without talking about the employees. People make or break your business, and accountability is vital to your success. To resurrect a dying business, get the right people on board and get the wrong people off, period! This requires proactive, tough decisions to structure the personnel and management to execute your go-forward plan.
Innovate
Lack of innovation is one of the warning signs of a dying business. It is impossible for a business to remain relevant in the market if it fails to introduce new products and services or update existing ones. People change, markets change, technology changes and so must your business. If you refuse to change and do not innovate your products and services, you are doomed. To bring your dying business back to life, focus on innovation and devise a written plan to generate a high ROI.
Branding and marketing
One of the consequences of a distressed or dying business is the negative impact it has on the brand. Your customers begin to lose trust in the brand as their satisfaction level declines. Negative marketing spreads and the brand is no longer liked or trusted in the market. To correct this negative association with the brand, you have to make fast and definitive changes.
Finance and cash flow
A detailed focus on your finances is critical. Money is a must to any business, and one of the most obvious signs of a distressed or dying business is a lack of money. Insolvency is a situation you must avoid. If you can’t meet your financial obligations and are already insolvent, you must create a plan to turn things around immediately.
External funding can be a very daunting task, especially if you are insolvent. Start sourcing for funds from within the business. Only after you have exhausted these internal funding options should you seek external sources.
Execution
After all is said and done, there is no way to bring your dying business back to life by mere words; you need to make the commitment and get busy. You need to both rethink and rework the way you are used to operating.
Many business owners are engaged in a random work approach rather than a performance-driven or goal-oriented work approach to their business, and execution is the key to your opportunity for success.
In some cases, the prospects of the firm may be too bleak to continue as an ongoing operation and an exit strategy may be appropriate.
(Lionel Wijesiri is a retired company director with over 30 years’ experience in senior business management. Presently he is a freelance newspaper business writer.)
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