If a business has been underperforming for a number of years, or if it is in financial distress, turnaround management may be the best approach. A turnaround manager or CEO can take the company through a restructuring process leading to solvency.
In distressed companies, management has often been at the helm for years, not sure how to fix the business. Despite many different attempts, success has remained elusive. Although the owners are dedicated to turning the business around, they’re out of ideas of what to do.
In these situations, a turnaround manager can be the alternative. Someone with experience, a fresh perspective and not held back by a ‘Not Invented Here’ attitude. Someone who can quickly assess the situation, make the tough decisions necessary to turn the business around, and implement solutions.
Causes of Poor Business Performance
A company’s lack of performance is usually the result of a multitude of factors. Rarely is it just one aspect of the business that’s misfiring. Factors that can contribute to a company’s lack of performance include:
- Sales decline
- Poor management decisions
- Weak execution
- Lack of sound business strategy
- High costs
- Poor inventory management
- Lack of management skills
- Personnel issues
- Insufficient resources
- Lack of new products
- Outdated technology
- Weak competitive position
- Excessive debt
- Weak accounting practices
- Low profits
- Poor pricing strategies
- Focus on the wrong markets
- Over (or under) diversification
Turnaround Management Process
Although each turnaround situation is unique in its own way, the typical turnaround process for a small business, including B2B firms, involves these key stages:
Assessing the Business
The turnaround manager or interim turnaround CEO conducts a comprehensive assessment to evaluate the viability of the company and identify the key issues. If the firm is worth saving, a turnaround strategy is developed that hinges around one or more of the following:
- Reducing cost
- Increasing revenue
- Changing top management
- Divesting certain assets
- Developing a strategic plan
- Strategic acquisitions
Developing an Emergency Action Plan
The goal is to achieve positive cash flow as soon as possible by reducing costs, increasing revenue, eliminating departments, reducing staff, rationalizing the product portfolio, selling off redundant assets, etc.
The emergency action plan is always customized based on the specific situation of the distressed company. There are no one-size-fits-all solutions.
Restructuring the Business
With positive cash flow established, a short-term plan is implemented, focused on improving continuing operations, adjusting the product mix, and sales and marketing effectiveness. The management team can begin to focus on achieving sustained profitability and positioning the B2B firm for future growth.
Returning to Profitability
The company is now profitable again and the changes are internalized. Both customers and employees regain confidence in the firm. Emphasis is placed on growing the restructured business.
Once the first phase of the turnaround effort has been successful, longer-term objectives can be formulated. This may involve operating the business as an on-going concern or creating an exit strategy. Key elements in this consideration are the longer-term viability of the business and the personal and financial goals of the owners.
Implementing an Exit Strategy
In simple terms, an exit strategy is based on one of several options:
- Increasing the Valuation – The owners may have a long-term objective of selling the business. Following a successful turnaround, the now profitable business can continue to operate for a period of time. During this time, the focus is on increasing the business valuation, making the company a more valuable asset to sell.
- Abandoning the Business – If the company’s viability is just too weak to justify continuing operations a rapid exit is often the most appropriate. An abandonment strategy involves rapidly exiting the market and liquidating or selling the business, assuming there is anything of value left.
- Harvesting Strategy – At this stage, no further investments are made. The goal is to maximize short-term cash flows and execute a structured wind-down plan. Basically, the owners are trying to recoup as much cash as possible over the course of the wind-down, before closing the doors for good.