Ten Commandments for a Successful Financial TurnaroundSummer 1998
Our Financial and Business Restructuring Practice Group would be happy to assist you with any questions relating to this article.
Even a healthy business can get into trouble quickly. The unexpected loss of a key customer, a mishap that disrupts production, or a spike in the cost of materials can produce financial distress. Cash begins to dry up and urgent short-term issues begin to distract you from strategic planning.
Our Financial and Business Restructuring Group frequently gets calls from businesses trying to deal with the financial consequences of problems like these. Our experience in counseling these businesses has taught us much about the right, and the wrong, ways to approach the task of returning your business to profitability. What follows are ten rules of thumb, designed to help the manager of a troubled business regain the focus which is essential to a turnaround.
1. Get help early. Financial reversals so serious that your bank sends the loan file to its "Special Loan" or "Special Asset" department should be viewed as a definite wake-up call. It is as if your company has entered the "Twilight Zone." If this happens to your company, it is no longer business as usual. Rather, you have entered a strange new world where you will be subject to bankers and creditors' jargon. You need experts to guide you through this new world and help interpret it for you. The sooner you get this help, the more likely it is that you will succeed.
2. Have reliable numbers. You are unlikely to succeed if you do not have reliable financial information. Accurate, current accounting and supportable, attainable projections are the fulcrum upon which your turnaround strategy will balance. Be confident that your present management is qualified for this task.
3. Recognize that next to cash, time is your most precious commodity. Time lost rehashing what should have happened in the past and who was to blame renders you less able to meet the challenge of turning your business "back to the future."
4. Develop a coordinated turnaround plan. In developing a turnaround plan, keep in mind that the insolvent company or the "nearly insolvent" company is accountable to its creditors. Different creditor groups-lenders, landlords, vendors, employees, and the "tax man"-all have different interests. Before implementing a turnaround plan, you need to analyze its impact on each group. For example, if you plan to pay down bank debt by delaying payments to vendors, what will this do to your access of needed materials and services? Remember, increased trade payables are increased debt that must be dealt with for existing shareholders to retain their interest in the company.
5. Plan for the worst . . . hope for the best. Very often, the best way to avoid Chapter 11 is to be prepared for it. The better prepared you are for Chapter 11, the more likely it can become a viable option, and the less likely it is you will have to employ it because your creditors may fear its adverse effects more than you.
6. You can still look to the sky . . . but keep your feet on the ground. If your company is not generating a return for equity, what is the chance that a new investor will come along who will infuse cash and not demand significant dilution? If your turnaround plan requires an infusion of equity, then a critical question becomes how much ownership you should give up to make your plan viable. With the help of turnaround experts, you can add a level of reality to your expectations.
7. Don't lose sight of or diminish your strengths. Your credibility may be your greatest asset. Protect and preserve it. At the end of the day, if there is not enough to go around, and if you want to keep some of the pie, you will have to convince others that you bring sufficient value to the table for them to set a place for you. One way to look at this is if creditors will receive more value from a going concern than from a liquidation, they will leave some value for you if you can help them attain it. This is so, even if they won't get 100 cents on the dollar. However, if they don't trust you, it will be extremely difficult to convince them of this.
8. Communicate. If people do not have information, they will usually assume that things are worse than they actually are. No matter how hard you try to avoid the spread of rumors, they are an unpleasant part of life in the turnaround world. Be prepared to deal with them. However, if you provide information, you can try to control the spin!
9. Accept responsibility. You will never convince people who are not getting paid that it is their fault . . . even if it is. Humility is the watch word of creditor-diplomacy, and this is a time for diplomacy.
10. Be prepared to share the pain. If your creditors are being asked to accept hardship, they will ask about your distress. Be prepared with an answer that is compelling. It will reduce the tension in the room.
A successful turnaround is extremely demanding on a business and its management. To get from "turned upside down" to "turned around," you need to move promptly and in the right direction. To do this, you need the help of professionals who are experienced and who have a proven track record. Godfrey & Kahn's Financial and Business Restructuring Group knows the terrain. Think of us as personal trainers for the business in financial distress