The process of turning around a troubled entity is complex. This is made more difficult and compounded by the multiple constituencies involved, all of whom have different agendas. Directors want to avoid risk 
and litigation. Lenders want a return of their invested capital, preferably with interest. Creditors want their money in exchange for goods and services. Original investors want and hope for recovery of their capital. Owners want to avoid guarantees and recoup some of their equity. Employees want their jobs and benefits. Other stakeholders want their interests protected. These desires can often be at odds with other parties and hamper the effort.
Let’s address the turnaround process as if all constituents are in favor of proceeding through to the end, when a restructured entity emerges.
There are many causes that contribute to business failure. According to a study conducted by the Association of Insolvency and Restructuring Advisors only 9 percent of failures are due to influences beyond management’s control and to sheer bad luck. The remaining 91 percent of failures are related to influences that management could control, and 52 percent are internally generated problems that management didn’t control.
Businesses fail because of mismanagement. Sometimes it is denial, sometimes negligence, but it always results in loss. Mismanagement is most often seen in more than one of multiple areas:
- Autocratic management, overextension
- Ineffective, non-existent communications
- High turnover neglect of human resources
- Inefficient compensation and incentive programs
- Company goals not achieved or understood
- Deteriorating business, no new customers
- Inadequate analysis of markets strategies
- Lack of timely, accurate financial information
- History of failed expansion plans
- Uncontrolled or mismanaged growth
Will Rogers once said, “If you find yourself in a hole, stop digging.” Good advice for directors and managers with the responsibility to lead a company.
Turnaround specialists are often an excellent choice when these circumstances are present. They bring a new set of eyes, trained in managing and advising in troubled situations. These experts are either practitioners or consultants. Turnaround practitioners take management and decision-making control as the chief executive officer or chief restructuring officer. Turnaround consultants on the other hand advise management, perhaps the same management that failed before. The Turnaround Management Association (TMA) was formed in 1988 and has grown to 8,600 members around the world who represent multiple constituencies working in the industry. TMA sponsors a Certified Turnaround Professional (CTP) program with strict reference checking requirements and testing of a body of knowledge to become certified. Approximately 500 CTP professionals are registered today.
The key is to build enterprises that future buyers want to invest in. Investors/buyers look for:
- Businesses that create value. Consistency period to period.
- High probability of future cash flows. History of performance and improvement, or the promise of cash.
- Market-oriented management team. Focus on producing revenue.
- Ability to sell and compete; develop, produce, and distribute products; thrive and grow. Track record or demonstrated changes in the right direction.
- Fair entry valuation. Realistic return potential.
- Exit options. Realize high ROI at the time of their resale.
There is a process of recovery and investment. It is based upon the fundamental premise that there is a lack of management when companies are in trouble. You must conduct fact-finding to assess the situation, then prepare a plan to fix the problems. You must implement the planned courses of action by funding the process and building a team to carry it out. Then monitor the progress and make changes where necessary.