Factors for Consideration in a Turnaround

Engaging a Specialist

The service fee of an experienced, accredited turnaround specialist is a direct cost, which may seem daunting to a company in times of distress. Be assured this cost is quickly recovered. An experienced turnaround specialist will have the expertise and resources to provide valuable insight quickly. Through investigation, analysis, and short-long term strategic planning the company will receive the tools necessary to ensure the best possible outcome.

The cost of interim executive management personnel (change management) may be significant, however, it is unreasonable to expect existing management, whom are trained and experienced at running the company, to have the time or qualifications to manage a sustainable turnaround operation. Even if incumbent managers are willing to implement changes, they often lack the objectivity to do so. It is vital to empower an independent professional that will look at the overall situation to identify inefficiencies, analyze the vitality of the business, instill a change in culture, and provide for an unencumbered strategic plan to recovery.

Human Resources

Human resources are the core to success. Employees must feel empowered and vested in the company’s overall objectives. A trait that distressed companies share is the loss and cost of replacing valuable employees that would have been crucial to change management. Losing leaders, who embrace change and would instill confidence of success and drive productivity, is costly and time consuming. It is important to bring in change management before this turnover takes place.

Productivity must be measurable and value-added.  The cost of administration and support staff, such as IT, HR, and maintenance, must be tied to their contribution to the overall objective of the company. Turnaround costs include establishing the measurement of success, training employees to addvalue,  andimplementingmeasurestomaximize productivity. This stresses the importance of employees who are retained and whom must be empowered to provide continuous  improvement.

Conversely, employees who are released should be treated equitably. This is important to the cost of re-building customer relationships and retained employee confidence. Legacy costs are an insurmountable burden for many long lived companies.Accordingly, the cost of benefits, including healthcare and pensions should be evaluated to ensure the benefits meet the needsof the employees and are sustainable and cost-effective for the company. This may include the cost of benefits analysis forlarge, complex plans, as well as the cost of labor negotiations.

Infrastructure

Manufacturing and IT infrastructures are evolving on a continuous basis. Many distressed companies have a history of deferred maintenance and acquisition of updated equipment. This creates a situation where cost of production, sales, and administration prevents a competitive advantage resulting in the loss of sales and deteriorating gross profit. Typical costs of recovery for distressed companies include capital investment in new technologies and systems to match production levels and quality.

Financing

For change management, an initial challenge for planning for capital investment can be securing financing to meet the short-term operational needs of the company. An advantage to the company is that their existing banks and creditors have a history and may be willing to provide loans and advances.

Ways to provide prompt positive cash flow would be to factor in receivables, restructuring debt, related party financing, negotiating credit terms with suppliers, and the sale of nonessential assets. Other methods to afford short-term cash flow release include furloughing employees, deferring maintenance, forgoing professional services, and deferring employee benefits. The employment of these measures and the costs of each will vary depending on the characteristics and degree of the distressed company. Making sound, objective, strategic decisions with regard to financing is critical. This involves a debt to equity analysis, and customarily requires an equity investment commitment.

Garnering private equity interest requires the commitment to change and the ability to show quantifiable, tangible turnaround results. Empowering the turnaround expert with the authority to make decisions and implement change is paramount to a company’s ability to succeed. Change management must be enabled with the ability to engage a team that has established business relationships with attorneys, investment banks, and private equity firms. An accredited turnaround specialist will have the requisite forethought to anticipate the demands of an outside investor. This is also pertinent in planning a strategic transaction, in which the company or business components are sold.

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