For a struggling company, turnaround cost is greatly influenced by how quickly management identifies and acts on the need to obtain outside resources to restore a deteriorating company. In many cases, management will attempt to work around the issues in ways that are only postponing the inevitable and will hurt their odds for recovery. Such actions to avoid are, factoring receivables, exhausting revolving lines of credit and even jettisoning value-added components. Prolonging addressing and identifying underlying problems will contribute to eliminating options and the cost of recovery increases.
The most expensive cost of a turnaround is the opportunity costs. The opportunity cost of a choice is the value of the best alternative forgone. When in the “firefighting” stages of a turnaround, the focus transfers from strategic to basic non-strategic tasks. When calculating the costs of a turnaround or a turnaround professional the organization’s opportunity costs needs to be included. Too often this does not occur due to the fact that the opportunity costs and economic costs is not germane to the accounting costs that are normally utilized.
The second most perilous factor associated with the turnaround costs is risks. What is the costs if you do not change or have a professional agent of change assist you in these difficult periods?
It is important to acknowledge both quantifiable and unquantifiable costs. The cost of eroding credit can be measured in the cost of obtaining financing; however the costs of customer confidence and employee morale are much harder to quantify, but equally important. Turnaround costs vary considerably based on the circumstances of the distressed company and its environment. There is no uniform combination of measures to provide for a generally accepted turnaround solution since not all elements are controllable. This is where bringing in outside consultation early on is most valuable; the cost of not taking action is greater than active turnaround costs. Engaging an independent, objective turnaround professional to evoke change management to implement the identified efficiencies may be the only means of appeasing creditors, shareholders, key customers, and other stakeholders.
Each company’s causes of distress, stages of distress, and consequently, the related turnaround costs will differ. As such, providing statistical analysis with respect to turnaround success rates and average or median turnaround ROI would be ineffectual. Each company requires a professionally prepared analysis by a turnaround specialist; some companies are investment bargains, others provide a respectable ROI and others are a means for the current owners to relieve liabilities through equity restructuring.
The prevailing strategy of private equity firms and other firms that specialize in acquisition of distressed companies is to acquire the target while it remains a going concern. The investor will perform due diligence to confirm the company has turnaround potential and will then move to secure the acquisition. It is a case by case review process which does not rely solely on acquiring assets. If a distressed company is acquired as a going-concern, there is validation that the cost of a turnaround is expected to produce a favorable ROI.
Investors take operational control to maximize their return with installing change management the requisite’s experience and past success. This will serve to revitalize and restructure organizations to ensure that turnaround decisions are made and implemented with objectivity. Securing new investments becomes easier with less restrictive terms, enabling investors to see a viable change strategy.