Turnaround management is a process dedicated to corporate renewal. It uses analysis and planning to save troubled companies and returns them to solvency, and to identify the reasons for failing performance (or decreasing presence and position) in the market, and rectify them. Turnaround management involves management review, activity based costing, root failure causes analysis, and SWOT analysis to determine why the company is failing. Once analysis is completed, a long term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency.
DEFINITION OF ‘TURNAROUND’
The financial recovery of a company that has been performing poorly for an extended time. In order to effect a turnaround, a company must acknowledge and identify its problems, consider changes in management and develop and implement a problem-solving strategy. In some cases, the best strategy may be to cut losses by liquidating the company rather than trying to turn it around.
INVESTOPEDIA EXPLAINS ‘TURNAROUND’
Possible characteristics of a troubled company in need of a turnaround include revenues that do not cover costs, an inability to pay creditors, layoffs, salary cuts for officers and a significant decline in stock price. Poor management and/or social, technological and competitive changes may have caused the products or services the company sells to be perceived as subpar by consumers. A speculator may profit from a turnaround if he or she accurately anticipates the improvement of a poorly performing company.
A company may be stuck at a certain level of sales for a number of years, without any signs of progress. Worse yet, the business can be in financial distress and facing bankruptcy. In both cases, a turnaround solution may be called for to break out of the existing stalemate and move the company to the next phase.
Often, management has been at the helm for years and they’re not sure on how to fix the business issues. Many different strategies and tactics have been tried, but without much success. The owners truly want to turn the business around, but they’ve run out of ideas of what to do.
In these situations, hiring a turnaround consultant, or an interim turnaround CEO, is often the best solution. Someone with experience, a fresh perspective and without the ‘not invented here’ attitude who can quickly assess the situation, make the necessary tough decisions, and implement a solution.
Usually there are multiple causes for a company’s lack of performance; it’s rarely just one thing. Many issues, large and small, can result in a a company’s lack of growth. Issues such as:
- Sales decline
- Poor management decisions
- Weak execution
- Lack of 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
- Poor accounting practices
- Poor profitability
- Poor pricing strategies
- Focus on the wrong markets
- Serving too many (or too few) markets
While each case is unique in its own way, the turnaround process led by a turnaround consultant or interim turnaround CEO frequently involves the following stages:
A comprehensive assessment of the business is carried out to evaluate the viability of the company. Assuming the firm is worth turning around, depending on the root causes of the distress one or more of the following turnaround strategies may be selected:
- Reduce cost
- Increase revenue
- Change of top management
- Divestment of certain assets
- Develop a strategic plan
- Strategic acquisitions
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.
Once positive cash flow has been achieved, the strategic plan is implemented, improving continuing operations, adjusting the product mix and re-positioning products, if necessary. The management team begins to focus on achieving sustained profitability.
The company has become profitable again and the changes are internalized. Employees regain confidence in the firm and 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 could involve operating the business as a going concern, or developing an exit strategy. The longer term viability of the business and the personal goals of the owners are key elements in this consideration.
In simple terms, an exit strategy is based on one of several options:
Increasing the Valuation – The owners may have a longer term objective of selling the business. Following a successful turnaround, the now profitable business can continue to operate for a period of time to increase its market value, making the company a more valuable asset to sell.
Abandoning the Business – If the company’s viability is just too bleak to justify continuing operations a rapid exit is often the most appropriate. An immediate abandonment strategy involves exiting the market and immediately liquidating or selling to another firm, assuming there is anything of value left to sell.
Harvesting Strategy – No further investments are made, short term cash flows are maximized and a structured wind-down plan is executed. In essence, the owners try to recoup as much cash as possible over the course of the wind-down, before closing the doors for good.