Helping you prosper
This article was published in issue Seven of Prosper Magazine.
In current times, small business entrepreneurs are becoming increasingly sophisticated in their approach to dealing with a failing business, and their financiers are more comfortable in supporting the rebuilding of their businesses through a controlled turnaround.
The turnaround process is time-critical, often requiring urgent working capital and strong stakeholder management.
It means finding the source of the downward spiral. This can be difficult, as it requires an objective and unbiased approach to diagnosing your business’ financial, operational, and strategic positions.
If you are concerned about the future viability of your company, here are five recommended actions to get your business back on track through a corporate turnaround:
1. If you snooze you lose
Being proactive on critical issues is essential. Turnaround advisers face many time-critical issues, especially in the early phases of turnaround, where cash and stakeholder support are needed. Indecision at this time can be fatal to the chances of a successful turnaround, as it creates uncertainty among key stakeholders about an owner’s appetite and ability to deliver results.
2. Remove the rose-tinted spectacles
The need for cash may mean you need to put in place a divestment strategy including the disposal of non-core assets in order to refocus on your core business; so be realistic about the value of your business’ assets. The turnaround adviser will usually obtain professional valuations of these assets. It may be that these values do not meet the expectations of an owner, but there is no time in turnaround for a long, drawn-out marketing and negotiation process to achieve your desired prices. While achieving value is important, unrealistically holding out for a better and quite likely unattainable price is not generally the best solution.
3. Its not all black or white
The existing owners and management might know the business better than anyone, but that is often the problem. Owners of SMEs can be too close to their business and fail to recognise the need for improvement or change, so listen to your trusted adviser who will bring an unbiased and balanced approach to what is needed.
It may be the environment has changed, possibly through advances in technology or social factors, which have resulted in a need to change “the way that business has always been done”. Don’t disregard the advice of a carefully selected turnaround adviser who will understand the need for change and know the right people for the job.
4. Communicate with your supporters
Directors of an SME often focus on their financiers when faced with a financial crisis. While this is important, communicating with all key stakeholders is crucial. Proper management of stakeholders may be the difference between success and failure. This applies to all facets of business, whether a large corporation or an SME.
Quite commonly in a failing business, communication between management and key stakeholders has broken down and in certain circumstances is close to the point of no return.
Key stakeholders need to be convinced that rescue, rather than termination, will in fact be the better outcome. The problem is, particularly when dealing with financial stakeholders, a CEO or managing director may have little or no experience in dealing with stakeholders in a crisis, whereas the financier is very likely to be experienced and highly knowledgeable in this area.
A role of a turnaround adviser is to rebuild confidence between the parties by providing a bridge between any knowledge gaps, and to reinstate fluency between the parties through appropriate communication. To achieve this, a turnaround adviser will need to analyse and understand what is at stake for all parties and will need to be in a position to do so before starting any negotiations.
Stakeholder management during a turnaround process will change in direction from a customer focus, which is typically employed in a normal trading scenario, to that concerned with supplies, capital and other elements that impact cashflow improvement in the short term.
The customer, of course, continues to be important and supported, but will be less of a priority in this ‘cash and time’ critical phase.
Stakeholder management is about gaining and communicating information. Understanding a stakeholder’s impact on a corporate turnaround through proper analysis is essential and includes working out the following key information:
Where do they fit within the business?
Due to the critical nature of turning around a failing business, there is rarely time to attend to all stakeholders as quickly as one may like. Consequently, stakeholders must be prioritised and graded according to the potential impact on the future of the business. Are they a key supplier, debt or equity provider? What are the implications on the business and its cashflow if they turn off the financial tap?
Are there any alternatives?
A ‘plan B’ provides certain comfort when negotiating in any situation, for example, finding another major supplier. But if a ‘plan B’ is not available, negotiate cautiously. Understand what is on both sides of the table, emphasise the benefits and be informative on any downside.
What are the expectations and limitations?
A turnaround adviser will need to assess the needs of the business against the expectations of the stakeholder and find some middle ground between them. This can be a long drawn-out process, but an important one. Knowing the limitations of all parties will help gain an understanding of where the compromise may fall.
Is there history?
Armed with a diagnostics review, a turnaround adviser will need to demonstrate that a business is capable of change and that the right team is in place to give effect to that change. It may be that, due to recent cashflow issues, it is probable that renegotiation of trading terms or financial covenants have previously been necessary. But if granted, were the varied terms met by the business? If promises have previously been broken, or a stakeholder misinformed, the relationship will be fragile and in need of repair.
The fine print
A full review of the relevant documentation is necessary to understand what legal steps a stakeholder may take in relation to a defaulted position. What rights does the stakeholder have that could seriously disrupt your turnaround strategy and plans for the future of the business?
Avoid infighting
The turnaround adviser will need to understand a stakeholder’s common interests or conflicts with other stakeholders. Support provided by a certain stakeholder may well encourage other stakeholders to follow suit. However, the outcome for stakeholders within the same group may be vastly different and, therefore, each will have its own agenda – particularly when dealing with debt holders. Consequently, the managing of competing interests is often a complex and delicate task, which requires timely communication of relevant information throughout the turnaround period.
Communication
When it is finally time to open discussions remember this is not just a quick fix. The actions taken in these early negotiations will lay the foundations of hopefully a long-term relationship. It is essential, therefore, that communication is open and honest; clear, concise and continuous; and based on high-quality objective information.
5. Play the Long Game
The turnaround process is not just about establishing normality. Long-term change and process improvements are essential for future growth, cashflow and profitability, so it’s important to see the process through to the end.
While the role of the turnaround adviser will likely lessen during the latter phases of a turnaround, there is still a role to be carried out. The turnaround process can be long and difficult but, if successful, will be morally and financially rewarding.
Want to know more?
Download our issue seven of Prosper magazine and turn to page 3 to read the article in full, plus much more. Prosper is our magazine aimed at businesses and business owners, covering the pertinent issues currently affecting you and your peers.
