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Revilalizing the
Under-Performing Company
By Gary Goldstick
Vol. I, Issue 1
In my twenty years of working with businesses of all sizes and in
many different industries, I've discovered that under-performing
businesses fall into three general categories; namely:
1. The emerging company that hasn't yet achieved a condition
of positive cash flow and continuing profits,
2. The company-in-transition that has had a profitable history
but an unexpected event (such as a management change, the emergence
of a vigorous competitor), or a poor decision, (such as an unsuccessful
acquisition) has resulted in losses, and
3. The financially troubled firm that continues to be unprofitable
and has generated aggregate losses such that it's continued existence
is in question.
All three categories of under-performing firms cannot continue
"business as usual" since, like Thelma and
Louise, they are speeding toward a precipice. What to do? Unfortunately,
the list of available strategies is rather limited. There are four:
1. Turnaround the under-performing businesses by means of operational
and financial changes so that the business is a viable and self-sufficient
enterprise at some point in the future.
2. Sell the business to another party who will either incorporate
the business unit into an existing enterprise or will effect a
turnaround of the business using their own capital.
3. Liquidate the business, by marshaling all of the assets that
have any value, such as accounts receivable, inventory, capital
equipment, etc., and selling them.
4. Abandon the business and its assets to the secured and unsecured
creditors. This action is also known as the "throw the keys on
the table and turn out the lights" strategy.
Discouraging isn't it? Three out of the four strategies require
the owners and entrepreneurs who are managing the business to effectively
give up and walk away from the enterprise that they've nurtured
and protected for years.
Faced with these options most businesses will plunge headlong into
a turnaround effort. Why not all? Because a turnaround project will
be a daunting challenge and can require financial, time, energy
and psychological commitments that the exhausted and battle-weary
businessperson may not be able or willing to make.
What percentage of turnaround efforts is successful? That's a very
elusive number since no one that I know of collects or analyzes
those statistics in a meaningful and consistent way. However, a
number of surveys have shown that the probability of a successful
reorganization under bankruptcy court supervision is about 10% for
small and middle market companies.
We've found that successful turnarounds have a number of common
ingredients, independent of the size and industry of the business.
When these ingredients are present, the probability of the turnaround
being successful is high. When any one is absent, the probability
of a successful turnaround is low.
First, even though the business as currently structured is not
profitable, there must exist some aspect of the business that can
be operated at positive cash flow at some specific time in the future.
For example, if a wholesale distributor sells $25 million of beauty
products to drugstores in the western states and is losing money,
perhaps he can sell $10 million of beauty products in the Pacific
Northwest and be profitable.
Second, if the business is operating at a cash loss, there must
exist a source of capital to cover the losses from the present until
the business generates a positive cash flow and is self sustaining.
This capital is the foundation of the revitalization plan. It may
be generated internally, by cutting operating costs, restructuring
debt payments, selling assets that are not needed in the future
business operations, or converting off balance sheet assets (such
as lease holds, claims, pollution credits, etc.) to cash. If these
actions will not generate adequate working capital, the needed funds
will have to come from bankers, investors, friends and family.
Third, the business needs an operating executive who is not mired
in the mistakes of the past and has the experience, vision, and
charisma to both lead the company and persuade lenders, creditors,
and employees to support the company.
Fourth, the business needs professionals with the skills and experience
to help the executives formulate, negotiate, and implement a restructuring
plan. The professional is a helmsman who helps the business navigate
the treacherous waters that insolvent firms must cross to achieve
a successful reorganization plan.
How important are these elements? Should you try a
restructuring effort with only two out of the four ingredients?
As the business owner, you can do anything you can afford. It's
your money to lose. However, my opinion is that launching a turnaround
effort without ALL of the elements in place is like backpacking
into the wilderness with only a portion of your gear. Sure, you
can attempt it. But is it worth the down side risk? Remember Alexander
Pope's immortal words:
"For fools rush in where angels fear to tread."
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