Working Successfully With Turnaround Professionals
SMP Library
Articles of Interest
|
Recover & Preserve Value: Working Successfully With Turnaround Professionals |
SMP Library Articles of Interest |
Strategic Management Partners
A nationally recognized turnaround management firm
specializing in interim executive leadership, asset recovery,
investing in underperforming distressed troubled companies.
Article
SMP Home Page
Contact SMP
SMP Library - Articles of Interest
 Nov 2006 |
 Dec 2006 |
|
Turnaround Corner
By John M. Collard The turnaround of a business in financial distress involves managing the business and
its problems. The process is time consuming and requires a special set of
skills. The problems of the business are often compounded by owners or
management who are facing financial distress for the first time and who are
reticent to change. This is where the turnaround specialist brings his/her art
to the process. The identity of the client must be clear. The client's identify may appear clear at
first glance, but it can quickly become blurred. For example, the owner of a
closely held business may be as concerned about personal guarantees as about
the survival of the business. In addition, if the lender has referred the
specialist, the specialist must make it clear to all parties whether the lender
or the business is the client. Turnaround specialists generally are either interim managers or consultants. Interim
managers will replace the CEO, take the decision-making reins of a troubled
business, and guide it through its troubled waters, hopefully to safety.
Turnaround consultants advise existing management without taking an operating
role within the company. Although some specialists are willing to act as either
an interim manager or a consultant, most prefer to act as one or the
other. A troubled business may also need the help of an experienced general manager or
an expert in a particular aspect of the business. A troubled business often has
a unique problem that requires an industry-knowledgeable expert rather than a
experienced general manager. Naturally, this determination depends upon the
particular company, industry, and problems involved. Keep in mind, however,
that industry knowledge is not the same as turnaround management knowledge. A
skilled turnaround specialist can often revive a company using his/her
turnaround talents despite initial unfamiliarity with the technical aspects of
the business. Many turnaround specialists also concentrate on varying stages of business decline.
While some practitioners work with clients in or on the edge of bankruptcy,
others concentrate on only those in an early stage of decline. Before this question can be answered, it is important to understand why businesses
fail. The answer is usually mismanagement. Some of the many internal and
external factors controlled by management include: Management is often prone to blame the misfortunes of the business on external
factors ostensibly beyond their control rather than to be held accountable and correct the
situation. Some of these external factors include: What are the warning signs of a business heading toward trouble? This is one of the
most frequently asked questions of turnaround specialists. Trouble comes from a
variety of causes. The obvious signals are rarely the root cause of the
problem. Losing money, for example, is not the problem, but the result of other
problems. The warning signs listed below are not all-inclusive, but may provide some insight
as to why the company is facing difficulty. Signs connected with a company's
operational performance include: Signs relating to a company's financial performance include: Signs associated with poor utilization of assets include: These signs are symptoms, not the problem. The signs are simply the evidence that a
problem exists, and it is the problem rather than the symptom that must be
identified and remedied. One widely known formula is the Z-Score, developed by Professor Edward Altman of
New York University. By weighing various financial ratios, the Z-Score attempts
to predict whether a manufacturing company is a bankruptcy candidate. The formula:? Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where: A = Working Capital / Total Assets B = Retained Earnings / Total Assets C = Earning Before Interest and Taxes / Total Assets D = Market Value of Equity (*) / Book Value of Total Debt E = Sales / Total Assets (*)When the company is not publicly traded, book value
of equity should be substituted for market value. The resulting scores are interpreted
to indicate the following: Less than 1.8 ? The company has a high probability for
bankruptcy within the next two years.? Between 1.8 & 3.0 ? The gray zone where the trend
is really the most important criteria. Greater than 3.0 ? The company has a low probability
for bankruptcy. A second statistical method developed by Jarrod Wilcox, former assistant
professor at MIT's Sloan School of Business, is known as the Gambler's Ruin
Prediction of Bankruptcy. This formula, designed to predict possible bankruptcy
for both manufacturing and retail companies up to five years in advance, is as
follows: Liquidation Value = Assets -
Liabilities Where: Assets
= 100% of cash and marketable securities plus 70% of accounts receivable,
inventory, and prepaid expenses plus 50% of remaining assets. Change in
Liquidation Value from previous year = Earnings before special items minus
100% of dividends minus 50% of year's capital expenditures and depreciation
minus 30% of increase in inventory and accounts receivable since prior
year.? If these computations indicate negative amounts, the company is considered a candidate for
bankruptcy. Given the market forces of capitalism, all businesses are as vulnerable to trouble as
they are to the lure of success. We live in a world of wildly changing
technologies. Even with these changes, a business that is managed properly will
continue to prosper. However, some industries are more susceptible to trouble
than others due to various factors and characteristics. The fortunes of companies in cyclical industries often depend upon forces outside
their control such as commodity prices or weather conditions. Those most likely
to withstand the effects of these forces are the ones that learn to adapt. They
either sufficiently diversify without losing sight of their primary business or
are able to control fixed costs in unstable conditions. The ability to adapt is
key. Companies in newly deregulated
industries face having to learn to survive in a competitive environment
without the legal protections previously enjoyed. Deregulation is generally
accompanied by an anticipated shakeout of the weakest businesses as competitive
forces take hold in the marketplace. As the United States
has evolved from a primarily manufacturing driven economy to an economy
increasingly driven by service-oriented industries, management
must recognize that its most irreplaceable assets are employees. Managing human
resources is more important than ever. Companies lacking a proprietary product, - or "me-too" companies
- are subject to attack from every direction. Examples of these companies are
retail businesses and non-licensed service sector businesses. They face low
entry barriers both with respect to capital and expertise and a multitude of
competitors. Many entrepreneurial
companies and start-ups are single-product and single-customer companies.
In order to succeed, these companies usually must develop new products or
diversify to compete and satisfy customers. Few are able to maintain their
start-up success, but instead struggle to compete with existing competition and
new market entrants. Reaching maturity takes years during which the company is
vulnerable. Rapidly growing
companies are often driven by entrepreneurial zeal and overwhelming
emphasis on sales. Often, inadequate attention is given to the effects of
growth on the balance sheet. With huge sales increases and significant
investments into R&D, these companies suddenly find themselves in a
situation where the balance sheet simply cannot support the growth. Highly leveraged companies have
so many factors that must converge to be successful that they are often most
susceptible to the external uncontrollable causes of business failure, such as
interest rate fluctuations or an increase of raw material costs. Closely held
businesses and family owned businesses, by their nature, select
leadership based not upon managerial talent but by virtue of family or close
personal relationships with the shareholders. More than in other businesses,
owner/managers link their personal psyche to that of their business. To the
owner/managers, business failure is often perceived as a personal failure.
Owner/managers often believe that they are irreplaceable or are afraid to admit
that they are not. They want to maintain control, and consequently, they fail
to either develop a management team or a plan for transition of management.
These owner/managers are reluctant to acknowledge early warning signs of
failure and are also apt to ignore them. Perhaps declining industries face
the most difficult task of all. Declining industries are those in which total
industry-wide unit shipments are declining. Maintaining market share involves
shrinking. Maintaining volume involves increasing market share (i.e., taking
business from competitors). Management, which refuses to admit that the
industry is declining or bets its future on the industry recovering, is the
most prone to failure. Approximately 70% of entrepreneurs and start-ups fail
within two years. Entrepreneurs do not necessarily come from managerial
backgrounds. They have visions of what the future will look like before the
rest of us know to invent the better mouse trap. Their modus operandi is
to capitalize on their head start as a way to convert their vision to a
profitable reality. The same skills that keep an entrepreneur focused on an
idea, regardless of obstacles, can make him oblivious to the competition on his
heels or to new changes in the market. Ultimately, the market does catch up,
forcing the entrepreneur to compete in a mature industry rather than in an
emerging industry. As entrepreneurs survive the transition to professional
management and new technologies gain a stronghold on the economy, emerging
industries are born. Before seeking a turnaround specialist, a business should attempt to understand its
desires and needs and it should be willing to face the reality of very
difficult issues. With statistics generally pointing to mismanagement at the
root of most crises, the business should be aware that the turnaround
specialist will perform a quick study of management capability. Management must
be committed to participate in the recovery, agree that the turnaround
specialist is the catalyst to the recovery, and undertake to learn as much as
possible so that it can better manage the business at the conclusion of the
turnaround engagement. Thus, before calling a turnaround specialist, management should ask itself some hard
questions: Owners should be cautious and deliberate in selecting a turnaround specialist.
Retaining a turnaround specialist has been analogized to having a heart
transplant, an experience few would undertake without much trepidation. But
just as heart transplants are necessary to save the life of the patient, a
corporate turnaround is very often what is needed to keep a business alive. Owners should do their homework before interviewing any turnaround specialist. Resumes
and references should be requested and checked in advance. Owners should not be
misled by professional affiliations and should avoid hiring unneeded skills.
Beware of an unemployed CEO or CFO masquerading as a turnaround specialist.
Simply having a background as a CEO does not mean that the candidate will
possess the needed skills to be a good turnaround specialist. Lawyers,
accountants, bankers, and financial advisors should be consulted for their
opinions and advice. Several specialists should be interviewed. Despite their hopes, owners should neither
expect miracles nor be misled by unrealistic promises or guarantees of success.
What the turnaround specialist offers should be weighed against what is
realistically achievable. Be introspective, as the questions above suggest. But when the turnaround
specialist arrives, answer his questions, help him find his answers, and above
all, listen. Do not forget that owners and management must work together as a
partner with the turnaround specialist. Existing management is a key resource
for the turnaround specialist and should adopt an attitude that it wants to
learn as much as possible so that it will have the skills necessary to run the
business when the turnaround specialist's engagement has been completed. Ask the turnaround specialist about his/her work schedule. Meet the entire
turnaround team, particularly those who will be on the company premises. Obtain
commitments regarding the turnaround specialist's personal involvement.
Understand what functions he will perform and what will be delegated to his
staff. Ask about the interplay between the company's management, the company's
staff, and the turnaround team. The personal chemistry between the turnaround team and management is critical to
the success of the recovery. Thus, select a person, not a firm or a reputation.
A turnaround is a very personal and highly sensitive operation. Management
should select the specialist it thinks can do the best job, not a firm because
it has a good reputation. The reputation will not turn around the company; an
individual might. Learn about the turnaround specialist's relationship with your lender, other
potential lenders, trade creditors, and alternate suppliers. Make sure the
specialist brings credibility. Companies in trouble often need access to
products and funds. One of the resources the turnaround specialist brings to
the engagement is credibility to lenders, and consequently, enhanced access to
credit. A troubled business often needs more money than its existing lender
will supply, and therefore, management assumes a successful turnaround will
involve a new lender. This logic, however, often ignores the relationship
between the company's operating problems and its lender. It is unreasonable to
anticipate that a new lender will be more lenient. In fact, a new lender will
likely extract stricter covenants and restrictions, charge significantly higher
fees because of the risk of going into a troubled situation, and monitor the
loan much more closely. Therefore, the "old" bank may be the
company's best source of new money if credibility can be re-established. Always obtain a written proposal from the turnaround specialist. That proposal should address
the turnaround specialist's initial findings, expectations from you and your
staff, professional fees, anticipated use of the company's staff, a time line
overview, who will be assigned to the engagement, how much time the turnaround
specialist expects to commit to the engagement, whether the turnaround
specialist will be on hand to implement the plan, at what point the turnaround
specialist would expect to withdraw from the engagement, the complete fee
structure, and how the turnaround specialist will assist in whatever management
changes are necessary. Finally, insist upon and enter a written engagement
agreement prior to engagement. Ask for regular written reports from the turnaround specialist. These reports
should be concise and timely. They will force the turnaround specialist to
organize his thoughts, get to the essence of what has happened in the reporting
period, not require a significant amount of his time, and make it clear that he
works for the company. Expect the turnaround specialist to involve the company's staff in the daily
operations of the business. Seek from the company's staff an evaluation of the
performance of the turnaround specialist. Although the initial engagement of a
turnaround specialist can be unsettling, management and staff should be made to
understand that their jobs are linked to the turnaround effort. Share those
evaluations with the turnaround specialist. Most importantly, demand and expect both confidentiality from and accessibility to
the turnaround specialist. Though the turnaround specialist may be brutally
honest with the client, he must present the client in the best light possible
to others. Given precarious circumstances, the company must have as much access
as it needs to its turnaround specialist. The turnaround specialist offers a new set of eyes, skills and understanding of
troubled situations to independently evaluate the company's circumstances. The
turnaround specialist very quickly must face a series of questions that
existing management may never have asked, such as: What is the purpose of this business?
Should it be saved? If so, why? Are those reasons valid? The turnaround specialist must gather information, evaluate it for accuracy and
analyze it quickly so that those initial questions can be addressed openly and
honestly. That process generally focuses upon the following issues: The turnaround specialist should discuss those questions openly with his client,
and if it is determined that the answer to any of the above questions is
"No," the parameters of the engagement should be reexamined. Should a
specialist still be engaged? What kind of plan is needed to otherwise minimize
the losses and to maximize the value of the business for the benefit of his
client. The process of recovery undertaken by the turnaround specialist involves
several stages. Fact-finding. The turnaround specialist must learn as much as possible
as quickly as possible so that he can assess the present circumstances of the company. Analysis of the facts. The turnaround specialist should prepare an assessment of
the current state of the company. Preparation of a business plan outlining and suggesting possible courses of action.
Depending upon the engagement and who his client is, the turnaround specialist will seek the input
of his client to determine which of alternative courses of action should be
undertaken. Implementation of the business plan. Once
the course of action has been chosen, the turnaround specialist should be
involved in putting the plan into place whether as an interim manager or as a
consultant to management. This is the time a specialist begins to build the
team of players both inside the company and from outside resources. Monitor the business plan. The turnaround specialist should keep vigil over the
plan, analyzing variances to determine their causes and the validity of the
underlying assumptions. Stabilization and transition. Assuming that liquidation is not the cornerstone of
the business plan, the turnaround specialist should remain involved in the
engagement until the business has achieved stabilization and to assist the
business in a transition of management if necessary. Turnaround specialists immediately focus on cash flow since it is often a cash shortage
that causes troubled businesses to seek help. The turnaround specialist's first
goal is to stabilize the cash flow and to stop the hemorrhage. The turnaround
specialist usually performs a quick analysis of the company's sales and profit
centers and of its asset utilization. In many cases, these factors indicate that the business may have lost focus of its
core. To remedy the cash shortage, turnaround specialists generally analyze
which assets are available to generate a quick infusion of cash and which
operations could be terminated thereby stopping the cash outflow. These are
difficult decisions since they intrinsically involve down-sizing the company
and eliminating some jobs. On the other hand, it has the effect of saving the
good parts of the company - and many jobs. After the turnaround specialist has been engaged and a business plan has been
designed, the turnaround specialist plays many roles. Since many troubled businesses
often lose much of their credibility with lenders, trade suppliers, employees,
customers, shareholders, and even the local community at large, retaining a
turnaround specialist is often the first sign to outsiders that the company is
taking positive steps toward both recovery and rebuilding damaged
relationships. The turnaround specialist usually serves as a liaison or
intermediary with these outside constituencies to calm troubled waters and to
present bad news as a preamble to a plan for recovery. Because management's credibility is often strained, the turnaround specialist actively
assists in the preparation of a viable business plan and advocates its approval
and adoption by the various constituency groups whose cooperation is necessary
for implementation. The turnaround specialist is experienced in negotiating
both with lenders and with trade suppliers in the midst of a crisis. The
turnaround manager brings their personal integrity, their own credibility, and
their track record to the table in contrast to that offered by existing
management, which finds itself in a downturn. The turnaround specialist often directs communication for the troubled company with
outsiders and company employees. The job of the turnaround specialist is to
determine what is in the best interests of the business objectively, regardless
of any other agendas. The turnaround specialist must take into account the
objectives of the assignment and approach difficult decisions without the
weight of historical expectations on his back. The effective turnaround specialist is a teacher and knows that it is critical to
success that a capable management team with acute awareness of its goals must
be left behind. If management is deficient, the turnaround specialist has the
very delicate task of communicating that message, identifying appropriate roles
for existing managers and facilitating a transition. Special skills the turnaround specialist may also bring to the engagement include
knowledge of sources of de nova financing and familiarity of trade
relationships necessary to assure the flow of product the company needs to fuel
its recovery. Given difficult questions that a troubled business must face, there is often some
tension between owners, management, employees of the company and the turnaround
specialist. One main problem is that businesses in trouble will often postpone
action because their own owners no longer can tolerate jarring change and an
uncomfortable transition to something new. Despite statistics indicating
otherwise, owners and management may generally believe that its particular
situation fits within those minority cases in which decline is attributable to
uncontrollable external factors. A variety of misconceptions and myths abound, which make businesses leery about
hiring a turnaround specialist. The turnaround specialist has "no heart". He does not care about
the employees, the long-time suppliers or the bank with whom the company has
been doing business for many years. He is cutting employees and telling
creditors that they are not going to be paid. Do not forget that the turnaround
specialist is goal oriented and recognizes that his job is to make hard
decisions. The turnaround specialist is an experienced negotiator with
creditors to whom he tells the truth, be it good or bad and relies upon his
credibility to build the consensus necessary to build for the future. The turnaround specialist does not understand the company's corporate culture.
This is a legitimate observation, but it does not follow that without history on his
side, the turnaround specialist is not capable of bringing order out of chaos
and adding value to the client. One of the most appealing aspects of a
turnaround specialist is that he brings a new set of eyes to a situation as
well as an experienced and knowledge base of managing businesses through the
turnaround process. The turnaround specialist does not know the client's particular business or industry. The
skill the turnaround specialist brings to the table is his management ability,
his ability to marshal resources and maximize the value from those diverse
resources. If the business requires special expertise, the turnaround
specialist should assist in attracting that expertise. Most importantly, these
issues should be discussed prior to the engagement. The company's employees have no loyalty to the turnaround specialist. Just remember
that management, labor and the turnaround specialist have a responsibility to
the organization to work together for the common good, and any power struggles
will ultimately hurt the company and the turnaround effort. The turnaround specialist has a private agenda. For example, the specialist
is ultimately interested in purchasing the business, is using the business as a
springboard into other ventures, or is there to maximize the value to his
referral source without regard to the other stakeholders. These issues with
particular emphasis on independence should be addressed pre-engagement and potential
conflicts should be addressed in an engagement agreement. The turnaround specialist will not have to live with his recommendations for change
and probably will not even live in the community beyond the period of the
engagement. As a result, the turnaround specialist is not accountable
to anyone. In reality, however, the turnaround specialist is motivated to
perform the best if the troubled company is used for purposes of future
references or if the company reports the results of the engagement to the
referral source. The turnaround specialist's credibility and recommendations
are the basis upon which lenders and trade suppliers will ultimately rely in
deciding whether to offer support ? and throw future business his way. The turnaround specialist will steal ideas or techniques. If the company has
proprietary property, it should legally protect itself. Otherwise, the
engagement agreement should cover points of privacy or proprietary content
which the turnaround specialist must leave behind or be restricted through
contract provisions similar to non-disclosure and non-compete agreements. Because the number of
successful corporate turnarounds has been steadily increasing during the past few
years, the increased visibility of the industry has attracted operators
masquerading as qualified turnaround specialists. The expression "Ready,
Shoot, Aim," rings all too familiar. Businesses seeking management
assistance should be cautious to carefully consider each turnaround candidate. Beware of the
turnaround specialist who refuses to supply references. Since the
profession is relatively young, there is limited general knowledge in the
marketplace regarding the capabilities and backgrounds of turnaround
specialists. Particularly, check with attorneys and CPAs with whom the
turnaround specialist has worked and obtain as much specific information
regarding the turnaround specialist's actual experience as possible.
The TMA has implemented a Certified
Turnaround Professional (CTP) designation, which checks professional and client
references, and requires CTP to pass a three-part rigorous examination before
qualification. Like any
professional, the competent turnaround specialist will not guarantee results
whether it be a recovery, new funds, a renegotiated loan, an equity investor or
buyer, or any other guaranteed result. A guarantee of any result, other
than a best effort, is a signal to keep interviewing. If the turnaround specialist makes an
effort to impress the company with his particularly close relationship with
banks, trade suppliers, investor, or any particular resource the business may
need, investigate that particular relationship further. Make sure that
the turnaround specialist has adequate independence from other sources so that
he can provide the company not only with his undivided attention, but also so
that the company can be comfortable that his advice and leadership will be void
of any possible conflicts of interest. A turnaround specialist who tries to
impress the company with a "look how much our firm has grown" sales
approach is equating quantity with quality. The implication is that the
firm has grown because the marketplace recognizes the quality of the work
performed. The issue of the turnaround specialist
taking equity is a double-edged sword. Some turnaround specialists
believe that taking equity or having an opportunity to receive an equity
position with a client is a conflict of interest, which could impair their
management judgment. Others believe that, as an equity holder, the turnaround
specialist not only shares the risk but also must maximize shareholder value,
and therefore, benefit all constituents, to receive the full compensation. This
is effectively the same theory underlying stock option plans for management in
many companies. Regardless of whether equity participation is good or bad, the
company and the turnaround specialist should fully discuss equity participation
prior to the engagement and define the potential role of equity, if any, in the
engagement agreement prior to employment. Investigate the
turnaround specialist's actual experience. Ask what portion of this
business has actually been in turnaround situations rather than in other
executive or consulting capacities. Although the number of turnaround
specialists is rather small at this time, try to avoid providing a job in
transition for an executive or a training ground for a consultant. When discussing fees, provide
specifically for what expenses are to be reimbursed and the level of
reimbursement generally expected. Most importantly, do not let it
become either a surprise or a source of disagreement. Again, cover as much as
possible prior to the engagement in a written engagement contract. Always insist upon a written engagement
agreement to outline the terms of the engagement. Provisions that should at
least be considered include: While most owners of distressed businesses believe that access to more money would
solve their company's financial problems, turnaround specialists recognize that
the shortage of capital is often only a symptom, rather than the primary
problem facing a distressed company. Although sufficient and available
financial resources are necessary to implement turnaround plans, a successful
turnaround must first attack and solve the business problems which produce the
cash crisis. Financing is an integral part of a troubled company's plan of reorganization. An
effective financing plan will stabilize the company's cash position during the
crisis, provide the necessary capital base to allow the company to return to
profitability, and restructure the balance sheet so that it can support the
company into the future. Financing strategies
differ from situation to situation according to the liquidity and viability of
the distressed business. Initially, turnaround specialists attempt to maximize
the liquidity to provide sufficient time to evaluate the viability of the
business. In addition, the turnaround specialist is likely to implement cost
reduction plans and attempt to renegotiate the terms and covenants of existing
financing arrangements to a level the company can live with during the recovery
period. When necessary, the turnaround-financing plan can involve a recapitalization, or a
restructuring of the right side of the company's balance sheet. This involves
changing the relationship between existing financial stakeholders through a
combination of debt and equity conversions, exchange offers, stock rights
offerings, and the addition of new financial stakeholders. Obviously, the more
sever a company's situation is, the more difficult it is to work out an
arrangement with existing trade creditors, lenders, equity holders, and the
harder it is to attract new stakeholders. Turnaround financing specialists provide financially distressed companies a number of
financial resources and expertise to draw upon. Capital resources and the range
of services differ widely among lenders, equity investors, and purchasers of
securities and claims of distressed companies. Historically, asset based lenders have been a primary source of loans to distressed
businesses. These loans are often made at premium rates while the lender
requires an enhanced security position. With the increasing number of Chapter
11 bankruptcies, debtor-in-possession lending departments emerged in many large
commercial banks and investment banks. Debtor-in-possession loans are made to a
company after it files for bankruptcy protection. To encourage these lenders to
undertake the risks, the law provides a super priority status for repayment of
their loans. Actually, because of this super priority status, some companies must file a bankruptcy
case to provide the lender with the level of security it seeks. Ironically,
many lenders prefer the control aspect of the bankruptcy process. Without
court's protection and supervision, in a non-bankruptcy environment, these same
lenders may well lend to a distressed company but with restrictive covenants
and fees that may seem burdensome. In addition, taking into account the higher
fees and rates - coupled with other restrictions to be anticipated in a
distressed situation - management flexibility is limited and higher interest
rates often slow the recovery. Therefore, the turnaround-financing plan is only
effective if viewed on a long-term basis, and if it ultimately helps the
company achieve recovery. When a distressed company is unable to find a suitable lender, management should
consider turnaround equity investors who will infuse equity
capital into the business. As one would anticipate, equity funds are also an
expensive alternative. Equity investors typically require a controlling
interest in the company in exchange for their capital and in consideration of
the abnormal risk. Equity investors often specialize in particular industries,
company sizes, investment minimums and maximums, and anticipate varying
management roles. Since investors bring different capabilities to the table,
management should determine whether the company would best be served by
financial or strategic assistance. Financial investors sometimes have turnaround management and bankruptcy
experience and are able to assist management through the complexities of the
reorganization process. Investments are often made at a significant discount
compared to the business's underlying asset value. While most financial
investors remain involved only at the board of director level, they
occasionally fill top management positions if necessary to protect their
investment. While some financial equity investors have funds committed and immediately available,
others act as financial intermediaries receiving an equity position in the
company as their compensation upon completion of the investment. These
investors act as a "gate keeper" between the financially distressed company
and the alternative sources of financing. While many financial
intermediaries are skilled financial advisors and have a wide network,
management should be aware of possible conflicts of interest between the advice
they receive from the financial intermediary and his compensation arrangement.
Full disclosure should be sought to assure that the primary motivation for
putting the deal together is not the fee involved. Alternatively, strategic equity investors are identified by their specific
industry or geographic requirements and generally provide specialized
experience and knowledge with their investment. These investors often acquire
financially distressed companies to consolidate with their existing companies
and typically become involved in the management of the acquired business at a
senior operating level. Since the passage of time usually works against a
financially distressed company, the strategic investor may provide the company
with a more timely, or occasionally, the only solution. Regardless of the type of equity investor, the financially distressed company will often
benefit from the increased negotiating leverage with its constituencies that a
credible new investor brings to the turnaround. Once new equity funds are
infused into the business, the company's existing lender may be more willing to
modify the loan agreement if they feel that their loan is protected from
further impairment. Trade creditors may agree to credit terms more favorable to
the troubled business if they believe that future payments have become more
certain and if no trade creditors are being preferred over others. A local
government may be more willing to provide tax concessions and financing if it
believes jobs will be saved so that the business can continue to contribute
positively to the local economy. Of equal importance, employees may be more
willing to consent to concessions if they believe that the company's survival
is at stake, that their jobs are in jeopardy, and that they are an integral
part of the recovery process. Purchasers of securities and claims of financially distressed companies do not infuse
capital directly into the business. However, management should be aware that
these investors can have a tremendous impact on the company's turnaround
efforts through their purchase of securities and claims from the company's
existing financial stakeholders. Investments are typically made in company's
debt, since in a bankruptcy, debtholders have a higher priority status than
equity holders and are able to influence management's reorganization efforts
through participation on the creditors? committee. In some cases, these
investors will infuse equity capital into the business as part of the plan of
reorganization to increase the returns on their investments. This growing number of investors look for opportunities to purchase securities and claims at
significant discounts from financial stakeholders who prefer immediate
liquidity rather than the uncertainty of recouping their investment over the
long term. They believe that their investments will yield considerable returns
upon the successful reorganization of the financially distressed business. Experienced turnaround specialists also have networks to assist their clients to find the funds
necessary to fuel the recovery. The turnaround itself can take years of hard work to achieve, and the turnaround specialist
can only be a catalyst to the change. Difficult decisions must be made by
owners to enable this process to take place. Ultimately, the success or failure of a turnaround rests upon the shoulders of a business? most
valuable assets, albeit not shown on any balance sheet: its turnaround
leadership, its owners and lenders, its management and its employees all
dedicated to turning around the company. It is upon their effort, performance,
credibility, and commitment that the turnaround specialists, lenders and
creditors, and the marketplace, ultimately rely. 
Recover & Preserve Value:
Working Successfully With Turnaround Professionals
Is A Turnaround Specialist Needed?
WARNING SIGNS: How Do You Diagnose Trouble?
Several formulas exist to predict failure.
Companies Susceptible to Trouble
Hiring A Turnaround Specialist
How To Select a Turnaround Specialist
Interviews and Background Checks
Time Commitment of the Turnaround Team
Select an Individual
Credibility
Obtain a Written Proposal
Regular Written Reports
Involvement in Company's Operations
Confidentiality and Accessibility
How Turnaround Specialist Operates
Business Ownership's Resistance to Turnaround Specialists
Remember to Be Cautious
Engagement Agreements
Turnaround Financing For Financially Distressed
Companies
A Final Word of Advice...
Do Not Expect Miracles Overnight.
ABF Journal, Recover & Preserve Value, Part 1 of 2
ABF Journal, Recover & Preserve Value, Part 2 of 2
John M. Collard is chairman of Strategic Management Partners, Inc., a turnaround management firm based in Annapolis, maryland, and specializing in interim executive leadership and investing private equity in underperforming companies. He is past chairman of the Turnaround Management Association and brings 35 years senior operating leadership, $85M asset recovery, 40+ transactions worth $780M, and $80M fund management expertise to advise company boards, institutional and private equity investors, and governments. For more information about Strategic Management Partners, call (410) 263-9100 or visit www.StrategicMgtPartners.com
We welcome constructive inquires. More information is available if required.
There is more to Strategic Management Partner's
Return to Home Page
Contact Information
John M. Collard, Chairman
Strategic Management Partners, Inc.
522 Horn Point Drive
Annapolis, Maryland [MD] 21403
Voice 410-263-9100 Facsimile 410-263-6094 E-Mail
Strategist@aol.com.
We serve as experts for comment or quote, please contact us at 410-263-9100
![[Telephone]](phone.gif){kind=small}
We welcome constructive inquires, please send via E-Mail to:
Strategist.
![[Mailbox]](mail.gif){kind=small}
![[Return]](return.gif){kind=small} |
Top
Index
Sections
Contact PDF PDF Part 1 of 2 PDF Part 2 of 2 SMP Library www.StrategicMgtPartners.com www.StrategistLibrary.com www.StrategistArticle.com www.StrategistFeature.com |
Copyright © 2006-2007
Strategic Management Partners, Inc.