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Tips to Turn Around
a Distressed Company
By Robert J. Meehan
1. Recognize the Cash Situation is Much Worse than Reported, and the Company Did Not Just Become Distressed.
2. Understand that Senior Management Does Not Have the Turnaround Skills to Fix the Problems and May Resist Outside Help.
3. Immediately Engage a Turnaround Firm with an Operational, Financial and Strategic Skill Set.
4. Manage for Cash, not Earnings.
5. Make Working Capital a Major Focus.
6. Understand a Lender’s Perspective.
7. Involve All Employees in Developing and Implementing the Action Plan.
8. Compress the Time Frame, and Don’t Slow Walk the Changes.
9. Continue to Develop and Refine Cash Generation Options.
10. Maintain Credibility at All Costs
“There is no such thing as a quick fix. Since the financial results have probably been doctored for many quarters, the situation may be much worse than advertised, and the problems may be hidden.”
A Quick Overview
What is a distressed company?
- A company that is facing a viability crisis can be said to be “distressed.”
- A company that may not have recognized or acknowledged it may also be distressed.
What is a viability crisis?
- A company that can’t generate the cash resources to support its future existence.
- Throughout their lives, most companies face viability challenges.
What are indicators of a distressed company?
- Deteriorating performance
- Continually missing earnings and cash targets
- Doctoring financial results
- “Excusing away” critical capital expenditures
- Experiencing day-to-day liquidity crisis
- Worsening net working capital
- Continually reducing balance sheet reserves
The recurring problem in turning around distressed companies is that boards of directors (BOD) often postpone engaging a “turnaround” professional—with an operational, financial and strategic skill set—until the company is almost out of cash. At this stage, few options remain except to sell or liquidate the company. BOD’s believe they are “selling out management” if they engage a turnaround professional. Yet not engaging a turnaround professional is a breach of the BOD’s fiduciary responsibility.
In order to implement significant changes in a very short time, the turnaround professional must involve all employees, especially the highly-skilled team members—both salaried and hourly. They are a key to implementing significant change within a short time.
The turnaround strategy—not just financial engineering—must work for your company and in your industry and environment. There is no cookie-cutter solution, but there is a world of opportunities.
There is no such thing as a quick fix. Since the financial results have probably been doctored for many quarters, the situation may be much worse than advertised, and the problems may be hidden.
01. Recognize the Cash Situation is Much Worse than Reported, and the Company Did Not Just Become Distressed
Companies become distressed through:
- Excessive leverage—especially coupled with an unpredictable revenue stream
- Unsuitable Management Processes—given the company’s leverage and market challenges
- No strategy or Value Proposition to steer the company
- Doctored financial results that have hidden the problems
- This is no time to accept excuses.
- Please, no weather excuses.
- If there is an industry downturn, management should have implemented the necessary changes.
- Compensating controls for known risks should have been implemented.
- Cash-losing operations should have been sold or closed.
- Underperforming managers should have been replaced.
- Options available to turn around a distressed company diminish rapidly. If the BOD continues to postpone engaging a turnaround professional, a more radical fix—such as liquidation—may be required.
02. Understand That Senior Management Does Not Have the Turnaround Skills to Fix the Problems and May Resist Outside Help Once a Company Becomes Distressed
- Senior management:
A. Has not recognized—by taking appropriate action—the severity of the liquidity problem
B. Is probably not objective
C. Has lost credibility with the lenders
D. Has too much emotional ownership to take the necessary actions.
- Senior management should recognize that a turnaround firm could validate their strategy, thereby improving their credibility.
- Often, the employees labeled as “trouble makers” play a major role in turnaround companies because they are more interested in change than in maintaining the status quo.
- Lender fatigue, which occurs when lenders tire of dealing with senior managements’ paralysis, is a major issue. Lenders will stop listening to the management team, and the situation will deteriorate.