December 2004/ January 2005

Step 1 – Recognize the Problem for What it Really Is – A MAJOR CRISIS

The undeniable temptation of the business owner seems to be conveniently blaming one major event for the company’s problems:

• Perhaps it’s just another low point in the regular cycle.
• Perhaps it’s just one bad management decision on extending credit or investing heavily in a new product that failed.
• Perhaps it’s just a couple of new orders that cost you more money than anticipated.

But your business advisors (lawyers, accountants, etc.) have got to help you accept the fact that your business is, in fact, in a Life Threatening Major Crisis, and the sooner you accept and acknowledge that you are in a crisis, the sooner you can take appropriate steps to deal with it.

Step 2 – Recognize the Need for Outside Help

The problems you have dictate the type of outside help you should seek. If you are in a true crisis or near one, you are likely faced with dwindling cash, little time to act, and decreasing options still available to you. It’s critical to seek help from outsiders, turn-around consultants, who have “been there and done that.” Most owners have never even heard of turnaround consulting, let alone witnessed a turnaround specialist in action; therefore, the concept of “real economic value” they can provide seems vague and abstract.

The cost of the turnaround consultant or team is usually a huge shock to the entrepreneur. Having one or more full-time consultants on the expense ledger, charging several hundred dollars an hour for several months, can be very expensive. Although, frankly speaking, what does it matter? Your alternative is almost certainly losing your company, your investment, your career and your status.

Step 3 – Selecting the “Right Firm”

Most entrepreneurs operating a business in crisis are afraid of failure. This fear often paralyzes the decision-making process of the company; however, the open-minded owner looking to escape the crisis and save the company must act quickly and forcefully. The best way to do this is to bring in an objective turnaround consulting firm. Many owners make the FATAL decision of thinking they can fix the company themselves (usually with the existing management team). It’s fatal because if they had the skills and experience necessary to fix the company, wouldn’t they have already done it?

When choosing the turnaround consultant, chemistry, personality and style of the day-to-day project management are most important. In essence, you have to believe that you can really trust your project manager—and that other stakeholders will, as well. Although the project manager must “fit in” with you and your company’s culture, it is also critical that the project manager is a hands-on, goal-driven type. Unfortunately, my company had a less-than-satisfactory false start with a report-writing, accounting-type consulting firm. Fortunately, we found the right person and firm on the next go-round.

Step 4 – Announcing the Decision

Our project manager emphasized the immediate necessity of communicating with our various groups of stakeholders. Although this direct style of communicating the crisis was a little scary at first, it worked well. I was told that owners are always worried about directly telling stakeholders about the seriousness of the problem, but I was assured that the vendors—and the employees especially—were already well aware that the company was in serious trouble.

The first day the “real” turnaround consultants started with us, I was asked to convene three meetings. First, we met with the senior management team, second with all managers and supervisors, and finally with all employees. The agenda was essentially the same at all three meetings: I explained that fundamentally we had a good company, but that events of recent years had put the company into serious financial difficulty; therefore, I had decided to hire professional help who had a strong track record in turnarounds, and that I had full confidence that our consultants would identify what we needed to change and lead us through the difficult issues of change. Then, the project manager explained that over the next few weeks the company would be refocused on generating more cash, reducing costs and establishing good management controls on decisions, processes and results. The meetings helped create a sense of urgency with the employees and start the process of empowering the consultant.

We initially contacted all vendors by letter announcing the selection of the turnaround consultant, using a positive spin. We immediately had our purchasing manager call all major vendors to discuss the announcement and to offer a face-to-face meeting with our consultant. And yes, I completely turned over the checkbook to the consultant so that all emotion and politics were removed from the expenditure process.

The lender went to the consultant directly and frequently. At first, I was somewhat uncomfortable with this, especially since the lender had recommended the consultant. However, as time wore on and I trusted the consultant more, my concerns vanished. The consultant significantly improved the timeliness and accuracy of both financial and operational information, and this communication with the lender went a long way toward improving our relationship.

We did not directly communicate the consultant’s engagement with our customers, as we sold fairly expensive capital equipment. However, we did arm our sales force and senior managers on how best to handle the inevitable customer curiosity and concern. In general, we followed the recommended approach: be factual, don’t downplay the seriousness of the problems, but focus on the viability of the business and our commitment to making the necessary changes to fix it.

Step 5 – Getting to Work

The turnaround consultant must be granted, and be able to, assume full authority to implement changes. That doesn’t mean the consultant has no accountability to the owner. An experienced consultant will build a relationship with the owner by checking in daily and explaining the rationale for any major decision prior to its announcement and implementation. The owner must be willing to allow the consultant a fairly free rein to get the job done, and be willing to let go of “sacred cows” and even long-term employees, if necessary. A good consultant will under-stand and appreciate the natural emotion involved in such difficult issues and be helpful but firm in working through such issues.

It seems that the diagnostic phase of the engagement was done independently by our consultants. However, the operational and financial turnaround planning, and its subsequent implementation, were collaborative efforts between the owner, its managers and the consultants. Milestones and goals were set collaboratively.

Our consultants maintained high visibility throughout the engagement. They walked the plant floor and office daily talking with employees, getting input and sharing stories illustrating progress. They set up and managed cross-functional work teams to address specific issues. We set up regular meetings with employees. They had meetings with vendors or were accessible by phone all the time. I made it a point to introduce all visitors to the consultants, even customers.

Step 6 – Concluding the Project

Although no owner wants to hear this, a good consultant will tell the owner upfront that sometimes businesses are not viable and a quick sale or liquidation is the only realistic option. A good owner needs assurance that the consultant will help the owner and the company through whatever the outcome, and that the consultant will protect the owner’s integrity during any wind-down process. Luckily, my business was viable.

Assuming milestones are generally met and the company’s financial results and prospects are now in black ink, it’s time to return the company to regular management. In fact, good turnaround managers get anxious to leave at this point, as the crisis is the battle they like. However, it’s critical that the owner, and perhaps more importantly the turnaround manager, believes you have a capable management team in place.

Epilogue
The turnaround of my company was dramatic. In 6 months under the leadership of our turnaround consultant, we went from losses of nearly $2 million annually on $20 million of sales, a $2 million loan with a $750,000 over-advance and a lender who wanted out “now” and a host of operating maladies to a company making nearly $1 million annually, a new $2.5 million loan with nearly $500,000 of availability, and a much smoother operation.

On a personal note, I no longer had to worry about the business and the real possibility of having my personal guarantee called and potentially losing our home. Approximately a year later, my business was successfully sold for a very nice value. Although the turnaround consulting cost the company over $300,000, it was worth every cent. You really do “get what you pay for.”

AIRA News is published six times a year by the Association of Insolvency and Restructuring Advisors, 221 Stewart Avenue, Suite 207, Medford, OR 97501. Copyright 2004 by the Association of Insolvency and Restructuring Advisors. All rights reserved. No part of this newsletter may be reproduced in any form, by xerography or otherwise, or incorporated into any information retrieval systems, without written permission of the copyright owner.