In 1953 the Department of Health, Education and Welfare became a cabinet level department in the United States. In 1979 the Department of Education Organization Act split HEW into the Department of Education and the Department of Health and Human Services. HHS is responsible for the health, safety and well-being of residents of the United States. This mandate also extends internationally for cross-border health and safety issues.
HHS administers over 300 programs with a budget of over $737 billion. HHS mission includes a wide range of human issues, including substance abuse, Medicare and Medicaid, childrens health, health disparities, disease prevention and health promotion. It is the largest grant-making department within the Federal Government.
In 1979 the Department of Health and Human Services established the Office of Small and Disadvantaged Business Utilization to develop and implement outreach to the small business community. The Office performs its mission through small business fairs, procurement conferences, trade group seminars, conventions and forums.
The Office of Small Business Development, also called OSDBU, is host to Vendor Outreach Sessions that happen twice monthly. The purpose of these sessions is to introduce and educate vendors on the small business program and to provide them information so that they can effectively market their products and services to HHS.
The Department of Health and Human Services is the only executive agency where Small Business Specialists report to the OSDBU Director. These Small Business Specialists are located within the eleven agencies of HHS.
Every day, these Specialists work with Contracting and Program Office staff, so as to determine the best acquisition strategy; they also work to make their approach unified so that when vendors deal with Health And Human Services, this unity will benefit them.
Currently, HHS does not provide grants or loans to help small businesses get going, but it is in fact the largest organization to make grants within the federal government. It has over 300 grant programs today, and it handles mission-specific topics, which are in turn delegated among the various HHS operating agencies. The Catalog of Federal Domestic Assistance profiles all Federal grant programs; these provide financial assistance and include HHS programs. In addition, specific points of contact for obtaining applications or additional information are also provided.
Vendors who are interested in doing business with Health And Human Services do not have to have any special certification, but instead, the Small Business Administration provides certification to firms under the Business Development Program, the Historically Underutilized Business Zone Program, and the Small Disadvantaged Business Program. Businesses that are Women-Owned, Veteran Owned, Service Disabled Veteran Owned, or Small Businesses are generally managed with self-certification. Self-certification is not challenged unless or until an interested party or competitor provides protest to it. In addition, an HHS Contracting Officer may request that the SBA provide a size determination.
Thursday, September 16, 2010
Wednesday, September 15, 2010
How to Work With Turnaround Professionals - How They Operate and How to Find Financing
The turnaround specialist offers a new set of eyes, skills and understanding of troubled situations to independently evaluate a 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:
* Is the business viable?
* Is there a core business?
* Are there sufficient sources of cash to fuel a recovery?
* Is existing management capable of leading company?
The specialist should discuss those questions openly with his client, and if it is determined 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 possible courses of action. Depending upon the engagement and who his client is, the specialist will seek client input 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 specialist should be involved to put the plan in place whether as interim manager or as a consultant to management. This is the time a specialist begins to build a team both inside the company and from outside resources.
Monitor the business plan. The specialist should keep vigil over the plan, analyzing variances to determine their causes and the validity of the underlying assumptions.
Stabilization and transition. Assuming liquidation is not a cornerstone of the business plan, a specialist should remain involved in an engagement until stabilization is achieved and to assist a business in 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 specialist's first goal is to stabilize cash flow and stop the hemorrhage. The specialist 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 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 specialist has been engaged and a business plan designed, the specialist plays many roles. Since many troubled businesses often lose much of their credibility with lenders, trade suppliers, employees, customers, shareholders, and 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 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.
Business Ownership's Resistance to Turnaround Specialists
Given difficult questions that a troubled business must face, there is often 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 employees, long-time suppliers or 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 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 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 does not know the client's particular business or industry. The skill the 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 turnaround specialist has a private agenda. The specialist is ultimately interested in purchasing the business, is using the business as a springboard into other ventures, or is there to maximize 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, techniques. If the company has proprietary property, it should legally protect itself. Otherwise, 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.
Remember to Be Cautious
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.
Engagement Agreements
Always insist upon a written engagement agreement to outline the terms of the engagement. Provisions that should at least be considered include:
* The purpose of the engagement.
* General responsibilities of the turnaround team, the company's management and staff.
* Time the specialist will devote to company. (What other commitments must specialist deal with simultanously?)
* Specialist's staff.
* Company staff.
* Specialist's core of professional support for the business (attorneys, accounting firms, etc.).
* Terms of any equity opportunities for the specialist (The entire question of the turnaround specialist and equity is one of the more troublesome in this growing profession. It is critical that all parties understand the rules up front. For example: discuss equity kickers, the specialist as an equity participant, finder's fees, etc.).
* Term of the engagement (Define the time period of the engagement).
* Fee arrangement, terms of performance bonuses, payment schedule.
* Project "deliverables" (What the specialist is expected to deliver, even if it is only a best effort. A schedule of anticipated benchmarks where both parties may measure progress and satisfaction with the other.)
* Fee for acting as a broker in selling the business.
* Regular reporting mechanism (to assure communication between the parties.)
* Specialist's follow-up responsibilities after the engagement is concluded.
* Termination provisions (includes notification periods, for both parties.)
Turnaround Financing For Financially Distressed Companies
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 cash position during crisis, provide necessary capital base to allow the company to return to profitability, and restructure the balance sheet so 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 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 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 have networks to assist their clients to find the funds necessary to fuel the recovery.
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:
* Is the business viable?
* Is there a core business?
* Are there sufficient sources of cash to fuel a recovery?
* Is existing management capable of leading company?
The specialist should discuss those questions openly with his client, and if it is determined 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 possible courses of action. Depending upon the engagement and who his client is, the specialist will seek client input 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 specialist should be involved to put the plan in place whether as interim manager or as a consultant to management. This is the time a specialist begins to build a team both inside the company and from outside resources.
Monitor the business plan. The specialist should keep vigil over the plan, analyzing variances to determine their causes and the validity of the underlying assumptions.
Stabilization and transition. Assuming liquidation is not a cornerstone of the business plan, a specialist should remain involved in an engagement until stabilization is achieved and to assist a business in 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 specialist's first goal is to stabilize cash flow and stop the hemorrhage. The specialist 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 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 specialist has been engaged and a business plan designed, the specialist plays many roles. Since many troubled businesses often lose much of their credibility with lenders, trade suppliers, employees, customers, shareholders, and 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 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.
Business Ownership's Resistance to Turnaround Specialists
Given difficult questions that a troubled business must face, there is often 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 employees, long-time suppliers or 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 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 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 does not know the client's particular business or industry. The skill the 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 turnaround specialist has a private agenda. The specialist is ultimately interested in purchasing the business, is using the business as a springboard into other ventures, or is there to maximize 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, techniques. If the company has proprietary property, it should legally protect itself. Otherwise, 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.
Remember to Be Cautious
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.
Engagement Agreements
Always insist upon a written engagement agreement to outline the terms of the engagement. Provisions that should at least be considered include:
* The purpose of the engagement.
* General responsibilities of the turnaround team, the company's management and staff.
* Time the specialist will devote to company. (What other commitments must specialist deal with simultanously?)
* Specialist's staff.
* Company staff.
* Specialist's core of professional support for the business (attorneys, accounting firms, etc.).
* Terms of any equity opportunities for the specialist (The entire question of the turnaround specialist and equity is one of the more troublesome in this growing profession. It is critical that all parties understand the rules up front. For example: discuss equity kickers, the specialist as an equity participant, finder's fees, etc.).
* Term of the engagement (Define the time period of the engagement).
* Fee arrangement, terms of performance bonuses, payment schedule.
* Project "deliverables" (What the specialist is expected to deliver, even if it is only a best effort. A schedule of anticipated benchmarks where both parties may measure progress and satisfaction with the other.)
* Fee for acting as a broker in selling the business.
* Regular reporting mechanism (to assure communication between the parties.)
* Specialist's follow-up responsibilities after the engagement is concluded.
* Termination provisions (includes notification periods, for both parties.)
Turnaround Financing For Financially Distressed Companies
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 cash position during crisis, provide necessary capital base to allow the company to return to profitability, and restructure the balance sheet so 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 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 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 have networks to assist their clients to find the funds necessary to fuel the recovery.
Monday, September 13, 2010
Medical Transcription Outsourcing - Turnaround Time Guarantee
Turnaround time guarantee given by the medical transcription service provider plays an important role in the service provider selection process.
Why is turnaround time guarantee a deciding factor?
To answer this question, one needs to examine the importance of medical transcription and the part it plays in the provision of quality healthcare. Medical transcription is the process of creating records of the patient-healthcare professional encounter. These records then serve as the foundation for providing healthcare, for referring to specialists, as evidence in case of litigation and form the basis for billing.
One can see that the quality of healthcare hinges on the availability of accurate and timely information, therefore turnaround time is very important for a healthcare facility.
What is turnaround time?
Turnaround time is the time between the audio files is uploaded to the time when the final transcript is made available to the healthcare professional. Ideal lead time would depend on the type of report. For most reports a turnaround time of 24 hours would be considered ideal, but STAT reports would require of 4-12 hours.
How can a healthcare facility be ensured that the committed time would be met?
This would require the healthcare facility to have a careful screening process of various service providers. To ensure that a service provider would stand by their guarantee they need to be evaluated on the following:
· Technology used: The technology used by the service provider will have a direct impact on the time taken to revert back with the transcripts
· Training methods used: A team of well-trained transcriptionists would ensure that the time guaranteed by the service provider for reverting back with the finished transcripts would be met without any compromise to quality.
· Quality assurance methods used: The methods used to ensure quality would not only ensure accuracy but also save a lot of time in correction of errors, thereby fine-tuning the time required for delivering the transcripts.
· In-house transcription: Transcription done in-house and not through sub-contractors would cut down on time needed for delivering transcripts by avoiding dilution of control over the process of transcription.
While evaluating the quality of transcription services it is important to assess whether the transcription service provider can maintain accuracy and still meet turnaround time guarantees.
Why is turnaround time guarantee a deciding factor?
To answer this question, one needs to examine the importance of medical transcription and the part it plays in the provision of quality healthcare. Medical transcription is the process of creating records of the patient-healthcare professional encounter. These records then serve as the foundation for providing healthcare, for referring to specialists, as evidence in case of litigation and form the basis for billing.
One can see that the quality of healthcare hinges on the availability of accurate and timely information, therefore turnaround time is very important for a healthcare facility.
What is turnaround time?
Turnaround time is the time between the audio files is uploaded to the time when the final transcript is made available to the healthcare professional. Ideal lead time would depend on the type of report. For most reports a turnaround time of 24 hours would be considered ideal, but STAT reports would require of 4-12 hours.
How can a healthcare facility be ensured that the committed time would be met?
This would require the healthcare facility to have a careful screening process of various service providers. To ensure that a service provider would stand by their guarantee they need to be evaluated on the following:
· Technology used: The technology used by the service provider will have a direct impact on the time taken to revert back with the transcripts
· Training methods used: A team of well-trained transcriptionists would ensure that the time guaranteed by the service provider for reverting back with the finished transcripts would be met without any compromise to quality.
· Quality assurance methods used: The methods used to ensure quality would not only ensure accuracy but also save a lot of time in correction of errors, thereby fine-tuning the time required for delivering the transcripts.
· In-house transcription: Transcription done in-house and not through sub-contractors would cut down on time needed for delivering transcripts by avoiding dilution of control over the process of transcription.
While evaluating the quality of transcription services it is important to assess whether the transcription service provider can maintain accuracy and still meet turnaround time guarantees.
Wednesday, September 8, 2010
The Important Board Chairperson
The board chairperson is the most important person in the organization. Is that true in your organization? Do you treat recruiting the chairperson as important or necessary? Do you have a successor plan for the chairperson?
The board exists to lead the organization. The leadership should come from the wisdom and guidance it provides rather than the commands it issues. The board chairperson selects the agenda in consultation with the administrative head of the organization (principal, executive director, etc.). If the agenda is filled with non-mission related items, petty issues, and budget issues, where is the opportunity for the wisdom and guidance to emerge?
The chairperson should manage the board. Otherwise, the professional leader (principal, executive director, etc.) must manage the board. When the professional leader is managing the board, it creates problems. The professional has less time for the operational oversight. The board engages in more operational oversight and less planning and visioning. It is hard for the board to objectively evaluate the performance of the professional leader and team. With the professional acting as the board leader, it is awkward to do the annual performance review. The board discussions are often less strategic and more operational than is optimal. There is a risk the board will become a rubber stamp rather than a deliberative body. Is it fair to give one more job to the professional?
When the chairperson is managing the board, the board is usually more effective. There is usually a greater emphasis on planning, board structure, membership development, accountability, transparency, and mission.
Of course, all of the preceding depends on the person who is the chairperson. Without an intentional recruiting process based upon the specific needs of the organization at this moment in its evolution, success is more luck than design. When things are going well it is easy to believe one can be less selective.
Are things going well at the moment? Perhaps internally things are okay. Externally, this is a difficult time for our communities. Is the chairperson guiding discussions to ensure that the external problems have minimal affect on the mission and internal performance? What is the chairperson doing to monitor the health of the organization? Does the chairperson know that monitoring health at a time like this is more about predicting trends than looking at past results?
If the organization is under stress is the chairperson right for the job? We often see organizations under stress with a good firefighter as the chairperson. Firefighters are good at putting out fires. They are seldom called upon to keep the neighborhood from declining, preventing new fires, or helping to rebuild a neighborhood.
In times of stress, it is best to have a community organizer or turnaround specialist as the chairperson. Community organizers are good at gathering support, motivating people, and changing the status quo. Turnaround specialists have a broad knowledge, know how to plug leaks and trim excesses as well as set new direction. Both are high-energy individuals with a very strong goal orientation. Both are hard to find but worth the search when the need arises. Do you know which you need? Both need to be replaced as soon as the turnaround has self-sustaining momentum.
Next Step:
Determine where the organization is in its life cycle, what its immediate leadership needs are, and what its long-term goals are
Create formal selection criteria for the chairperson
Intentionally recruit to match the criteria and be prepared to invest in the chairperson (training, education, mentoring, etc.) to ensure his or her success
Create a successor plan, the chairperson is too important to leave the successor to chance
There should be two successors waiting. One who will be a great leader if things continue to go well. The other will be a great leader if the organization is under stress when the opening occurs. The depth of skills in the potential successors will add perspective to the board deliberations and increase the quality of the decision-making.
The chairperson is a very special individual and should be carefully selected based upon the immediate and long-term needs of the organization as well as where the organization is in its life-cycle. The right chairperson is able to foster growth regardless of the internal or external conditions because he or she was carefully chosen. The converse is also true. If growth is elusive, it may be appropriate to ask if the right person is the chairperson. If you believe that you have the right chairperson but still find growth elusive, it is time to bring in outside help.
The board exists to lead the organization. The leadership should come from the wisdom and guidance it provides rather than the commands it issues. The board chairperson selects the agenda in consultation with the administrative head of the organization (principal, executive director, etc.). If the agenda is filled with non-mission related items, petty issues, and budget issues, where is the opportunity for the wisdom and guidance to emerge?
The chairperson should manage the board. Otherwise, the professional leader (principal, executive director, etc.) must manage the board. When the professional leader is managing the board, it creates problems. The professional has less time for the operational oversight. The board engages in more operational oversight and less planning and visioning. It is hard for the board to objectively evaluate the performance of the professional leader and team. With the professional acting as the board leader, it is awkward to do the annual performance review. The board discussions are often less strategic and more operational than is optimal. There is a risk the board will become a rubber stamp rather than a deliberative body. Is it fair to give one more job to the professional?
When the chairperson is managing the board, the board is usually more effective. There is usually a greater emphasis on planning, board structure, membership development, accountability, transparency, and mission.
Of course, all of the preceding depends on the person who is the chairperson. Without an intentional recruiting process based upon the specific needs of the organization at this moment in its evolution, success is more luck than design. When things are going well it is easy to believe one can be less selective.
Are things going well at the moment? Perhaps internally things are okay. Externally, this is a difficult time for our communities. Is the chairperson guiding discussions to ensure that the external problems have minimal affect on the mission and internal performance? What is the chairperson doing to monitor the health of the organization? Does the chairperson know that monitoring health at a time like this is more about predicting trends than looking at past results?
If the organization is under stress is the chairperson right for the job? We often see organizations under stress with a good firefighter as the chairperson. Firefighters are good at putting out fires. They are seldom called upon to keep the neighborhood from declining, preventing new fires, or helping to rebuild a neighborhood.
In times of stress, it is best to have a community organizer or turnaround specialist as the chairperson. Community organizers are good at gathering support, motivating people, and changing the status quo. Turnaround specialists have a broad knowledge, know how to plug leaks and trim excesses as well as set new direction. Both are high-energy individuals with a very strong goal orientation. Both are hard to find but worth the search when the need arises. Do you know which you need? Both need to be replaced as soon as the turnaround has self-sustaining momentum.
Next Step:
Determine where the organization is in its life cycle, what its immediate leadership needs are, and what its long-term goals are
Create formal selection criteria for the chairperson
Intentionally recruit to match the criteria and be prepared to invest in the chairperson (training, education, mentoring, etc.) to ensure his or her success
Create a successor plan, the chairperson is too important to leave the successor to chance
There should be two successors waiting. One who will be a great leader if things continue to go well. The other will be a great leader if the organization is under stress when the opening occurs. The depth of skills in the potential successors will add perspective to the board deliberations and increase the quality of the decision-making.
The chairperson is a very special individual and should be carefully selected based upon the immediate and long-term needs of the organization as well as where the organization is in its life-cycle. The right chairperson is able to foster growth regardless of the internal or external conditions because he or she was carefully chosen. The converse is also true. If growth is elusive, it may be appropriate to ask if the right person is the chairperson. If you believe that you have the right chairperson but still find growth elusive, it is time to bring in outside help.
Monday, September 6, 2010
Business Networking For SME's
Business networking is something that has been around for donkey's years and can be the most effective way of doing business as it works on the premise that people buy off people. This fact has gotten diluted to some degree in the context of a global boom. In the market conditions that we found ourselves over the last 10 years or so businesses have been growing every year as a result of a global boom, this meant that instead of having to fight for most of our business, revenues grew simply because there was more employment and people had more money in their pockets. As a business was growing so to were internal budgets which in turn meant more money being spent which also resulted in further growth. Unfortunately all this has changed; the global market is going through one of the worst recessions since the 1930s. What does this mean? First of all what it means is the way we have been doing business over the last 10 years has to change, every business will have to restructure to cope with a recession and then reorganize so that they survive in a more competitive environment. It is often said that survival is the new success.
Business networking is one of the key ways of how a business can operate differently in an ever changing environment. In lots of ways it just means going back to the old way of doing business, whereby we meet as many people as we can in order to raise our profile and to educate people on what we do. Word-of-mouth is by far the most powerful method of marketing and business networking is by far the best way to use the power of "word-of-mouth" marketing. There are lots of organizations out there to help you improve the way that you network because it takes work, it takes preparation and also helps if you do something for somebody without asking for anything in return. There are lots of organizations out there like BNI, 4N, BRX and Venture that will help you improve your networking abilities so that you can get more business.
As a result of the recession business networking groups has grown substantially as SME's try to find new ways to do business in order to survive. The more people you meet more chance you have of doing business because in the current environment we all have to fight harder for less business. However once you know that and accept that you already have a better chance of surviving than most, business networking is a very effective way to get introduced to more people. One famous car sales man was asked how he was so successful and one of the things he said was that if you give me 1000 business cards I will be asking for more business cards in two months time, however if you give some of my colleagues 1000 business cards they will have 500 left at the end of the year. We are all good sales guys, it's just that I meet more people and therefore I have a better chance of doing business.
Business networking is one of the key ways of how a business can operate differently in an ever changing environment. In lots of ways it just means going back to the old way of doing business, whereby we meet as many people as we can in order to raise our profile and to educate people on what we do. Word-of-mouth is by far the most powerful method of marketing and business networking is by far the best way to use the power of "word-of-mouth" marketing. There are lots of organizations out there to help you improve the way that you network because it takes work, it takes preparation and also helps if you do something for somebody without asking for anything in return. There are lots of organizations out there like BNI, 4N, BRX and Venture that will help you improve your networking abilities so that you can get more business.
As a result of the recession business networking groups has grown substantially as SME's try to find new ways to do business in order to survive. The more people you meet more chance you have of doing business because in the current environment we all have to fight harder for less business. However once you know that and accept that you already have a better chance of surviving than most, business networking is a very effective way to get introduced to more people. One famous car sales man was asked how he was so successful and one of the things he said was that if you give me 1000 business cards I will be asking for more business cards in two months time, however if you give some of my colleagues 1000 business cards they will have 500 left at the end of the year. We are all good sales guys, it's just that I meet more people and therefore I have a better chance of doing business.
Thursday, September 2, 2010
IT Jobs and Roles of the Open Source Specialist, Business Process Engineer and Capacity Manager
IT jobs and opportunities for open source specialists have become very popular and these professionals are high in demand. These professionals can connect directly with developers and can provide stable and widely used software products which include Apache and various others. IT jobs for these professionals are increasing as there provide services on open source technology which can enable anyone to develop the source code. IT jobs in this field includes processes that are highly reliable, secure and provide high performance applications. There in an increase in the demand for open sources and technologies in the market today. IT jobs for open source specialists are competitive compared to any other proprietary solution framework or development platforms and can provide solutions much better than the expectations of the client.
Professionals who seek IT jobs as business process engineers can provide business savvy technologists who can provide various ideas which can be mixed. These engineers can redesign and analyze work flow within and between various organizations. IT jobs can also involve these engineers combining various technical systems with business processes which can help IT professionals to get and keep key positions.
Capacity managers are very high in demand and can choose various IT jobs related to optimization of the servers performance and availability. Capacity manager can also seek IT jobs associated with identifying the existing and future bottlenecks and provide solutions for improvement. The capacity manager possesses the skills to reduce the downtime costs and can build in various intelligent features which can help to optimize servers, utilization and performance and also maximizing the server investment. Capacity managers can also stay high in demand when it comes to optimizing resources and accurately designing financial values to technology resources. Information technology is the strongest sector in the economy and professionals who make successful careers out of it can grow and achieve satisfaction. The professionals involved in this field possess skills in various sectors which can be used for development, networking, administration and in building secure databases and networks.
Professionals who seek IT jobs as business process engineers can provide business savvy technologists who can provide various ideas which can be mixed. These engineers can redesign and analyze work flow within and between various organizations. IT jobs can also involve these engineers combining various technical systems with business processes which can help IT professionals to get and keep key positions.
Capacity managers are very high in demand and can choose various IT jobs related to optimization of the servers performance and availability. Capacity manager can also seek IT jobs associated with identifying the existing and future bottlenecks and provide solutions for improvement. The capacity manager possesses the skills to reduce the downtime costs and can build in various intelligent features which can help to optimize servers, utilization and performance and also maximizing the server investment. Capacity managers can also stay high in demand when it comes to optimizing resources and accurately designing financial values to technology resources. Information technology is the strongest sector in the economy and professionals who make successful careers out of it can grow and achieve satisfaction. The professionals involved in this field possess skills in various sectors which can be used for development, networking, administration and in building secure databases and networks.
Wednesday, September 1, 2010
Business Debt Reduction - Key to Rebuild Profits and Surviving Downturn
Thousands of business entities are on the brink of financial disaster and recognize-it's no longer business as usual. Most don't realize that they can take measures, such as reducing debt to help save their businesses.
Enacting a plan to reduce business debt can save a business. Businesses that borrow unknowingly take on a demanding and parasitical partnership with creditors that often will dictate how a company operates and one that will siphon profits through interest payments. Using revolving credit for capital adds additional risks to operating your business and may not be the only alternative for starting or funding expansion. Any debt can be too much, if a business doesn't generate multiple times the principal and interest payments in added net profits attributable to the use of borrowed funds. So how much debt is reasonable for your business? The list below illustrates some acceptable levels of debt-to-capital for selected industries.
Industry Debt%
Publishing 34%
Home-building 37%
Advertising & Marketing 37%
Lodging & Gaming 56%
General Retailing 24%
Supermarkets Drugstores 33%
Commercial Transportation 18%
Packaged Foods 27%
Restaurants 23%
Health Care: Managed Care 20%
Movies & Home Entertainment 17%
Source: Standard & Poors
Credit and debt problems are evident. Solutions may seem less so. Most small businesses lack a basic understanding of alternatives and solutions including (business debt settlement) that can provide options to bankruptcy. Owners faced with excessive debt, tend to make cuts in operations just to maintain credit and seldom seek other alternatives to business closure or bankruptcy. These can include exercising alternatives such as Self-liquidations, Turnaround Specialists and even Assignment for the Benefit of Creditors (ABC's). A little know option called Business Debt Settlement can be highly effective as a debt reduction tool and can take a huge burden off the business owner, preserve cash flow and allow them to focus on running the business.
Business owners that find themselves in too much financial difficulty can and should begin to seek remedies to reduce non-fixed expenses such as bank debt, vendor and supplier debt and other related business debts to balance and restore profitability. If this is a challenge facing your business today, try to remember that whatever decision or course of action is taken, there is a price associated for everything including maintaining the status quo. Tough times, require tough action. Look for out-of-the box alternatives, which in today's economy can be the key to changing the situation for the better.
Enacting a plan to reduce business debt can save a business. Businesses that borrow unknowingly take on a demanding and parasitical partnership with creditors that often will dictate how a company operates and one that will siphon profits through interest payments. Using revolving credit for capital adds additional risks to operating your business and may not be the only alternative for starting or funding expansion. Any debt can be too much, if a business doesn't generate multiple times the principal and interest payments in added net profits attributable to the use of borrowed funds. So how much debt is reasonable for your business? The list below illustrates some acceptable levels of debt-to-capital for selected industries.
Industry Debt%
Publishing 34%
Home-building 37%
Advertising & Marketing 37%
Lodging & Gaming 56%
General Retailing 24%
Supermarkets Drugstores 33%
Commercial Transportation 18%
Packaged Foods 27%
Restaurants 23%
Health Care: Managed Care 20%
Movies & Home Entertainment 17%
Source: Standard & Poors
Credit and debt problems are evident. Solutions may seem less so. Most small businesses lack a basic understanding of alternatives and solutions including (business debt settlement) that can provide options to bankruptcy. Owners faced with excessive debt, tend to make cuts in operations just to maintain credit and seldom seek other alternatives to business closure or bankruptcy. These can include exercising alternatives such as Self-liquidations, Turnaround Specialists and even Assignment for the Benefit of Creditors (ABC's). A little know option called Business Debt Settlement can be highly effective as a debt reduction tool and can take a huge burden off the business owner, preserve cash flow and allow them to focus on running the business.
Business owners that find themselves in too much financial difficulty can and should begin to seek remedies to reduce non-fixed expenses such as bank debt, vendor and supplier debt and other related business debts to balance and restore profitability. If this is a challenge facing your business today, try to remember that whatever decision or course of action is taken, there is a price associated for everything including maintaining the status quo. Tough times, require tough action. Look for out-of-the box alternatives, which in today's economy can be the key to changing the situation for the better.
Monday, August 30, 2010
What is Corporate Restructuring?
Corporate restructuring is a term used to denote a company's reorganisation at the highest corporate level. This can also include legal status, ownership, operational, and financial restructuring to improve profitability and provide better organisation for the present and/or prepared for market changes. Often, preparation for the future is referred to as repositioning. Other reasons for restructuring include change of ownership or ownership structure, merger, acquisition, or divestiture.
Generally, however, corporate restructuring has come to mean reorganisation prompted by a period of unsatisfactory performance and declining profits caused by poor management, sudden market changes, or most recently world financial crisis. Debtors or equity holders (partners/shareholders) may force it. If under debt pressure (insolvency is a potential choice) restructuring usually then includes restructuring of debt as well as corporate reorganization.
Corporate restructuring is usually a long, drawn out process with probably the majority of the time involved with planning rather than actually implementing the restructuring decisions. Most importantly, restructuring a company is an often-difficult operation requiring a no nonsense approach and a willingness to face financial realities and prioritize difficult decisions.
Potential remedies include closure of facilities to reduce overhead, consolidation to eliminate duplicate administrative functions and personnel, divestment of under performing divisions, outsourcing costly services to reduce expenditures associated with in-house employees. Finally, one of management's most painful and difficult tasks, lay-offs are often essential for improving the profit picture.
In fact, in order to approach restructuring with dispassion a turnaround specialist is hired to help with restructuring or a new CEO to identify and make the difficult decisions required.
Alternatively, the first "outsourcing" decision is to bring in company experienced in restructuring as advisors and even decision makers. In any case, the fact is that the objectivity and a fresh point of view of an outsider are often essential. Companies specializing in restructuring offer skilled specialists able to evaluate the issues, both financial and operational, that adversely affect performance and formulate comprehensive plans and assist in there execution to address your businesses challenges.
When choosing a restructuring company look for experience and a wide range of capabilities with in-depth skills that integrate both financial and operational restructuring. The company should analyse and develop reorganization plans and alternative, provide interim management if necessary, and assess the insolvency process as restructuring option.
When all is said and done, restructuring is simply cutting costs, fixing what is broken, and strengthening what is not.
Generally, however, corporate restructuring has come to mean reorganisation prompted by a period of unsatisfactory performance and declining profits caused by poor management, sudden market changes, or most recently world financial crisis. Debtors or equity holders (partners/shareholders) may force it. If under debt pressure (insolvency is a potential choice) restructuring usually then includes restructuring of debt as well as corporate reorganization.
Corporate restructuring is usually a long, drawn out process with probably the majority of the time involved with planning rather than actually implementing the restructuring decisions. Most importantly, restructuring a company is an often-difficult operation requiring a no nonsense approach and a willingness to face financial realities and prioritize difficult decisions.
Potential remedies include closure of facilities to reduce overhead, consolidation to eliminate duplicate administrative functions and personnel, divestment of under performing divisions, outsourcing costly services to reduce expenditures associated with in-house employees. Finally, one of management's most painful and difficult tasks, lay-offs are often essential for improving the profit picture.
In fact, in order to approach restructuring with dispassion a turnaround specialist is hired to help with restructuring or a new CEO to identify and make the difficult decisions required.
Alternatively, the first "outsourcing" decision is to bring in company experienced in restructuring as advisors and even decision makers. In any case, the fact is that the objectivity and a fresh point of view of an outsider are often essential. Companies specializing in restructuring offer skilled specialists able to evaluate the issues, both financial and operational, that adversely affect performance and formulate comprehensive plans and assist in there execution to address your businesses challenges.
When choosing a restructuring company look for experience and a wide range of capabilities with in-depth skills that integrate both financial and operational restructuring. The company should analyse and develop reorganization plans and alternative, provide interim management if necessary, and assess the insolvency process as restructuring option.
When all is said and done, restructuring is simply cutting costs, fixing what is broken, and strengthening what is not.
Thursday, August 26, 2010
Managing Turnarounds in Times of Crisis - Phases and Actions to Accelerate the Recovery Process
There is plenty of trouble in today's economy, and few industries have been spared hardship. Turnaround opportunities abound for those who have the knowledge and fortitude to go through the process. The rewards can be plentiful and the failures catastrophic.
The process of turning around a troubled entity is complex and made more difficult by the multiple constituencies involved, all having different agendas. Lenders want their invested capital returned, preferably with interest. Creditors want to get paid for goods and services. Original investors want and hope for recovery of their capital, while distressed investors want to buy in at 20 cents on the dollar and then turn a profit, some by trading the credit and others by turning the business positive and then selling. Owners want to avoid guarantees and recoup some of their equity. Employees want to retain their jobs and benefits. Directors want to avoid risk and litigation. Other stakeholders want their interests protected. These varied desires often can be at odds with one another and hamper the turnaround effort.
Let's address the turnaround process as if all constituents favor proceeding through to the end, when a restructured entity emerges, although clearly other scenarios can be envisioned.
The High Cost of Mismanagement
Many causes contribute to business failure. According to a study conducted by the Association of Insolvency and Restructuring Advisors, only 9% of failures are due to influences beyond management's control and to sheer bad luck. The remaining 91% of failures are related to influences that management could control, and 52% are rooted in internally generated problems that management didn't control.
Businesses fail because of mismanagement. Sometimes it is denial, sometimes negligence, but it always results in loss. Mismanagement is most often seen in more than one of multiple areas:
* Autocratic management and overextension.
* Ineffective, non-existent communications.
* High turnover and neglect of human resources.
* Inefficient compensation and incentive programs.
* Company goals not achieved or understood.
* Deteriorating business and lack of new customers.
* Inadequate analysis of markets and strategies.
* Lack of timely, accurate financial information.
* History of failed expansion plans.
* Uncontrolled or mismanaged growth.
Will Rogers said, "If you find yourself in a hole, stop digging." It's good advice for directors and managers with responsibility for leading a company and very good advice for lenders and investors contemplating investing more capital into a troubled entity. This is an opportunity for distressed investors having the "dry powder" to invest at bargain rates, the stable of leaders to affect a turnaround, and the knowledge and chutzpah to take on these challenges.
The Role of Turnaround Specialists
To engineer a successful turnaround, a company needs someone with clear thinking to quickly assess opportunities, to determine what is wrong, to develop strategies that no one has tried before, and to implement plans to restructure the company. The problems are rarely what management indicates they are, but rather are usually two or three underlying, systemic ills that often can be fixed. You can't focus on the symptoms; you must find the real causes. Management has allowed these problems to exist and bring the company to its depressed state. Therefore, management is not equipped to manage the turnaround.
When these circumstances are present, turnaround specialists are often an excellent choice. They bring a new set of eyes trained in managing and advising in troubled situations. These experts are either practitioners or consultants. Turnaround practitioners take management and decision-making control as chief executive officer or chief restructuring officer. As an alternative, turnaround consultants can advise management, perhaps the same management that failed before.
Businesses fail
because of
mismanagement.
Sometimes it is denial,
sometimes negligence, but
it always results in loss.
The key to turnarounds is building enterprises in which future buyers want to invest. Investors and buyers look for businesses that:
* Create value and exhibit consistency from period to period.
* Have a high probability of future cash flows or have a history of performance and improvement or the promise of cash.
* Possess a market-oriented management team with a focus on producing revenue.
* Are able to sell and compete; to develop, produce, and distribute products; and to thrive and grow as indicated by a track record or demonstrated changes in the right direction.
* Exhibit a fair entry valuation and realistic return potential.
* Have exit options (a high return on investment, or ROI, realized at time of resale).
There is a process of recovery and investment in a turnaround. It is based on the fundamental premise that management is lacking when companies are in trouble. Turnaround specialists must conduct fact-finding to assess the situation and then prepare a plan to fix the problems. They must implement the planned courses of action by funding the process and building a team to carry it out, then monitor progress and make changes where necessary.
Stages in the Turnaround Process
The turnaround process has five stages:
* Management change.
* Situation analysis.
* Emergency action.
* Business restructuring.
* Return to normal.
Let's look at each stage individually to understand the objectives and what should be done by each function within the company. The timing is important to coordinate what's happening between functions. Stages can overlap, and some tasks may impact more than one stage.
The process is designed to first stabilize a situation, which is done by addressing management issues, assessing situation, and implementing emergency actions. The restructuring process begins with preparations during the emergency action phase. Positioning for growth starts with restructuring and grows when the normal stage is reached.
Management Change
It is very important to select a CEO who can successfully lead the turnaround. This individual must have a proven track record and the ability to assemble a management team that can implement the strategies to turn the company around. The best candidate most often comes from outside the company and brings a special set of skills to deal with crisis and change. His or her job will be to stabilize the situation, implement plans to transform the company, and then hire a replacement.
It is essential to eliminate obstructionists who may hamper the process. This move could require replacing some or all of top management, depending on the deal. It will undoubtedly also mean replacing some of the board members who did not keep a watchful eye.
Management must address issues related to the major stakeholder groups: executives, function managers, employees, lenders, vendors, customers, and others. To accomplish a turnaround, a company must make a concerted effort to change how it operates. Most turnaround companies have a lack-of-sales problem that necessitates a change to jump-start sales and drive revenue. There must be information that all can rely on for decision making. Production management must support and make what the market wants to purchase at competitive prices. Management must nurture the critical human capital resources that are left within the company, while at the same time holding them accountable for results.
Changing management is synonymous with changing the philosophy of how a company is run to achieve results. Communication with all stakeholders is paramount throughout all stages of the process. Set goals that achieve stakeholder objectives, then apply incentive-based management to motivate the proper results. Tie everyone to the same broad set of goals and emphasize how functions can complement the performance of related departments.
Situation Analysis
The objective at this stage is to determine the severity of the situation and whether it can be turned around. Questions to ask include:
* Is the business viable?
* Can it survive?
* Should it be saved?
* Are there sufficient cash resources to fuel the turnaround?
This analysis should culminate in a preliminary action plan stating what is wrong, how to fix it, and which key strategies can turn the entity in a positive direction. There should also be a cash flow forecast (at least 13 weeks) to understand cash usage.
Identify effective turnaround strategies. Operational strategies include increasing revenue, reducing costs, selling and redeploying assets, and establishing competitive repositioning. Strategic initiatives include adopting sound corporate and business strategies and tactics and setting specific goals and objectives that align with ultimate stakeholder goals. Too often, goals are misaligned with the ultimate direction and lead to confusion, wasted time, false starts, and employees sent in the wrong direction. Understand that many of the good employees have already left the company. Managements have to work with the "second string" in the interest of time and build as they go.
Understand the life cycle of the business and how it relates to the chosen turnaround strategy. Document key issues so that all parties will understand what you are trying to accomplish and will pull in the same direction. Identify which product and business segments are most profitable, particularly at the gross margin level, and eliminate weak performers and nonperformers. Make certain that all functional areas are working to support the goals of their counterparts. Selling work with flexible delivery times can fill valleys in production cycles, which reduces costs per unit. Producing only what sales staff can sell to meet customer demand will increase sales and gross margin.
Turnaround strategies often are affected by local government policy considerations and regulations. In the United States, the Worker Adjustment and Retraining Notification (WARN) Act requires 60-day notice of massive layoffs, which certainly impacts cash flow. In many countries in Europe and the Far East, stringent rules govern payment of wages after layoffs, as well as dealings with local authorities; some regulations even prioritize which workers can be laid off. When government policy favors labor and employment is not "at will," there will be complications.
Emergency Action
At this stage, the objective is to gain control of the situation, particularly the cash, and establish breakeven. Centralize the cash management function to ensure control. If you stop the cash bleed, you enable the entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition.
You must raise cash immediately. Review the balance sheet for internal sources of cash, such as collecting accounts receivable and renegotiating payments against accounts payable. Sell unprofitable business units, real estate, and unutilized assets. Secure asset-based loans if needed. Restructure debt to balance the amount of interest payments with the level the company can afford.
Lay off employees quickly and fairly. It is much better to cut deep all at once than to make small cuts repeatedly. Remaining employees are more likely to focus if they believe their jobs are secure.
Rightsizing the company means much more than laying off employees. Correct underpricing of products, prune product lines to only those that are profitable and meet demand, and weed out weak and problem customers. Sometimes too much overhead is applied to support customers that aren't paying their fair share of that service. Emphasize selling more product at profitable rates. Reward those who change the situation; sanction or release those who don't.
Business Restructuring
In this stage, the objective is to create profitability through remaining operations. Stress product-line pricing and profitability. Restructure the business for increased profitability and return on assets and investments. This is the point at which the focus should change from cash flow crisis to profitability. Fix the capital structure and renegotiate the long- and short-term debt.
Ensure reporting systems put in place are operationalized to show profitability at each revenue center, cost center, profit center, cash center, incentive center. If employees can't see it, they can't manage it.
Incentive-based management drives employees to get involved smartly and manage to the goals all ascribe to. Create teams of employees to identify and rework inefficiencies and promote profitability.
There are only two ways to increase sales: 1) sell existing product to new customers, and 2) sell new products to existing customers. If you want growth, do both.
Return to Normal
The goal at this final stage is to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.
This could be time to restructure long-term financing at more reasonable rates now that the company is stable and on a path to growth.
The odds of a successful turnaround increase dramatically if a turnaround phases-and-actions plan is implemented and followed. Create a plan that is specifically adapted to your unique situations, then turn it around.
The process of turning around a troubled entity is complex and made more difficult by the multiple constituencies involved, all having different agendas. Lenders want their invested capital returned, preferably with interest. Creditors want to get paid for goods and services. Original investors want and hope for recovery of their capital, while distressed investors want to buy in at 20 cents on the dollar and then turn a profit, some by trading the credit and others by turning the business positive and then selling. Owners want to avoid guarantees and recoup some of their equity. Employees want to retain their jobs and benefits. Directors want to avoid risk and litigation. Other stakeholders want their interests protected. These varied desires often can be at odds with one another and hamper the turnaround effort.
Let's address the turnaround process as if all constituents favor proceeding through to the end, when a restructured entity emerges, although clearly other scenarios can be envisioned.
The High Cost of Mismanagement
Many causes contribute to business failure. According to a study conducted by the Association of Insolvency and Restructuring Advisors, only 9% of failures are due to influences beyond management's control and to sheer bad luck. The remaining 91% of failures are related to influences that management could control, and 52% are rooted in internally generated problems that management didn't control.
Businesses fail because of mismanagement. Sometimes it is denial, sometimes negligence, but it always results in loss. Mismanagement is most often seen in more than one of multiple areas:
* Autocratic management and overextension.
* Ineffective, non-existent communications.
* High turnover and neglect of human resources.
* Inefficient compensation and incentive programs.
* Company goals not achieved or understood.
* Deteriorating business and lack of new customers.
* Inadequate analysis of markets and strategies.
* Lack of timely, accurate financial information.
* History of failed expansion plans.
* Uncontrolled or mismanaged growth.
Will Rogers said, "If you find yourself in a hole, stop digging." It's good advice for directors and managers with responsibility for leading a company and very good advice for lenders and investors contemplating investing more capital into a troubled entity. This is an opportunity for distressed investors having the "dry powder" to invest at bargain rates, the stable of leaders to affect a turnaround, and the knowledge and chutzpah to take on these challenges.
The Role of Turnaround Specialists
To engineer a successful turnaround, a company needs someone with clear thinking to quickly assess opportunities, to determine what is wrong, to develop strategies that no one has tried before, and to implement plans to restructure the company. The problems are rarely what management indicates they are, but rather are usually two or three underlying, systemic ills that often can be fixed. You can't focus on the symptoms; you must find the real causes. Management has allowed these problems to exist and bring the company to its depressed state. Therefore, management is not equipped to manage the turnaround.
When these circumstances are present, turnaround specialists are often an excellent choice. They bring a new set of eyes trained in managing and advising in troubled situations. These experts are either practitioners or consultants. Turnaround practitioners take management and decision-making control as chief executive officer or chief restructuring officer. As an alternative, turnaround consultants can advise management, perhaps the same management that failed before.
Businesses fail
because of
mismanagement.
Sometimes it is denial,
sometimes negligence, but
it always results in loss.
The key to turnarounds is building enterprises in which future buyers want to invest. Investors and buyers look for businesses that:
* Create value and exhibit consistency from period to period.
* Have a high probability of future cash flows or have a history of performance and improvement or the promise of cash.
* Possess a market-oriented management team with a focus on producing revenue.
* Are able to sell and compete; to develop, produce, and distribute products; and to thrive and grow as indicated by a track record or demonstrated changes in the right direction.
* Exhibit a fair entry valuation and realistic return potential.
* Have exit options (a high return on investment, or ROI, realized at time of resale).
There is a process of recovery and investment in a turnaround. It is based on the fundamental premise that management is lacking when companies are in trouble. Turnaround specialists must conduct fact-finding to assess the situation and then prepare a plan to fix the problems. They must implement the planned courses of action by funding the process and building a team to carry it out, then monitor progress and make changes where necessary.
Stages in the Turnaround Process
The turnaround process has five stages:
* Management change.
* Situation analysis.
* Emergency action.
* Business restructuring.
* Return to normal.
Let's look at each stage individually to understand the objectives and what should be done by each function within the company. The timing is important to coordinate what's happening between functions. Stages can overlap, and some tasks may impact more than one stage.
The process is designed to first stabilize a situation, which is done by addressing management issues, assessing situation, and implementing emergency actions. The restructuring process begins with preparations during the emergency action phase. Positioning for growth starts with restructuring and grows when the normal stage is reached.
Management Change
It is very important to select a CEO who can successfully lead the turnaround. This individual must have a proven track record and the ability to assemble a management team that can implement the strategies to turn the company around. The best candidate most often comes from outside the company and brings a special set of skills to deal with crisis and change. His or her job will be to stabilize the situation, implement plans to transform the company, and then hire a replacement.
It is essential to eliminate obstructionists who may hamper the process. This move could require replacing some or all of top management, depending on the deal. It will undoubtedly also mean replacing some of the board members who did not keep a watchful eye.
Management must address issues related to the major stakeholder groups: executives, function managers, employees, lenders, vendors, customers, and others. To accomplish a turnaround, a company must make a concerted effort to change how it operates. Most turnaround companies have a lack-of-sales problem that necessitates a change to jump-start sales and drive revenue. There must be information that all can rely on for decision making. Production management must support and make what the market wants to purchase at competitive prices. Management must nurture the critical human capital resources that are left within the company, while at the same time holding them accountable for results.
Changing management is synonymous with changing the philosophy of how a company is run to achieve results. Communication with all stakeholders is paramount throughout all stages of the process. Set goals that achieve stakeholder objectives, then apply incentive-based management to motivate the proper results. Tie everyone to the same broad set of goals and emphasize how functions can complement the performance of related departments.
Situation Analysis
The objective at this stage is to determine the severity of the situation and whether it can be turned around. Questions to ask include:
* Is the business viable?
* Can it survive?
* Should it be saved?
* Are there sufficient cash resources to fuel the turnaround?
This analysis should culminate in a preliminary action plan stating what is wrong, how to fix it, and which key strategies can turn the entity in a positive direction. There should also be a cash flow forecast (at least 13 weeks) to understand cash usage.
Identify effective turnaround strategies. Operational strategies include increasing revenue, reducing costs, selling and redeploying assets, and establishing competitive repositioning. Strategic initiatives include adopting sound corporate and business strategies and tactics and setting specific goals and objectives that align with ultimate stakeholder goals. Too often, goals are misaligned with the ultimate direction and lead to confusion, wasted time, false starts, and employees sent in the wrong direction. Understand that many of the good employees have already left the company. Managements have to work with the "second string" in the interest of time and build as they go.
Understand the life cycle of the business and how it relates to the chosen turnaround strategy. Document key issues so that all parties will understand what you are trying to accomplish and will pull in the same direction. Identify which product and business segments are most profitable, particularly at the gross margin level, and eliminate weak performers and nonperformers. Make certain that all functional areas are working to support the goals of their counterparts. Selling work with flexible delivery times can fill valleys in production cycles, which reduces costs per unit. Producing only what sales staff can sell to meet customer demand will increase sales and gross margin.
Turnaround strategies often are affected by local government policy considerations and regulations. In the United States, the Worker Adjustment and Retraining Notification (WARN) Act requires 60-day notice of massive layoffs, which certainly impacts cash flow. In many countries in Europe and the Far East, stringent rules govern payment of wages after layoffs, as well as dealings with local authorities; some regulations even prioritize which workers can be laid off. When government policy favors labor and employment is not "at will," there will be complications.
Emergency Action
At this stage, the objective is to gain control of the situation, particularly the cash, and establish breakeven. Centralize the cash management function to ensure control. If you stop the cash bleed, you enable the entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition.
You must raise cash immediately. Review the balance sheet for internal sources of cash, such as collecting accounts receivable and renegotiating payments against accounts payable. Sell unprofitable business units, real estate, and unutilized assets. Secure asset-based loans if needed. Restructure debt to balance the amount of interest payments with the level the company can afford.
Lay off employees quickly and fairly. It is much better to cut deep all at once than to make small cuts repeatedly. Remaining employees are more likely to focus if they believe their jobs are secure.
Rightsizing the company means much more than laying off employees. Correct underpricing of products, prune product lines to only those that are profitable and meet demand, and weed out weak and problem customers. Sometimes too much overhead is applied to support customers that aren't paying their fair share of that service. Emphasize selling more product at profitable rates. Reward those who change the situation; sanction or release those who don't.
Business Restructuring
In this stage, the objective is to create profitability through remaining operations. Stress product-line pricing and profitability. Restructure the business for increased profitability and return on assets and investments. This is the point at which the focus should change from cash flow crisis to profitability. Fix the capital structure and renegotiate the long- and short-term debt.
Ensure reporting systems put in place are operationalized to show profitability at each revenue center, cost center, profit center, cash center, incentive center. If employees can't see it, they can't manage it.
Incentive-based management drives employees to get involved smartly and manage to the goals all ascribe to. Create teams of employees to identify and rework inefficiencies and promote profitability.
There are only two ways to increase sales: 1) sell existing product to new customers, and 2) sell new products to existing customers. If you want growth, do both.
Return to Normal
The goal at this final stage is to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.
This could be time to restructure long-term financing at more reasonable rates now that the company is stable and on a path to growth.
The odds of a successful turnaround increase dramatically if a turnaround phases-and-actions plan is implemented and followed. Create a plan that is specifically adapted to your unique situations, then turn it around.
Wednesday, August 25, 2010
Effective Project Management During a Business Turnaround
During a business turnaround, you will almost always identify commercial debt reduction as an action item when you implement the turnaround plan. It is a good idea to start the debt reduction program and accomplish this action item in parallel with the other items, let us take it a step further and apply some formal project management techniques. In doing so, we will go a long way to ensuring that the implementation period of the turnaround ends in a timely fashion (usually it does take 60 days or less).
If you have access to project management software, you can input all of the action items and it will create a project management schedule that you can use to execute all of the action items and thus implement the turnaround plan. I recommend that you purchase software to assist you with organizing your turnaround into a project plan.
Creating a project plan is a straightforward exercise for project managers, and many project management templates are available on the open market. If you have hired turnaround specialists, they should be familiar with this process and able to transform your list of action items into a formal project plan.
If you are not familiar with this process, you can obtain software or hire someone to assist you. Most businesses will have formal procedures for project management, and if this is the case with your business, you can utilize those resources. You can also hire a project manager as a consultant to manage this process, but in effect, this is what your turnaround expert-if you have one-is hired to do.
Once all of the action items in the turnaround plan have been turned into a formal project, the project timeline will show each task, which person is responsible, when it will be finished, and what the prerequisites or co-requisites are to complete the task.
Tuesday, August 24, 2010
The Turnaround Specialist's Black Bag
The ability to keep an organization running smoothly requires talent. But the ability to reverse the fortunes of a flagging institution or department calls for a highly specialized mix of skills. Those who possess them belong to an elite fraternity. If you think you have what it takes to join, here is a list of what your "black bag" will need to contain:
X-ray glasses - The turnaround specialist must have Superman-like vision. You have to be a quick study of both people and circumstances. There is rarely a single cause when an organization reaches "turnaround" status. Wherever you have chaos, you have people who are benefiting from it. So in addition to the obvious challenges, you must be able to identify and then strategically neutralize those within the organization who need you to fail.
Carrots - Even the most talented turnaround specialist can't operate alone indefinitely. You will need allies. The most effective way to win them over is to appeal to the interests of those you seek to recruit. Far from manipulation, this tactic simply acknowledges the truth of the old saying -"you attract more flies with honey than with vinegar." Successful turnaround artists offer inducements that demonstrate how proposed changes will benefit those they seek to enlist or whose support they will need. Even the most noble and worthwhile of crusades require loyal and committed soldiers.
Fire hose - Organizations or departments requiring the touch of a turnaround specialist are usually combating at least one crisis if not several. Putting out these "fires" quickly and efficiently is not only a matter of basic security. They represent quick wins that demonstrate competence and expertise - two qualities that build credibility, which is a currency that you will use early and often.
Whip - When inducements and heroic deeds don't work, you may have to get rough. Sometimes it's a necessary component of establishing the parameters of a new working environment. Organizations that are spiraling out of control are often staffed by individuals who are no longer being held accountable for delivering on expectations. When this is the case, it represents the first and most crucial task that a turnaround specialist will need to address and you will need to do so in swift and unambiguous terms.
Baby Rattle - It only takes one agitated toddler to turn play time into a pint-sized mob scene. To keep tiffs from turning into tantrums, concerns should be addressed expediently but tactfully. It can also be helpful to preserve some familiar (but compatible) elements from the current culture to ease the transition from old to new. These gestures can be used as tactics to soothe and refocus nervous energy until employees feel comfortable with a new way of working.
Megaphone - When change starts to yield positive results, publicize it clearly, widely and loudly. Success breeds success and reassures those who have supported change with caution or who have remained firmly planted on the fence, that the new leader has the group headed in the right direction.
Pompoms - Of the turnaround specialist's many jobs and responsibilities, one of the most important is to be the organization's biggest cheerleader. Because turnarounds can be painful, it is imperative to find ways to also make them fun whenever possible. As the pressure begins to lift there will invariably be something to celebrate. Even if it's a small triumph, celebrate it as a signal of more good things to come.
With black bag firmly in hand, this daring crusader will dive head first into turbulent waters, expected to fix with lightening speed what it took someone else twice as long to break. And he or she must do it all under intense scrutiny. But before you go running off to enroll in the nearest Turnaround Specialist certification course, let me add this. Should you actually navigate these landmines successfully, my last piece of advice would be to take lots of pictures and then pack the photos with your luggage because you probably won't be around long enough to enjoy the fruits of your labor. Turnaround situations require the brash risk-taking character of a person who is willing to blow up the entire structure and start from scratch if that's what the job requires. Unfortunately, that means that sometimes these architects get hit with their own shrapnel. By the time the beauty of their creation has matured enough to be fully appreciated, they will either have bled out or the "bat signal" will be illuminated elsewhere and they will be called away to their next mission.
So why bother you ask? Some do it for the thrill, others for the bragging rights. There is a certain cachet in being able to succeed where others have failed. But the overriding motivation comes from the knowledge that you'll leave a place a little better than you found it. At the risk of sounding disingenuous, it's not all about altruism. Turnaround specialists have industrial strength egos. But in the end, the satisfaction has to come from the work itself because you won't always get to benefit from your results. Successful turnarounds become monuments to themselves and when done right, that's benefit enough.
Monday, August 23, 2010
How to Work With Turnaround Professionals - How They Operate and How to Find Financing
The turnaround specialist offers a new set of eyes, skills and understanding of troubled situations to independently evaluate a 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:
* Is the business viable?
* Is there a core business?
* Are there sufficient sources of cash to fuel a recovery?
* Is existing management capable of leading company?
The specialist should discuss those questions openly with his client, and if it is determined 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 possible courses of action. Depending upon the engagement and who his client is, the specialist will seek client input 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 specialist should be involved to put the plan in place whether as interim manager or as a consultant to management. This is the time a specialist begins to build a team both inside the company and from outside resources.
Monitor the business plan. The specialist should keep vigil over the plan, analyzing variances to determine their causes and the validity of the underlying assumptions.
Stabilization and transition. Assuming liquidation is not a cornerstone of the business plan, a specialist should remain involved in an engagement until stabilization is achieved and to assist a business in 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 specialist's first goal is to stabilize cash flow and stop the hemorrhage. The specialist 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 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 specialist has been engaged and a business plan designed, the specialist plays many roles. Since many troubled businesses often lose much of their credibility with lenders, trade suppliers, employees, customers, shareholders, and 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 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.
Business Ownership's Resistance to Turnaround Specialists
Given difficult questions that a troubled business must face, there is often 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 employees, long-time suppliers or 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 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 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 does not know the client's particular business or industry. The skill the 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 turnaround specialist has a private agenda. The specialist is ultimately interested in purchasing the business, is using the business as a springboard into other ventures, or is there to maximize 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, techniques. If the company has proprietary property, it should legally protect itself. Otherwise, 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.
Remember to Be Cautious
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.
Engagement Agreements
Always insist upon a written engagement agreement to outline the terms of the engagement. Provisions that should at least be considered include:
* The purpose of the engagement.
* General responsibilities of the turnaround team, the company's management and staff.
* Time the specialist will devote to company. (What other commitments must specialist deal with simultanously?)
* Specialist's staff.
* Company staff.
* Specialist's core of professional support for the business (attorneys, accounting firms, etc.).
* Terms of any equity opportunities for the specialist (The entire question of the turnaround specialist and equity is one of the more troublesome in this growing profession. It is critical that all parties understand the rules up front. For example: discuss equity kickers, the specialist as an equity participant, finder's fees, etc.).
* Term of the engagement (Define the time period of the engagement).
* Fee arrangement, terms of performance bonuses, payment schedule.
* Project "deliverables" (What the specialist is expected to deliver, even if it is only a best effort. A schedule of anticipated benchmarks where both parties may measure progress and satisfaction with the other.)
* Fee for acting as a broker in selling the business.
* Regular reporting mechanism (to assure communication between the parties.)
* Specialist's follow-up responsibilities after the engagement is concluded.
* Termination provisions (includes notification periods, for both parties.)
Turnaround Financing For Financially Distressed Companies
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 cash position during crisis, provide necessary capital base to allow the company to return to profitability, and restructure the balance sheet so 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 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 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 have networks to assist their clients to find the funds necessary to fuel the recovery.
A Final Word of Advice...
Do Not Expect Miracles Overnight.
The turnaround can take years of hard work to achieve, the turnaround specialist can only be a catalyst to change. Owners must make hard decisions enabling the process to take place.
Ultimately, success 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.
Friday, August 20, 2010
How to Work With Turnaround Professionals - Is a Specialist Needed and How to Hire One
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 a turnaround specialist brings his art to the process.
The identity of the client must be clear. The client's identity 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.
Is A Turnaround Specialist Needed?
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:
* Autocratic management resulting in overextended management, unclear lines of authority.
* Ineffective communications, unnecessary meetings, etc.
* Neglect of human resources evidenced by excessive turnover rates.
* Inefficient compensation and incentive programs.
* Company goals that are not understood or achieved.
* Deteriorating business from established clients, indicating strategies are outdated.
* Inadequate analysis of markets and strategies.
* Lack of timely and accurate financial information.
* History of failed expansion plans.
* Uncontrolled or mismanaged growth.
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:
* General economy
* Unfavorable legislation
* Interest rate fluctuations
* Labor unrest
* Labor cost increases
* Competition
* Litigation
* Market decline
* Raw material cost increases
WARNING SIGNS: How Do You Diagnose Trouble?
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 operational performance include:
* Decrease in profit
* Lack of short- and long-term planning and forecasting
* Quality control problems - returned goods, complaints
* Late or slow delivery
* Increase in fixed costs relative to revenues
* Management and employee turnover
* General employee dissatisfaction and performance
* Employee layoffs
* Declining revenues per employee
* Trade credit difficulties and restrictions
* Failure to take purchase and other cash discounts
* Delay returning telephone calls
* Delay submitting financial to banks, lenders, suppliers
* Board of Directors resignations
* Auditor resignations or turnover
* Failure of board of directors to diligently exercise its oversight function
* Return "retired" founder to visible management position
* Failure to adapt to new technologies
Signs relating to a company's financial performance include:
* Decrease in profit
* Decrease in sales
* Continued failure to meet bank loan covenants
* Decrease in available cash
Signs associated with poor asset utilization include:
* Worsening cash position - reduced working capital
* Decrease in quick asset ratio
* Increase in the debt to equity ratio
* Dwindling capital base
* Declining asset turnover rate
* Declining accounts receivable turnover rate
* Deteriorating account receivable aging
* Declining inventory turnover rate
* Deteriorating account payable aging
* Creeping loan balances
* Reduced R&D expenditures
* Changing accounting principles
* Financing purchase of fixed assets with working capital
* Overpaying for assets or business units
* Acquisitions of or expansion into non-core businesses or which cut into or compete with the core business
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.
Several Formulas Exist to Predict Failure.
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.
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 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.
Companies Susceptible to Trouble
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.
Hiring A Turnaround Specialist
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:
* Can a turnaround be realistically achieved?
* Is management aware that a true turnaround can take years to accomplish?
* Have business issues been isolated from personal issues? Or, is the primary goal of hiring the specialist to protect the owner from personal guarantees and preserve personally owned assets?
* What can be reasonable and realistically expected from the turnaround specialist?
* Is management willing to admit the business' problems are, in all likelihood, the result of mismanagement?
* Is management willing to become, if necessary, the student rather than the teacher or the follower rather than the leader?
* If asked to give up the controls of the business, is management willing to do so?
* Is management willing to face its own shortcomings and to face facts that may reflect on its ability?
* Since the turnaround specialist is often a temporary fix, is management willing to change?
* Can management learn to function in a highly controlled environment, subject to being monitored by outsiders?
* Is management willing to accept business' failure since some are simply unavoidable and not savable?
* Is management willing to agree to a turnaround specialist's engagement if the only realistic expectation is to maximize liquidation value even if the ultimate result is the failure of the business?
* Is management willing to sell control and become both a minority shareholder and an employee of a new board of directors if necessary to attract the capital to preserve the company?
* Is management, in the case of smaller businesses particularly, willing to face stigma of bankruptcy?
How To Select a Turnaround Specialist
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.
Interviews and Background Checks
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.
Time Commitment of the Turnaround Team
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.
Select an Individual
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.
Credibility
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.
Obtain a Written Proposal
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.
Regular Written Reports
Ask for regular written reports from the 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.
Involvement in Company's Operations
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.
Confidentiality and Accessibility
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.
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