• Business Turnaround, it is time to take action

Business Turnaround, it is time to take action

Caribbean Business

The sustained periods of economic downturn and financial distress facing Puerto Rico and its economy, have created a climate in which no business can take stability for granted. There continues to be an increase in the number of organizations facing financial distress. Those organizations generally have viable businesses and have been around for some time.

As once-stable, profitable, and competitive organizations struggle to maintain operational and financial performance, the need for engaging in revitalization “or turnaround” initiatives is becoming more evident and in many instances, critical.

Ojel Rodriguez, a partner and head of advisory at Kevane Grant Thornton who works with organizations in turnaround, reorganization and recovery stages, states “organization leaders who encounter corporate distress often go through the same emotional stages as a terminally ill person: denial, anger, bargaining, depression, and finally acceptance. The last stage is when most organization leaders voluntarily seek turnaround initiatives.”

Signs of trouble in your business

Recognizing and acknowledging the signs of trouble and taking action in earlier stages give a much better chance for a successful recovery and turnaround effort. Many businesses in distress display more than one of these external and internal signs of trouble:

• Customer needs have changed and the business has not addressed this
• Investments in unprofitable facilities and/or products have not been dealt with
• Lack of timely, accurate financial information
• Not prepared for the economic downturn
• Not responded effectively to its competitors
• Operating without a business plan
• Over diversification
• Poor lender relationships

Family run businesses deal with a set of challenges that are similar to those facing other businesses; however they tend not to take action early enough to avoid a crisis, and they also have to deal with intergenerational transfer issues.

Stages of a Turnaround

A turnaround process has five stages:

• Management change
• Situation analysis
• Emergency action
• Business restructuring
• Return to normal

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.

Stage one: management change

Management change can begin only when organization leaders have decided and commit that changes are necessary. “To accomplish a turnaround, an organization must make a concerted effort to change how it operates”, states Mr. Rodriguez.

During this stage or after Stage two — situation analysis—steps need to be taken to weed out or replace any top managers who might impede the turnaround effort.

Stage two: situation analysis

Before making any major changes, it is necessary to determine the chances of the business’s survival, identify appropriate strategies, and develop a preliminary action plan.

This means that an initial fact-finding and diagnostic is necessary about the scope and severity of the organization’s ills. Is it in imminent danger of failure? Does it have substantial losses but its survival is not yet threatened? Or is it merely in a declining business position? A more detailed assessment of strengths and weaknesses is necessary in the areas of competitive position, engineering and R&D, finances, marketing, operations, organizational structure, and personnel.

In the meantime, it is often necessary to deal with various constituencies and vested interest groups. The first and often most vocal of the groups are angry creditors who may have been kept in the dark about the organization’s financial status. Employees are confused and frightened, and spend more time worrying about their own job security than fixing the business. Customers, vendors, and suppliers are wary about the future of the organization. “It is recommended to be open and frank with all these audiences” says Mr. Rodriguez.

Once the major problems are identified, a strategic plan with specific goals and detailed functional actions is prepared. The plan needs acceptance by all key parties in the organization, including the board of directors, the management team, and employees. Presenting the plan to key parties outside the organization—bankers, major creditors, and vendors—should restore confidence that the business can work through its difficulties.

Stage three: implementing an emergency action plan

Mr. Rodriguez explains, “When the condition of the organization is critical, the plan is simple but drastic. Emergency surgery is performed to stop the bleeding and enable the organization to survive, as such, at this time emotions run high. Cash is the lifeblood of the business. A positive operating cash flow must be established as quickly as possible. In addition, a sufficient amount of cash to implement the turnaround strategies must be sourced.”

The plan typically includes financial, marketing, and operational actions to restructure outstanding debt obligations, improve working capital management, reduce operating costs, improve budgeting practices, correct product line and customer mix pricing, prune product lines, and accelerate high-potential products.

The status quo is challenged, and those who change as a result of the turnaround plan should be rewarded while those who don’t are sanctioned. In a typical turnaround, the new organization emerges from the operating table as a smaller organization that no longer is losing cash.

Stage four: restructuring the business

Once the bleeding has stopped, losing divisions have been sold, and administrative costs have been cut, turnaround efforts are directed toward making the remaining business operations effective and efficient. The organization must be restructured to increase profitability and its return on assets and equity.

“In many ways, this stage is the most difficult of all. Eliminating losses is one thing, but achieving an acceptable return on the organization’s investment capital is quite another”, states Mr. Rodriguez.

The financial state of the organization’s core business is particularly important. If the core business is irreparably damaged, the outlook is bleak. If the remaining organization is capable of long-term survival, it must now concentrate on sustained profitability and the smooth operation of existing facilities.

During the turnaround, the product mix may have changed, requiring the organization to do some repositioning. Core products neglected over time require immediate attention to remain competitive. In the new and leaner organization, some facilities might be closed; the organization may even withdraw from certain markets or target its products toward a different niche or market segment.

Stage five: return to normal

In the final step of a turnaround, an organization slowly returns to profitability. While earlier steps concentrated on correcting problems, the final stage focuses on institutionalizing an emphasis on profitability and return on equity, and enhancing economic value-added.

For example, the organization may initiate new marketing programs to broaden the business and customer base and increase market penetration. It may increase revenue by carefully adding new products and improving customer service. Strategic alliances with other world-class organizations may be explored. Financially, the emphasis shifts from cash flow concerns to maintaining a strong balance sheet, securing long-term financing, and implementing strategic accounting and control systems.

“This final step cannot be successful without a psychological shift as well. Rebuilding momentum and morale is almost as important as rebuilding return on investment. It means a rebirth of the corporate culture and transforming negative attitudes to positive, confident ones as the organization maps out its future” states Mr. Rodríguez.

Of course, not all turnarounds succeed in the manner outlined here. An organization may put a quick end to its disastrous losses but never quite attain an acceptable return on investment position.

Role and benefits of turnaround specialists

Turnaround specialists have no political agenda or other obligations to bias the decision-making process, allowing them to take sometimes unpopular, yet necessary, steps required for an organization’s survival.

“Like an emergency room doctor, a turnaround professional must make critical decisions quickly to staunch the financial bleeding and give a patient the best chance for recovery” says Mr. Rodriguez, who assists organizations in need of turnaround, recovery and reorganization. Operating in the eye of the storm, a turnaround specialist must deal equitably with angry creditors, frightened employees, wary customers, and a nervous board of directors. Clearly this is no assignment for the faint-hearted.

For a troubled organization, no decision may be more crucial than hiring a turnaround manager. Yet, with all the pressures and distractions building within a troubled organization, this decision must be made at the worst possible and most stressful time.

Time, indeed, is often of the essence.

Ojel Rodriguez, CPA/ABV, CVA, CISA, CIA, CFE

Advisory Partner

T (787) 754-1915 ext. 104