How to make a success of a business turnaround
Posted: Tue 28th Jul 2020
Tyrone Courtman, partner in RSM Restructuring Advisory LLP based in the East Midlands, reflects on the key principles behind a successful business turnaround.
It's natural to avoid talking about problems you're having in your business, and that applies just as much to when your business is on track as much as it does when things are going badly.
We all hear about the failures, but no one mentions the businesses that experienced difficulties, and recovered because of skilful management and sound advice at a critical time.
In more normal times, many of the businesses requiring expert restructuring support are underperforming or have become so because of an inability to react to changes in the markets in which they operate whether technological, regulatory, increased competition or social and economic. In other cases, an event outside of their control has had a major impact on their prospects: the loss of a major customer, or a big contract or a supplier failing. Or as is the case now, the unforeseen 'left of field' event such as the COVID-19 pandemic and lockdown!
Businesses may be in difficulty without a cash flow problem, but a cash crisis means there are major issues which often need to be addressed rapidly.
In the current environment, there will be many, hitherto successful businesses, who find, because of the COVID-19 pandemic, that the unthinkable has or is happening. Those challenges may bring into question the businesses very survival and increase the need for the management to seek expert turnaround/restructuring support.
More typically underperforming businesses have poor returns, but underutilisation of assets and ineffective management are also common to stagnating businesses. But many during this pandemic will experience significant reductions in income generation/revenue…far faster than management can hope to rescale and then what?
What is certain is that if these issues are not addressed a crisis will ensue, and then it may be too late or the business may not be able to afford to do anything about it. It never ceases to amaze me how reluctant directors and business owners are at making difficult decisions and in seeking professional help. Whilst unpalatable, they sometimes just need to act, often needing to act quickly if a disaster is to be avoided.
Our business turnaround objective is to create a sustainable recovery, not just a short-term solution to short term problems. Returning a business to good health does not mean helping it to limp along for 12 months before collapsing. Business managers must recognise that change is required to get the business back on track. An open-minded approach and frank talking are vital ingredients of a successful turnaround.
There is no single blueprint for a successful turnaround. Initial actions will need to be swift and directed at stabilising the development of any crisis, making sure things get no worse. Typically, it involves strong cash flow management, asset realisations or a reduction in costs and the development of a short-term business plan. It is often necessary to secure additional finance to tide the business over until the turnaround can take effect.
The management will likely support to effect the necessary changes and the experience of a 'Company Doctor' who has helped another business get itself back on track can be vital. Over the years we have worked with many individuals who have done it before, so we are able to readily identify individuals who are appropriate to crisis situations. Moreover, we ourselves have considerable situational expertise and can utilise our lifetime of business experience in leading the turnaround from the front. Experienced leadership is critical to the success of most turnarounds.
Inevitably the short-term business plan will need to be supplemented with a longer-term strategy, and that's where a new perspective on the business is key. Management's role is vital, making key decisions and defining the future direction of the business, but a fresh perspective and understanding of what actions are required can make a real difference to the turnaround. Acting as a catalyst for change is equally important.
In the current unprecedented economic environment, post lockdown, assessing the future landscape for your business and revisiting your business vision and strategy are essential in ensuring that your business is going to be fit for purpose. That may involve a comprehensive reassessment of both the businesses and your personal objectives against the backdrop of the new normal. Whatever new normal is likely to mean. Importantly against such uncertain times, its critical for the business to develop and to financially model several recovery strategies so that management have an idea of what the implications are for any contingency plan that might need to be affected at short notice.
In doing so, management will secure a more complete appreciation of the drivers in their business and of the KPIs that need to be achieved to help them determine the most appropriate way forward. They also need to understand what insolvency is and what additional responsibilities and risks they may unwittingly attract, so that they can either be avoided or entered with their eyes wide open to the likely risks and consequences.
They also need to understand when to stop and what the implications of doing so will mean for the business, its creditors and shareholders and for them personally.
Working in partnership with management and the businesses stakeholders is what makes the difference. Communicating regularly and frankly, keeping an open mind and being prepared to consider all possible solutions will ensure that the endeavour is successful - the success that no one ever hears about!