5 things I know about: Turning around troubled companies

Ted Gavin, CTP Managing Director and Founding Partner Gavin/Solmonese LLP

Corporate distress comes in many forms, and it is no longer a stigma — it happens to the best of them.

“Wait and see” is not a business plan

Management or owners of a troubled company often try and wait out the storm. There are plenty of perceived risks — losing control, being blamed, not wanting the stigma of corporate failure attached to their names. In reality, those things don’t matter. Plenty have come back stronger from the experience and, more importantly, the earlier management acts, the better the likelihood of success is.

There are four requirements for a successful turnaround

For a company to be turned around and saved, it needs 1) a viable core business or businesses; 2) adequate organizational resources and skills to ensure the talent to operate the company during the process; 3) access to enough cash to accommodate ongoing losses and operate the business during the turnaround process,
4) a competent turnaround manager.

EBITDA is a great big lie (in the context of corporate distress)

EBITDA (earnings before interest, taxes, depreciation and amortization) is great and all, but you can’t spend depreciation and amortization because they’re not cash, and the company’s going to have to pay interest (or the bank will default the loan) and taxes (or else … ). The only thing that matters to a distressed company is cash — if you have enough of it, any company can run forever while losing money. If you don’t have enough of it, then no company can survive.

Distress is almost always something that could have been prevented

Companies fail for lots of reasons — but in only about 15 percent of all instances do they fail for reasons that could not have been addressed by management (such as regulatory change, acts of God, etc. …). That means that most corporate distress occurs over time and while management was watching.

Turnarounds are a difficult process, but the alternative is worse

Suppose you have a cash crisis and you know you are at risk of missing your next payroll and necessary payments unless a reduction in force is done. Do you make only the cuts you think you need to, lay off as many as you can spare, or try to find the middle? This is a tough reality to face — and making the wrong decision could mean that everyone loses their job and value is eradicated. There is a correct answer. And sometimes decisions that save jobs and preserve value don’t make turnaround professionals very popular.

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