A restructuring, is it time? Tick, tick, tick, the clock is ticking. In less than a week payroll is due. The company does not have enough cash to pay the 200 employees and you are not even thinking about how to pay the suppliers. The credit line is fully drawn and you have no more collateral to give. What do you do? How much time does the company have? These are the type of issues the company is facing. Is it time for a business restructuring?
If you cannot meet payroll, staff will leave, the state will be notified that the employees have not been paid, and this will be only the beginning of the company’s problems. You know that if the company does not meet payroll, the game, known as the business, is over. And this is the only the start of the problem. For a privately owned business, personally guaranteed company obligations will default, and the personal assets of the owners will be seized.
This is not so much of an extreme case. This scenario often happens. So thinking about the company from the perspective of how to avoid or change the situation is critical. A business restructuring may be needed and now!
Business difficulties can happen quickly and for many reasons. Businesses may suffer from lost market expectations, reduced operating earnings, or severe cash flow troubles. Whether triggered by marketplace forces or internal dynamics, an early assessment and quick decisive moves will be needed to reinvigorate earnings and company value (PriceWaterhouseCoopers LLP, 2012). This is when you know that a business restructuring must commence.
Stakeholders Want Answers
Collectively, employees, vendors, bankers, and other creditors (the stakeholders), will be assessing answers from the rubble of the company to questions ranging (DiNapoli & Fuhr, 1999) from “What’s in it for me? to “What are my alternatives?” to “How did this happen and when do I get my money?” Think about it; the following questions each stakeholder will want to know:
Many issues can cause business distress. Liquidity constraints can limit the business from operating efficiently. Cash flows, cash reserves and access to a working capital line of credit can result in a short-term liquidity crunch. The inability to pay employees, suppliers, and the taxing authorities can be acute. This will lead the company to failure. A business restructuring will be required.
An economic downturn, shifting buyer taste or behavior, increased competition, ineffective operations, disruptive technologies, incompatible strategies, issues that can seriously place the company into financial distress. Left unanswered can result in threatening the organization’s existence. A host of problems will trigger declines in revenue, customer loss, key employees, profitability, and cash flows that will lead to working capital constraints. Distressed symptoms often occur well before crisis hits and is felt. Before you know it, the company is in a death spiral. This situation is not inevitable, and in many cases, can be halted and reversed. Taking aggressive action and discovering at an early stage through reviewing the organization’ strategies and it operations efficiencies can lead to a swift, decisive action to restore organizational performance and enterprise value. Timely action is critical in making this happen.
When a company is doing poorly that failure appears imminent, only a restructuring or turnaround can restore performance and profitability that can enhance the value of the business.
The best way to learn how to restructure a business is to study failure. Think about it, NASA studied its mistakes to make corrections with the space shuttle program. Pharmaceutical companies and financial services companies study product design failures to make improvements, and hospitals study their service offerings to improve the quality of healthcare service. Successful companies create value for shareholders, customers, and other constituents.
Many companies that once dominated their markets later slide into corporate distress often occur. These organizations lose their touch. It is often said that success breeds failure. Companies no longer have that “mojo” that touch, which creates shareholder value. When a company succeeds, we assume that they know what they are doing, but in fact it could be they got lucky. Companies create an overconfidence bias, becoming so self-assured that they think they do not need to change anything.
A number of factors influence a business restructuring strategy to achieve recovery. From an external perspective, in most part, the competitive environment and the maturing of the industry influence the selection and effectiveness of the turnaround strategies. From an internal perspective, the severity of the financial distress and management failure is a contributing factor to formulating the turnaround recovery strategy. The choice of the restructuring strategy is a function of the company size, management perception of the external factors, but most importantly, the degree of resource availability.
For a small business, given the exceptional high mortality rate, elements of decline and failure are important. Small business failure is generally attributable to issues of management control. Performance deterioration and resource availability are critical factors of for the enterprise success in addition to the strategies chosen to, in some cases, stop the bleeding.
Two organizations that have members that can effectively structuring and implement a business restructuring strategy include the Association of Insolvency and Restructuring Advisors (AIRA) where you can find a Certified Restructuring and Insolvency Advisor (CIRA) and the Turnaround Management Association (TMA) where you can look for a Certified Turnaround Professional (CTP). Remember…tick, tick, tick the clock is ticking maybe to your business’s decline.
DiNapoli, D., & Fuhr, E. (1999). Trouble Spotting: Assessing the Likelihood of a Turnaround. In D. DiNapoli, Workouts and Turnarounds II: Global Restructuring Strategies for the Next Century: Insights from the Leading Authorities in the Field (Vol. I). John Wiley and Sons.
PriceWaterhouseCoopers LLP. (2012, August 20). Restructuring and recovery. Retrieved August 20, 2012, from PWC: http://www.pwc.com/us/en/transaction-services/restructuring-recovery.jhtml#
Many papers and books have been written to study the origin of business distresses, its causes, consequences, and eventually, the best way to manage these organizations to avoid failure. The best way to learn how to manage a business turnaround is to study how mistakes were committed and what strategies were used that resulted in a turnaround success. Knowing what factors, including internal and external forces, that resulted in financial distress and crisis, as well as, how to avoid future business failures are critical.
Some companies experience traumatic pain, whereas other companies attempt to change direction to lessen the impact to land between the extremes of success and failure. Depending on the level of distress, the turnaround intervention will differ. Every company has a unique set of conditions that serves as serious problems to overcome.
Based on the pie chart[i], common reasons of business distress come from two forces, internal causes and external causes. Figure 1, shows some of the common reasons for business distress. The reasons are not ranked in accordance of severity, however to highlight some of the common threads the caused most distress situations.
During any stage of the business life cycle, potential failure is a threat that businesses normally face. A key is to recognize signs, the signals that the business may need to be restructured in order to turn around the situation. Each situation tends to be unique, but have common elements.
Inept Leadership/Management Caused Business Failures
What is the most important responsibility of leadership? Simply put, leadership is to identify the biggest challenges to forward progress and to devise a coherent approach to overcome them. This rule includes providing vision and motivation and to act as the change agent. Sounds nice. But in today’s competitive and volatile business climate, one cannot afford poor leadership, as business is not as usual.
Let us strip away at the excuses, explanations, rationalizations, and justifications for business failure; in the majority of cases it is because of management. In an honest analysis, it is plausible to say, “poor leadership” can lead towards corporate insolvency. Leaders will accept the kudos of business success; however most will not take the blame for business distress, which goes with the territory.
As a restructuring professional, it is plainly true that the number one cause of business failure is management. And in most cases it is because the leaders are “in a state of denial.” The common leadership reasons for business failure, and the roles and responsibilities they play are as follows:
Consequently, the characteristics of the leader and that of his/her key management play an important role in the decline of the business. Be it pure incompetency and/or the lack of interest in the business can lead to distress. Five principal factor for business distress include:
Also know that hubris on the part of certain leaders have led companies down the wrong path to insolvency. Pursuing inappropriate, or high-risk strategies based on false premises, have brought down some of the most highly thought of companies.
[i] Richard P. Remelt, “Good Strategy Bad Strategy” Crown Business 2011.
[ii] James E. Schrager, Ed. “Turnaround Management: A Guide to Common Restructuring.” Institutional Investor 2002.