Turnaround Strategies | The Bad and The Good
In our practice, we have seen many different turnaround strategies. Regardless
of the business, these turnaround strategies fall into 2 types, “wishful
thinking” and a logical approach. When we see firms fail, the primary
reason is the management decided to follow one of the “wishful thinking”
turnaround strategies instead of making hard choices and fixing their businesses.
The primary “wishful thinking” turnaround strategy is the search for conventional financing. When a firm gets into financial trouble, it often seems just a little money will fix the problem. Usually the CEO and CFO starts calling bankers, VCs, bridge financiers and other capitalists trying to get extra financing at a “good price.”
They spend months looking for the funds. When you speak to the CEO and CFO, they are always certain the last financier they met with will come through. But, funny thing … the money never arrives and the financiers never offer a term sheet.
The leadership gets into a trap of always believing the financing is just around the corner, and they stop focusing on their business problems. Big mistake. We have seen several cases where CEOs think that they were going to get their financing the day before they had to take bankruptcy! Clearly, they were living in a fantasy world.
Why does the funding never come through? Because no financier in his or her right mind will invest in a troubled business with declining sales, profits and cash flow. The risk is too high.
But, financiers always like to negotiate and tell others that they have deals working, even if it is unlikely that they will ever fund the company. So, the management team thinks the funding is imminent, when in reality they don’t have a chance.
You must avoid another “wishful thinking” trap as well. Don’t
believe that Chapter 11 bankruptcy will save your firm. From our experience,
whenever a firm files for Chapter 11, it only has 1 chance in 5 of surviving.
Judges typically convert most Chapter 11s into liquidations. So be careful
if your lawyer tells you that Chapter 11 is the solution to all your problems.
The only sensible approach is to downsize your business and only keep the profitable parts. With this approach, you don’t need more funding and you won’t have to file bankruptcy.
However, this approach does require that you take some unpleasant actions including laying off colleagues and shrinking the size of the firm. If you take these steps, profits, revenue growth and recognition will be your reward.
To learn how to fix your distressed business, we recommend that you read The Insider Secrets to Saving Your Business: The Step-by-Step Turnaround Guide. This should be your turnaround strategies bible and you won’t take any wrong steps if you follow these guidelines.