This is one of the toughest documents you’ll ever have to prepare: a turnaround plan for a company that is drowning in debt. First, you have to make the hard choice: can your company be rescued or has it come time to pull the plug? If you can save it, the turnaround plan needs your goals, a supporting cash flow analysis and, most important, a roadmap that your business can follow to get there. A well-constructed turnaround plan offers your company the best possible chance of success.
A Viable Core
The first step in any turnaround is to understand if you still have a core business hidden behind the debt. Never base your decisions on overall company financials. Conduct a break-even analysis per product or service line based on activity-based costing so you can identify which ones are profitable when you assign labor and direct costs. If you are working in more than one location, perform a four-wall analysis; it will help reveal how each site performs. But internal figures aren’t everything. You’ve got to look outward, as well. A market analysis showing past and projected demand indicates whether the company can survive, and a price analysis indicates whether you can raise prices or are headed in the other direction. Have new regulations hit the industry, and could new tariffs or trade wars impact you? Under all this: can at least some part of the business emerge as viable and profitable, and able to finance its own capital and liquidity needs?
Even with a viable core, you can still run out of cash before you can make things right. Your lenders may no longer trust your company or the industry you are in. The collateral that you used may not be worth as much. Find a way to have cash flow neutrality and determine how much it will cost to achieve this. The first step is to create a weekly cash flow forecast. Then go through each expected cash disbursement and ask yourself: “Can I not pay this at all? Or postpone it?” Next, look for additional sources of cash. Non-core assets can usually be sold: a line of business, real estate owned by the company, vehicles, or even an airplane. Maybe extra equipment, or a surplus of inventory. Examine your accounts receivable and notes receivable and accelerate collections. Can you borrow money from a new lender or a new owner? That will tide you over until better times.
The success of any plan depends on having the right people to execute it. Build an internal turnaround team that includes senior and middle management and influential staff with the discipline and inclination to make decisions and enforce new policies. Regularly ask yourself if you have the right people on that team. The team should also assess whether any of your company’s processes, products or financial systems are an impediment to the turnaround, and how much it will cost to remedy them. Many business owners just can’t find time or skill to manage a turnaround and the day to day operations of the company, and they need to hire an outside turnaround professional.
A good outside adviser offers a fresh eye, new skills, and discipline that you may lack. They’ve been through a few turnarounds already, so they understand the challenges and know where the traps are. They can also help you communicate effectively with all the people who are affected by what happens. You want someone who has worked with lenders to distressed businesses, who knows how to negotiate forbearance agreements, amend credit agreements, negotiate waivers and new financing terms. You also want someone you trust. Owners often think that employees will leave if they find out that the company is struggling. But the staff is often relieved that someone is finally taking charge of turning the business around, as long as they communicate a plan and talk openly about it.
Saving the Business Instead of Growing It
Once the decision to save the business is in hand, the objective for the future should be set. Most business owners have spent their careers on the goal of adding value to the company and to their own and their shareholders’ pocketbooks. When the mission becomes one of saving the business instead of growing it, your fiduciary responsibilities expand from merely the owners to encompass the entire company, i.e., the value of bond holders, lien holders and creditors as well as owners. Preserving the maximum possible value for the maximum number of interested parties requires a substantially more conservative plan of action than would have been pursued in a time of growth. Any decision now must take into account the impact of its consequences on your creditors.
Whether you sell or keep the current owners, you will enter an emergency period whose only goal is to cut losses and make it through to positive cash flow. The tool to do this is the 13-week cash flow forecast, which maps out real numbers. It shows you both whether the plan will produce cash-positive operations, and how much cash you will need before you get there. This is not theoretical. You will have to live with it every day, so make sure the numbers you put down for collections and expenditures are realistic, you reconcile your budget against reality every week, and you update the forecast weekly so that it is always looking 13 weeks into the future.
Your cash flow forecast is not your plan. You also need to create a strategy. Share it with all stakeholders in the company, too. It needs to explain who you are, how you got here, what you’re going to do about it, and how much it will cost to fix. Don’t go overboard with the detail. Include:
- company information,
- a history of financials that will tell them how the company got into trouble,
- the turnaround plan and the opportunities and risks associated with that plan,
- a summary of how much bridge financing you need and how much you’ll save by what you are going to do,
- the 13 week forecast with a clear statement that it will change,
- and supporting financials (including a benchmark of your company against competitors and the industry).
Enlist the Support and Goodwill of Employees
Next is execution. The worst temptation is to close your office door and just get it done. You must enlist the support and goodwill of employees and, to some extent, key customers and vendors. Get employee input, solicit their views on what the problem is, and what the solution should be, and show them you value their perspective. Everyone will be scared and confused, so you have to share your own assessment of the problem and a plan to address it. You should over-communicate. People are going to hear all kinds of stuff when the firm’s survival is in question. However, you should tailor your communications to the different stakeholders (e.g., employees, vendors, customers, lenders and equity holders), and not overwhelm them with too much information.
At the end of the day you will never have all the facts and the “to-do list” may never seem like it will end, but the key is not to stand still. Make some decisions and communicate them effectively so those impacted by them are bought in. Never attempt to do it all at once. If you have a 15 point plan of attack, do the first three points, the next three points, and so on. Celebrate those milestones along the way because progress leads to more progress. Finally, don’t forget to keep an eye on what’s going on around you. Discipline does not mean blinders. If the situation changes, you have to be willing to deviate from the plan. Any progress with incremental changes is better than standing still.
At each step, contrast the facts with your predictions. What did the actual results show and how did they compare to what you forecasted? What led to the discrepancy? How do you need to revise your expectations? Is it possible to enhance results by renegotiating specific deals? Use those insights to update the forecast, and start the process again. Plan, act, evaluate, repeat.
So what should a recovery plan look like, given that your company’s heavily in debt and cash flow is draining away? Your plan should include:
- A candid evaluation of whether the business and its financing, as well as its people, can deliver a viable turnaround.
- A commitment to preserving the business value for creditors as well as owners.
- A 13-week cash flow projection that you revisit every week.
- A written plan that you share with stakeholders.
- A person in charge who is visible and communicates frequently, makes disciplined decisions and accepts when it’s time to pivot.
An old saying notes that if you find yourself in a hole, the first thing to do is to stop digging. Your turnaround strategy should center on a few key goals that are straightforward to convey and accomplish.
