Revilalizing the Under-Performing Company
By Gary Goldstick
Vol. I, Issue 1

In my twenty years of working with businesses of all sizes and in many different industries, I've discovered that under-performing businesses fall into three general categories; namely:

1. The emerging company that hasn't yet achieved a condition of positive cash flow and continuing profits,

2. The company-in-transition that has had a profitable history but an unexpected event (such as a management change, the emergence of a vigorous competitor), or a poor decision, (such as an unsuccessful acquisition) has resulted in losses, and

3. The financially troubled firm that continues to be unprofitable and has generated aggregate losses such that it's continued existence is in question.

All three categories of under-performing firms cannot continue "business as usual" since, like Thelma and Louise, they are speeding toward a precipice. What to do? Unfortunately, the list of available strategies is rather limited. There are four:

1. Turnaround the under-performing businesses by means of operational and financial changes so that the business is a viable and self-sufficient enterprise at some point in the future.

2. Sell the business to another party who will either incorporate the business unit into an existing enterprise or will effect a turnaround of the business using their own capital.

3. Liquidate the business, by marshaling all of the assets that have any value, such as accounts receivable, inventory, capital equipment, etc., and selling them.

4. Abandon the business and its assets to the secured and unsecured creditors. This action is also known as the "throw the keys on the table and turn out the lights" strategy.

Discouraging isn't it? Three out of the four strategies require the owners and entrepreneurs who are managing the business to effectively give up and walk away from the enterprise that they've nurtured and protected for years.

Faced with these options most businesses will plunge headlong into a turnaround effort. Why not all? Because a turnaround project will be a daunting challenge and can require financial, time, energy and psychological commitments that the exhausted and battle-weary businessperson may not be able or willing to make.

What percentage of turnaround efforts is successful? That's a very elusive number since no one that I know of collects or analyzes those statistics in a meaningful and consistent way. However, a number of surveys have shown that the probability of a successful reorganization under bankruptcy court supervision is about 10% for small and middle market companies.

We've found that successful turnarounds have a number of common ingredients, independent of the size and industry of the business. When these ingredients are present, the probability of the turnaround being successful is high. When any one is absent, the probability of a successful turnaround is low.

First, even though the business as currently structured is not profitable, there must exist some aspect of the business that can be operated at positive cash flow at some specific time in the future. For example, if a wholesale distributor sells $25 million of beauty products to drugstores in the western states and is losing money, perhaps he can sell $10 million of beauty products in the Pacific Northwest and be profitable.

Second, if the business is operating at a cash loss, there must exist a source of capital to cover the losses from the present until the business generates a positive cash flow and is self sustaining. This capital is the foundation of the revitalization plan. It may be generated internally, by cutting operating costs, restructuring debt payments, selling assets that are not needed in the future business operations, or converting off balance sheet assets (such as lease holds, claims, pollution credits, etc.) to cash. If these actions will not generate adequate working capital, the needed funds will have to come from bankers, investors, friends and family.

Third, the business needs an operating executive who is not mired in the mistakes of the past and has the experience, vision, and charisma to both lead the company and persuade lenders, creditors, and employees to support the company.

Fourth, the business needs professionals with the skills and experience to help the executives formulate, negotiate, and implement a restructuring plan. The professional is a helmsman who helps the business navigate the treacherous waters that insolvent firms must cross to achieve a successful reorganization plan.

How important are these elements? Should you try a restructuring effort with only two out of the four ingredients? As the business owner, you can do anything you can afford. It's your money to lose. However, my opinion is that launching a turnaround effort without ALL of the elements in place is like backpacking into the wilderness with only a portion of your gear. Sure, you can attempt it. But is it worth the down side risk? Remember Alexander Pope's immortal words:

"For fools rush in where angels fear to tread."

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Other newsletters by
Gary Goldstick:
Five Crucial Questions You Need to Ask to Insure Business Success

Ten Dos and Don'ts to Keep Your Banker Happy

So Your Client is Killing Her Business? Tell Her!

>The Business Health Index is a self-testing instrument that will provide a business owner a general diagnosis of the company's health. Take the test

Mr. Goldstick has published a novel and two non-fiction books:

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“Business RX gives you solid information on the causes of failure, and a good dose of how to take positive action that can heal a troubled company. Along the way, Goldstick offers a few valuable insights.
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“Gary offers new insights on developing a good relationship with bankers. His real life examples will prove informative to any reader who is trying to secure a business loan.”
Rayburn S. Dezember, Former Chairman, American National Bank


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