Case Study - Turnaround
The Common Dilemma of Unrealistic Assumptions
After being in business for more than 75 years, a mid-western manufacturing company was purchased by a private equity group. While the company reported approximately $30,000,000 in annual revenue, spiraling debt and losses threatened its future. Aware of other firms in the industry that were extremely successful in engaging turnaround specialists to achieve a state of fiscal health, the owners contacted Lakelet Financial Forensics Group (LFFG).
Over the previous 15 years, the company had experienced multiple owners and it was a revolving door as far as CEOs were concerned. To make matters worse, the existing owners were in a state of denial regarding the financial health of the company.
First, they believed they already had all the answers. Too often company owners and investors are not realistic with regard to turnarounds. In this particular instance, the owners believed they had the answers before the preliminary study was even performed. They were simply seeking validation of their assumptions.
They also did not believe a turnaround plan was required since they purported to already understand the problem, solution and ramifications and trusted that management would be able to deliver the “fix.” However, what they weren’t grasping was the fact that it was that same team that had created the issues in the first place, or, at a minimum, was not cognizant of them.
Second, they were unrealistic about the costs. Though the company was losing a significant amount of money month-over-month, the owners thought it would only be a fraction of those costs to mitigate or eliminate this problem entirely. In addition, faced with the reality of the situation, they blamed the numbers. In other words, they believed the data must somehow be wrong and that they couldn’t be performing so poorly.
Third, they were unrealistic about the valuation of the business. This is quite common. Business owners almost always feel their business is worth far more than what the market will bear. This happens for a variety of reasons, including the fact that in most cases, a buyer is only willing to purchase a company based on the cash that is being kicked out month-over-month. So if that company is losing money, then valuation takes a big hit.
Fourth, there was a general lack of urgency and acceptance of responsibility. Perhaps not realizing the gravity of the situation, the owners didn’t feel the need to act quickly and had a “business as usual” attitude. However, when it comes to turnarounds, there is a limited timeframe in which to maximize efficiency, and make the transition from a negative cash flow situation to a positive one. So time is always of the essence.
When accepting this engagement, LFFG faced a variety of additional tough, but common obstacles, as well. For instance, there were few, if any, internal reports and metrics to gain an accurate sense of the “big picture.” In addition, believing they were operating in a unique situation, the company owners had been unwilling to benchmark their own organization against the competition in the past, leaving them even further in the dark.
LFFG started by focusing on the crux of the problem – in this case, determining the root cause of the financial decline – and began attacking that, allowing some of the smaller “fires” to burn themselves out. In doing so, our associates had to hone in on whether the source of the problem was related to people, processes or something else entirely.
Over the course of the engagement, LFFG met with many players within the company including employees, middle managers, and executives. During these talks, we let each individual know that anything communicated would be held in confidence and never be used against them. This approach not only gave everyone a chance to air their “dirty laundry” without fear of repercussion, but it also saved time, enabled team members to be a part of the solution, and confronted management with the reality of the situation.
Additionally, we revised the data infrastructure (guarantee results at a fixed amount and timetable). We also developed a series of accountabilities and responsibilities for the data and the processes for the future, so the situation would not be repeated down the line.
Within two weeks, LFFG prepared a detailed analysis for the board, creditors, banks and executives. This included financial and operational changes and the quantitative, tangible results. It also included an assessment of the team, issues with the Enterprise Resource Planning (ERP) solution and prior audited financial statements, as well as a 30-60-90 day plan for the company to follow.
One final note: As is the case with many turnarounds, one issue that arises is that company owners don’t want to “take their medicine” all at once. However, a successful turnaround is an art not unlike preparing a fine meal. In order for it to be effective, it requires using all the ingredients – not just the easiest ones to deal with.