Most recently on this blog we discussed New Year’s resolutions to complete a turnaround.
Alternatively (and somewhat gloomily) reflection in the New Year may also cause pause for the thought that a turnaround is no longer possible while continuing will only cause a worsening of the financial position and risks which stakeholders are not willing to accept.
A turnaround is inherently fuelled by a “glass half full” and optimistic view of the world and a “can do” approach to overcome problems. Therefore, a decision to cease a turnaround is anathema for the people involved given their inherent culture and a painful loss of the “blood and treasure” which has gone into the turnaround.
Optimism and positivity are very good things, but denying reality is pointless and unfortunately a significant proportion of turnarounds are not successful despite the best of efforts and intentions.
Some issues to consider when deciding about continuing with a turnaround are whether:
– Sufficient time has been allowed for the turnaround without the necessary/desired results. Most successful turnarounds are completed in 18 to 24 months.
– The turnaround is too difficult because the underperformance issues effecting a business are entrenched. Where a company experiences a sustained period of losses, only 33% complete a successful turnaround ie the longer the period of underperformance, the more difficult to complete a turnaround.
Here are some other indicia that a turnaround may be a lost cause:
1. Market conditions remain subdued or further deteriorate. Enduring an extended downturn may be beyond the financial capability of a business.
2. Competition which has a fundamental advantage such as cheaper production or vertical integration.
3. Financial restructuring process failing eg a refinance or sale transaction not progressing past due diligence. This may keep a company with a balance sheet (debt position) that makes it too difficult to ever achieve a turnaround.
4. Loss of support from suppliers/creditors who are no longer willing to maintain supply on existing/extended terms.
5. Tightening of financiers terms for instance in relation to covenants, rates and required security.
6. Management “fatigue” which prevent the transformational processes required.
7. Quite simply, the business has run out of cash!
Support for a decision to pull out of a turnaround process could also come from quantitative analysis ie based on ratios and other analysis.
Edward Altman’s Z-score model is the most widely used statistical method and apparently has a 95% success rate in predicting corporate failure. The Z-score is based on elements of earnings, equity, working capital and debt leverage levels. The Altman model is:
– More relevant to listed public companies.
– Attempting to provide an indication of the likelihood of corporate failure not absolutely that a business with fail.
Obviously, stakeholders would want more than a statistics/scoring model to decide to cease a turnaround process given the potential repercussions.
We have discussed above various ways to commercially analyse and assess a company’s future while for people involved in a turnaround it is difficult to remain objective and many of the required decisions involve strong emotional issues. Therefore some perspective from a trusted party removed from the situation can be one of the most helpful elements in making a decision about whether to continue or “cut and run”.
If you would like a no obligation, confidential discussion about turnaround management and executive solutions, please contact me at svertullo@integralfinancial.net.au.