Reviving troubled companies: Phases and actions in the turnaround process

By John M. CollardJohn Collard

Turnaround opportunities abound for those who have the knowledge and fortitude to go through the process. The rewards can be plentiful, and the failures catastrophic.

The process of turning around a troubled entity is complex. This is compounded by the multiple constituencies involved, all of whom have different agendas. Lenders want a return of their invested capital, preferably with interest. Creditors want their money in exchange for goods and services. Original investors want and hope for recovery of their capital. Distressed investors want to buy in at 20 cents on the dollar, then turn a profit; some by trading the credit, others by turning the business positive, then selling. Owners want to avoid guarantees and recoup some of their equity. Employees want their jobs and benefits. Directors want to avoid risk and litigation. Other stakeholders want their interests protected. These desires can often be at odds with other parties and hamper the effort.

There are many causes that contribute to business failure. According to a study conducted by the Association of Insolvency and Restructuring Advisors, only 9 percent of failures are due to influences beyond management’s control and to sheer bad luck. The remaining 91 percent of failures are related to influences that management could control, and 52 percent are internally generated problems that management didn’t control.

Businesses fail because of mismanagement. Sometimes it is denial, sometimes negligence, but it always results in loss. Mismanagement is most often seen in more than one of multiple areas:

  • Autocratic management, over-extension
  • Ineffective, non-existent communications
  • High turnover due to neglect of human resources
  • Inefficient compensation and incentive programs
  • Company goals not achieved or understood
  • Deteriorating business, no new customers
  • Inadequate analysis of markets and strategies
  • Lack of timely, accurate financial information
  • History of failed expansion plans
  • Uncontrolled or mismanaged growth

Look for the root causes first

Will Rogers once said, “If you find yourself in a hole, stop digging.” Good advice for directors and managers with the responsibility to lead a company. Very good advice for lenders and investors contemplating investing more capital into a troubled property.

To be successful in this arena, you need clear thinking to quickly determine what is wrong, develop strategies that no one has tried before, and implement plans to restructure the company. The problems are rarely obvious. Instead, there are often two or three underlying systemic ills that can be fixed. You can’t focus on the symptoms, but must find the real causes. Management has allowed these problems to exist and bring the company to its depressed state. Therefore, they may not be equipped to manage a turnaround.

Turnaround specialists are often an excellent choice. They bring a new set of eyes, trained in managing and advising in troubled situations. These experts are either practitioners or consultants. Turnaround practitioners take management and decision-making control as the CEO or chief restructuring officer. Turnaround consultants, on the other hand, advise management — perhaps the same management that failed before.

Stages in the turnaround process

There are five stages in the turnaround process: management change, situation analysis, emergency action, business restructuring, and return to normality. Look at these individually to understand what should transpire at each stage, and what role each function in the company should play. The chart below should give you a good idea of this.

Keep in mind that timing is important to coordinate what is happening between functions. Stages can overlap, and some tasks may impact more than one stage.

Turnaround process: Phases and actions

Stage/Focus Management Change Stage [Leadership] Situation Analysis Stage [Viability] Emergency Action Stage [Crisis Control] Business Restructuring Stage [Change] Return to
Normal Stage [
Going Concern]
Objectives Put top management team in place

Select turnaround specialist

Replace some/all top management

Eliminate impediments

Can it survive?

Should it be saved?

Is the business viable?

Are cash resources available to fuel turnaround?

Develop preliminary action plan and nature of turnaround


Get Control

Break even

Positive cash flow

Raise cash to support turnaround

Protect resources

Protect asset value

Create profitability through operations

Restructure business for increased return on assets and investments

Seek profitable growth

Emphasize profits and returns

Build competitive strengths

Sales &
Jumpstart sales

Drive revenue

Volume In = revenue

Products & services
Sales & marketing
strategies &
Correct underpricing

Prune product lines

Weed out weak customers & distributors

Bring sales & marketing costs
within industry avg.

Sell, sell, sell more

Reassess competitive & product line pricing

Exploit existing products

Develop new products

Improve customer & distribution mix

Improve sales & marketing effectiveness

Explore new markets & customer segment

Examine industry restructuring opportunities

Pursue value-added chain restructuring

Consider synergistic diversification

Financial Track cash

Develop trusted reporting & analysis

Cash flow
Break even
Cost reduction
Balance Sheet
Gross margin by product
Restructure debt

Improve work/capital

Sell non-producing assets

Reduce cost/increase Revenue

Eliminate creative accounting practices

Improve liquidity

Clean up balance sheet

Fix capital structure

Develop control systems

Create managerial accounting system

Develop strategic accounting

Restructure long-term financing

Develop stock valuation and buy-back system

& Production
Produce to meet sales levels only

Balance peaks and valleys

Volume out = throughput

Systems &
Shut down operations

Reduce workforce

Reduce inventories

Control purchases

Increase productivity

Develop productivity improvement programs

Re-evaluate overhead

Establish ongoing profit improvement programs

Restructure operations for competitive advantage

Consider strategic alliances with world-class firms

Research &
Develop new product and services to support sales Analyze:
New product
Improvements in:
Accelerate high-potential projects

Shut down tangential projects

Unbundle product offerings

Make new product development market & customer oriented

Build an economic value-added orientation into process engineering

Establish advanced technology monitoring systems

Seek competitive advantage, strategic leverage in all R&D activities

Organization Organize for change

Right-size company

Analyze systems:
Does organizational structure
make sense?
measurement &
Structure turnaround team

Review individual accountability & teamwork

Reward those that change the situation

Release those that don’t

Restructure for competitive effectiveness

Develop rewards that reinforce turnaround

Demonstrate with action the seriousness of the situation

Restructure to reflect changing strategies

Organize to succeed, then fill the positions with talented people; don’t compromise

Personnel &
Hold employees accountable

Nurture critical human capital resources

Slow turnover rate

Incentive-based management

Management teams
Sales, finance &
ops personnel
Recruiting, selection,
training, starting
& promotional
Get peoples’ attention

Establish who’s in charge

Create a professional, business-like atmosphere

Sanction nonperformers

Improve people mix

Incentive-Based Mgt
Bolster people to believe in consistent reward system

Get people to think
‘profit,’ ‘ROI,’
‘cash flow’

Institutionalize continuous management and employee training and development programs

Grow human assets

 About the author

John M. Collard is chairman of Annapolis, MD-based Strategic Management Partners, Inc. a turnaround management firm specializing in interim executive CEO leadership, asset and investment recovery, outside director governance, raising capital, and investing in and rebuilding under-performing, distressed, troubled companies. He is a Certified Turnaround Professional, Certified International Turnaround Manager, past chairman of the Turnaround Management Association, past chairman of the Association of Interim Executives, and serves on public and private boards of directors. He is an advisor to companies and private equity investors. Participated in 45 transactions worth $1.2B. He is inducted into the Turnaround Management, Restructuring, Distressed Investing Industry Hall of Fame. He received the Interim Management Lifetime Achievement Award, and the Most Admired CEO Award. He can be reached at 410-263-9100.

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