What is a troubled company? Is it defined by a financial metric such as negative profitability, cash flow or equity? Is it defined by a legal issue such as violating a lending covenant? Or maybe a short term liquidity crunch or the loss of a key executive or customer?
A troubled company is a company on a path to financial crisis guided by a management team that fails to recognize it is on that path. The negative events listed above are merely symptoms of a bad situation; the company was in trouble long before the negative event(s) occurred.
Part of our business is helping troubled companies survive and turnaround. When we are hired, it is often because the company is faced with a life and death threat. The crisis, such as the bank having demanded repayment of its loans, is a managerial wake up call that causes the company to seek help (the wake up call often being the motivation for the bank demanding on the loan in the first place).
The turnaround plan for a troubled business would obviously be most effective if started long before there is an actual crisis. Yet we are almost never hired ahead of time. Nor, after our initial review of the situation, do we often find evidence these companies have done much on their own preceding the crisis to change the direction of the business for the positive.
Understanding when a business is in trouble matters because identifying the problem early provides more flexibility for a solution and lessens the risk of eroding shareholder value.
The reality however is that most troubled companies live in denial as long as possible, failing to recognize they are in trouble early enough to avoid the crisis. In fact, not only do they not recognize the business is in trouble in advance of the crisis, a significant number don’t recognize the business is in trouble during the crisis. So often we hear clients and prospective clients speak of the unfairness of the situation – that the bank should provide them a little more money until a certain positive event occurs, that there is no problem because this year looks great, that asset values will rebound and so on.
There are a wealth of articles available on why business owners seem incapable of admitting they are in trouble until its too late. But, to me, the more interesting question is: Knowing this is a fact, what can business owners do about it?
Disciplined governance and managerial practices are a possible solution. For example, as owner/manager you can protect yourself from tunnel vision by creating a strong board of advisors. Hold quarterly sessions and monitor key metrics of strategic, operational and financial performance. Make sure your advisors are independent, qualified and strong enough to tell you when things are going in the wrong direction. Listen to them. When there is a negative trend, detail a plan to fix the problem and relentlessly monitor its execution.
Posted by Scott Sinclair, Range Corporate Advisors
Our passion is to support business owners in pursuit of their dreams.
We believe that for professional advice to be truly valuable to medium, small and entrepreneurial businesses, the adviser’s professional skills must be world-class, the adviser must participate in the effective execution of the solution and the advice must be affordable by the business. With this, these businesses can overcome all challenges.