Delicate Balance Needed in a Turnaround

There are many interesting pieces about companies facing turnaround problems—from banks like Wells Fargo, to large retailers, to food and beverage companies—and these difficulties are more pronounced with COVID-19.

Let’s talk about what is happening in turnarounds, why they are so difficult, and some pieces that many people have been missing.

In a turnaround, it’s ultimately a corporate strategy with a gun to your head because you have limited time to respond. First, you have to immediately cut costs. Employees and suppliers know that the company is usually not paying much attention during a turnaround. When I was a senior partner and did a lot of turnarounds, the first thing you would do is realize that fraud is taking place. It doesn’t matter if there’s no evidence—it’s taking place because that’s human nature. The first thing you need to do is impose very strict capital controls. Anything that needs to go out in terms of cash needs to get approval from somebody who is set up to check these things.

The second thing you have to do is the hard part: Figure out which businesses you’re going to keep that have a chance to grow at a rate sufficient enough to pay off the cost of capital and make this worthwhile. Choose the business you want to be in. Choose where in the value chain you need to play, what you’re going to offer in that part of the value chain, who your customers will be, how you’ll make money which is your business model, and how you’re going to do all of this against some very aggressive competitors.

Third, figure out which parts of the businesses you want to close and/or sell. It sounds easy, but selling and closing is difficult because you have union issues to deal with and liabilities to ring-fence. You have to decide if the business needs to be fixed before it can be closed and sold—and whether the cost to fix it makes sense.

These three steps become a delicate dance. Obviously, if you look at the second step, you have to invest. With the costs you were cutting in step one, you would take that saving and invest. It’s a cash flow balancing act because it’s typically hard to raise capital in that position. You have to make sure that while you’re doing all of this, you have sufficient cash. For example, you can cut a lot of costs but not that much relative to the investments you make.

You need to make investments in two areas. First, you need to make an investment in figuring out which businesses to grow and how to grow them. Then you need to figure out which businesses to sell and how to invest in them to turn them around and sell them for the best price. But you’re low on cash, so you can’t make all of the investments needed. You have to figure out a critical path here. What is the minimum investment you can make to get to step 2 of the 10 step process so that the businesses you want to be in and the businesses you want to keep make sufficient money?

That’s the hard part. It’s about staggering the cash flow investments so that the returns also come back and balance the cash going out. Most companies struggle with that and get that part wrong.

Insiders can see this with the Corporate Strategy and Transformation Program, which covers a turnaround of a power utility that is going through some difficult issues.

Remember that it’s a balancing act. If you get the balance wrong and spend too much in the businesses you want to keep, but the return only comes back two years down the line, you could run out of cash. If you spend too much fixing a business you plan to sell, but you either spend it too early or spend more than you need to and can only sell the company two or three years down the line, you’ve got a cash problem. In a turnaround, you cut costs, figure out where to grow, and figure out what to sell, but the tension is really managing the cash flow.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #13.