One of the first steps in a turnaround and in profit enhancement is setting your short- and long-term objectives. It seems almost ridiculous to ask what the objective of the effort should be when a company is underperforming or bleeding gobs of red ink. It’s like asking a seriously ill patient what he wants when he checks into the hospital. “To get better, of course,” is what he’d probably say. Likewise, the client usually looks at me in disbelief and says, “Stop the bleeding!” or “Fix the problem.” However, the “fix” is conditioned upon the real objectives, which may be one of four things:
Improve profitability and grow the current company long term.
Improve profitability and prepare the company for sale.
Improve profitability and keep the company the same size.
Begin liquidating the company after stabilization.
Often management has been through a lengthy period of poor performance and fatigue has set in with banks, which have been attempting to “work out” an underperforming loan for a long time without success. The desire to get rid of the loan at almost any cost becomes overwhelming. This is called “lender fatigue.”
The same thing often happens to investors and management. Thus, their first response to my question about their objectives is often, “Fix the damn thing and get me out.” But as one might expect, each of the four objectives I mentioned drives a different course of action.
In this scenario, companies take steps to improve profitability and make a concentrated effort on a long-term growth plan that emphasizes four things:
Improving the balance sheet, including possible additional equity and lending, which will support future growth
Identifying and enhancing the core competencies of the company
Searching for a long-term banking relationship that has not been spoiled by the current problems
Sourcing long-term investments that companies may need to ensure continued growth
In this situation, you are dressing the bride for the wedding (or sale, in this case). The intent is to achieve the highest-possible earnings before interest, taxes, depreciation, and amortization (EBITDA). Because most companies are valued based on a multiple of this number, maximization ensures that the greatest value is received in a sale.
This is a legitimate exercise that I have performed many times. In one instance, I was called in to operate an outdoor-sign company because the CEO had died suddenly. I was told at the outset that my role was to help the company’s managers handle the steps necessary for a sale as well as prepare them psychologically for such a change.
I asked the managers of the investment fund that owned the company, who wished to “cash out,” if they minded if I “tuned up” the enterprise to maximize EBITDA. They consented, and through various actions, I managed to raise the EBITDA by $2 million annually. This translated into an additional $14 million in sales price at the 7x multiple that the new buyer was willing to pay.
To improve the prospects of selling a company, managers take four actions:
Absolute maximization of profit through various short-term means, including personnel rationalization, severe cost cutting, and renegotiation of all external factors including rents and loans
Investment only in capital projects that will yield results in the short term. Investment in a new computer system that won’t yield savings for several years would be inconsistent with a “fix and sell” objective.
Open discussion with lenders about their intentions in order to elicit their cooperation.
Retention of an investment banking firm to help prepare for the sale while managers are improving the profitability.
This approach is most prevalent in private companies in which the principals wish to maintain a lifestyle without the energy and financial resources it takes to operate and grow a company.
In this instance the obvious objective is to maximize cash flow that can be returned to the shareholders. There is no desire to invest in high-risk growth alternatives. In other words, the owners want to stay within a comfort zone regarding size or industry.
There is nothing wrong with this approach. Four needs in this particular instance are:
Maximum profit and cash flow
A low-risk, market-volume maintenance plan
Judicious investment in high-yield, low-risk capital projects
Retention of key personnel through long-term incentives
The last scenario is the orderly liquidation of the business. I must admit that I really don’t like liquidating businesses, but sometimes fatigue becomes so great that the owners and lenders are unwilling to wait for a sale. In this instance, maximizing asset value is the only governing criterion. This means that some production may be necessary to optimize the value of work in progress or inventory.
Four key issues are:
One can see that the initial assessment of goals is very important as to how one proceeds in the turnaround. Obviously and thankfully, most activities are centered on improving companies in the long term. Often I will start with the company wanting to “fix and flee,” and as we are progressively successful in the turnaround process the objective becomes a “fix and grow” strategy.
Now that you’ve determined your goals, you are ready to determine your company’s problems and opportunities and gather ideas from those who know your company best: your employees, your customers, and your competitors.
Every consultant, as an initial step in “learning” a company, conducts a series of interviews. This is like borrowing a client’s watch to tell her what time it is. Management can do the interviews, but often personnel are too frightened to be totally honest with management, so a third party such as a consultant should be utilized to gather data. Either way, interview three groups:
The employees. They work day to day in the environment and often see internal mistakes long before you do.
The customers. They are on the receiving end of your goods and services and are in the best position to tell you if you are meeting their needs.
The competitors. They are a great way to hear about “other” plans in the marketplace.
Let’s revisit each of these areas.
When I go into a company, management usually introduces me to all the employees and tells the employees to be completely open with me. Usually people describe my role as one of “improving profitability,” which is absolutely true. I then set up one-on-one interviews with all the key employees at the vice presidential and director level as well as with many of the workers at much lower levels within the organization. I will talk to the head of the union and the janitor. I will talk to engineers and to machinists. I will talk to salespeople and sales managers . . . you get the idea. I want to get a true cross section of the company and I ask the same question of each of them: “If you were president of the company, what would you do to improve profits and make the company a better place?”
Someone once asked me, “How do you get people to talk to you?” My problem is usually the opposite one. Often I get much more information than I need or want; in other words, I can’t stop the torrent of words and ideas.
A lot of times one must sit through some personal petty complaints, but more often the response is thoughtful and well considered. After about the tenth interview, a picture of the nature of the company begins to emerge. A feeling for management style and corporate culture becomes evident and the same complaints and suggestions begin to emerge from the interviews.
If a complaint appears from multiple sources, I classify it as symptomatic of a problem. If a suggestion sounds good to me, I explore it with a number of interviewees to test its validity. Of course I take copious notes throughout the process and in my notebook I place a star or asterisk next to key ideas that emerge.
I was once called in to fix a petrochemical company in Pennsylvania that had been losing $3 million per month. As part of my interview process I spoke to the head of the quality-control lab. He was a very impressive young man who had worked for the previous owner of the facility, a very well-known U.S. oil company.
I asked him about his background and he said he was a chemical engineer with a master’s degree in business. It seemed odd to me that this bright light was in a role that did not reflect his background or education. As I probed further, I found that his formal education, especially the MBA, was not to the liking of the plant manager, who was an “old-timer.” The interviewee said he had made some suggestions to the prior owners about cost conservation and operating methodology that would save the company over $1 million annually. He was told that if he made any more proposals of that type he would be fired and to “just do his job.” I asked him to tell me his ideas, and they sounded logical and sensible. I checked his approach out with others, including other engineers, and it appeared valid. Within 48 hours of our interview, I was implementing those ideas with this young man’s help. He eventually became the chief operating officer of the company and helped me save many millions more.
Many companies have learned to listen to their customers through telephone interviews or feedback questionnaires. I’ve received a feedback form from virtually every hotel I’ve stayed at, and as you can imagine, I’ve stayed at quite a few. In the rare instances I’ve responded with a complaint or a suggestion, I’ve obtained zero feedback. I’ve written letters in order to provide helpful hints to Delta Airlines, Marriott, and many others with no response.
In the turnaround process, one cannot wait for response cards or attempt to get others to respond to a canned survey; one must be proactive in seeking opinions from customers. As with the employees’ interviews, I talk to big and small customers, customers we currently serve, and those we have lost. And I ask the following four questions:
The answers to these questions are often enlightening, sometimes shocking, and hardly ever related to price, as one might think.
Quite often the customers’ perception of the client company is completely different from how the company sees itself. Again, when a number of customers make an observation repeatedly, one begins to think that there is validity in what they’re saying.
For example, I once had a customer tell me we were undervaluing a product we were selling to him. He stated that our quality was much better than the competition’s and if we charged more he could easily pass the increase on to his customer, the eventual consumer. Needless to say, I was on my mobile phone changing prices before I left his parking lot.
Personally interviewing customers whom you have lost allows you to accomplish two tasks:
Identify the cause of the customer’s departure.
Provide an opportunity to bring the customer back into the fold again.
Every company should know as much about its competitors as possible. What are they doing? Where are they going? With the advent of the Internet, you can gather a great deal of public information on your competitors; and for public companies, their 10Ks and 10Qs are available.
But two of the best methods of finding out about the competition is through your sales network and by asking your competitors for information! What do I mean by this? When I am at a convention I always visit my best competitor’s booth and make a point of meeting with the CEO of the competitor. Obviously avoiding some questions that might get me into legal difficulty, I do ask the following: “You are a great competitor—to what do you owe your success?”
One would be amazed at the answers I get. Often ego takes over and I get a description of how my competitor plans to approach the market and with what products and services. At worst I get an idea from merely observing the products and services it is pushing.
Now you have an idea of where you eventually want to take your enterprise, some ideas about the problems and opportunities, and some ideas about how the business can be modified to begin generating cash. Extract what you have found from the investigation and place the information in a key “problem area/symptoms” list for action later.