Mar 25, 2013

7 Strategies For Turnarounds

When evaluating the business opportunity, know in advance what your exit will be, and what improvements you will be implementing in the company.

There are 7 ways to turn a company around, in order below from most-preferred and profitable to the least preferred and least profitable.

  1. Resurrect – Make changes to the company from within: a new sales contract or perhaps re-calibrating the marketing campaign, or a new innovation or disruptive technology. It’s easier said than done.  If you can improve the company from the resources within the company, you’re more likely to successfully turn the company around under your own terms.  When considering any business purchase, consider what opportunities are within the company that aren’t being tapped into or could use further development and attention.  With personnel for example, often the expertise and ability you’re looking for already exists within the company.  Peter Drucker famously stated,  “Because its purpose is to create a customer, your business has two purposes and two purposes only: Marketing and Innovation. Marketing and innovation make you money, generate sales, produce profit. Everything else is an expense...”.  Keep in mind that Innovation may come in spurts and with flashes of insightful breakthroughs.  But Marketing requires steady, consistent application of conveying a cohesive message often.  Have something good to say, say it well, and say it often.

  1. 2.  Recruit – Similar to a resurrection, if you’re recruiting top-talent from the market or from competitors, who have the experience and domain knowledge you’re needing for the company, you can often dictate the terms and conditions under which those talent-infusions come on board.  Whenever you consider buying a company, also look at the competing environment to find out who you might be able to recruit away and re-insert them into the company you’re looking to purchase.  The biggest challenge with recruiting or promoting from the outside, especially in top-level positions, is that these individuals will not have the specific cultural upbringing as those already inside the company. Still, if the company is struggling, it likely needs help from the outside, including new ownership, new management, and new employees.

  1. Refinance --  Often times the target company is encumbered with debt that can be refinanced under a new loan.  The new loan may offer a lower rate or a longer amortization period.  Taking out the old loan with a new loan is another way to make the company cash positive. 

  1. Re-equitize – Similar to a refinance, only you’re employing equity instead of debt capital.  Equity can come from existing managers or employees, recruited, to-be-hired managing partners, the broker involved in the deal, friends and family, private equity groups, wealthy individuals, investors, or your own pocket book.

  1. Re-amortize – This typically involves changing the amount owed or the timing of the payments to the creditors.  Often, if the company is struggling or encumbered with debt, the creditors will take a voluntary haircut on the amount due, or will stretch out the payments or lower the rate, if they know there’s a plan.  In the extreme cases, if the company has been more or less forced into bankruptcy, the bankruptcy judge can actually force the creditors to take a cram-down on the debt, which basically means the creditor takes a substantial haircut on the debt to align more realistically with the underlying assets’ actual, current valuation. 

  1. Re-sell – Selling the business as a going concern is far preferable than simply shutting it down or liquidating the assets of the business in a forced manner.  If you find that you’ve purchased a business that you’re not cut out for, or you simply aren’t driving the business like it needs to be driven, it’s far better to put it in the hands of someone who can and is willing to make it work.  If the company has value in the hands of someone else, sell it.  If the company is doomed to failure, (for example a flawed or no-longer relevant business model) do not sell it: it’s better to shut it down and pull the plug than to sell a broken, can’t-be-fixed business to someone else.  Refuse to sell refuse. 

  1. 7. Refuse – If the company you bought cannot or should not be sold as a going concern, if there’s simply no way the company can be saved as it is now, begin selling whatever assets you can that have real value.  In one of the biggest mistakes I made, I bought a company that was similar to another successful business I’d bought in the past.  I had made 10x my investment on the previous one, and thought this one would be similar.  I was overconfident.  I hadn’t done my due diligence as thoroughly as I should and after 3 months of owning this company decided it was actually better to shut it down completely rather than try to sell it to someone else or try to fix it (it was not a ‘fixable’ company by the time I bought it; and it would have been wrong for me to try to sell it to someone else as a going concern business).  When you buy a company, it’s easy to get sucked into the cashflows from the income statements and not take a good hard look at the balance sheet – the assets that can be sold should something go south.  As Warren Buffet says, the first rule of investing is don’t loose money.  Easier said than done, but a good follow up rule to this is to make sure your purchasing enough hard assets that you can cover your downside should the business go south.  One of the biggest problems I see buyers make is they buy too much goodwill and not enough hard assets.