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Articles & White Papers Selecting The Right Turnaround Specialist By Peter Tourtellot, CTP This article recently appeared in Institutional Investor. A troubled business seeking to improve its financial position and put an end to its spiraling debt and loses may look to the professional turnaround specialist as its best chance for long-term survival. In a fragile and often volatile economy it is indeed the turnaround specialist, armed with the proper skills and blessed with total objectivity, who can best accomplish such a feat. Unfortunately many businesses come to this conclusion late, so that by the time the turnaround professional arrives on the scene, there are few options left except to sell or liquidate the company. Businesses that do move in time, while there is still financial breath left in the organization, should be cautioned not to expect miracles. If company problems are recognized quickly and they are acted upon early, then the better the chance for success. While owners and stakeholders have reason for hope, they must still become aware of the sober realities and consequences of a turnaround. REALITIES TO CONSIDER BEFORE HIRING A TURNAROUND SPECIALIST First, the cause of most business failures is not bad luck, tight-fisted banks, tough venture capital firms or rough economic times but a management team that has failed to install the proper financial controls and/or committed a string of poor business decisions. Therefore, one can expect the turnaround specialist to first take a hard look at management capability. This is standard procedure, yet many a CEO and management team has felt the turnaround specialist is fixing blame rather than fixing the problem. They feel personally attacked and threatened. If the board of directors is not willing to face the realities of their mistakes, hiring a turnaround manager may do little good, and perhaps even exacerbate the problem. The same applies to owners who are unable to step aside for a stretch of time and relinquish the decision-making to the turnaround specialist. Second, a business must realize that a turnaround represents a significant investment in both time and money. In most cases years of misguided management have led to this crisis and undoing these mistakes may take more time than a few months . Compensation for a turnaround specialist is on the level of a CEO. Other players in the turnaround are highly skilled in their disciplines and are also billed at a rate commensurate with their experience. Third, a business must have a realistic perception of the new company that will emerge from the turnaround. Almost certainly it will not be a carbon copy of the old one. The new organization will probably be smaller and tightly ordered. If an owner, board of directors or management is looking for someone to rescue a company and restore it to its original form, they are looking for a magician, not a turnaround specialist. Fourth, a business must be willing to carry on the new direction and new procedures established by the turnaround specialist once the engagement has been completed. To simply return to the old ways to doing things is to invite the very same fate. In other words, professional turnaround managers do not only make a sick company well; they forge a whole new direction and discipline for a company. It is best for the company to face that at the beginning rather than the end. When a Southeastern retail chain called on a turnaround specialist a few years ago, it turned out management was looking for improved cash flow and profitability but not painful change. An operational audit revealed that the lavish corporate headquarters and generous perks were draining the company's finances. Management was comfortable with downsizing its stores and distribution centers but not its own office, so the turnaround specialist was not asked to continue. The chain was eventually sold and no longer exists. Fifth, the business must understand the two-sided sword of bankruptcy. Even though it offers a powerful weapon against hungry creditors, the turnaround specialist will probably do everything possible to avoid it. Bankruptcy does more than carry a negative stigma. It is expensive and draining. In some cases bankruptcy is not only appropriate but is the only way to achieve a successful turnaround. However, stakeholders should understand that developing a turnaround while at the same time complying with bankruptcy rules and procedures creates an imposing challenge. Sixth, the management must face the fact that despite the best efforts of a skilled turnaround professional, the company may still face dissolution. After all, no outcome can be one hundred percent guaranteed. A thorough understanding of all the possible outcomes will be helpful before hiring a turnaround specialist. As a rule, a company in such straits has the right to hope for the best, but must be aware of the worst. Underlying all of the above tenets is a willingness to keep personal issues off the table as much as possible and concentrate on the business issues. Emotion not only clouds the judgment but fuels selfish goals and agendas. In the case of one textile company, the recalcitrance of its owner virtually sealed its fate. When a respected turnaround specialist was brought in at the insistence of the bank, the owner quarreled with him constantly. The manufacturer, a major employer in a small town, was hopelessly mired in debt to its suppliers and lenders. The turnaround manger's strategy was to keep the company alive just long enough to attract a healthy buyer. Long-term orders were scuttled in favor of short-term orders, which could produce a quicker payment. The owner chaffed at this policy and worked to undermine the turnaround specialist's credibility with employees. When a cash-rich suitor appeared, the turnaround specialist urged the company to sell, but the owner believed this to be poor advice. Today the company no longer exists. The community lost a proud pillar and hundreds of jobs. Making the decision to hire a turnaround manager is a bold one. No decision may be more important in determining the company's fate, so a few insights should be helpful. The rest of this article is devoted to using the right criteria to select the best turnaround specialist. LOOKING OVER THE FIELD OF CANDIDATES The first decision that needs to be addressed is what kind of turnaround specialist is needed for the assignment. Firms that engage in this kind of activity fall into three categories:
Since quick action is usually required to correct corporate ills, the selection process cannot be a long, drawn out process. However, it must be extremely thorough and intense. Before a candidate is called in for an interview, resumes and reference should be investigated and thoroughly checked. Most likely a resume will be full of glittering credentials and impressive accomplishments. The challenge is to sort through the hype to discover the candidate with the right experience. A person may possess an incredible array of skills, yet few of them are necessary for the job ahead. The turnaround specialist will need a good working knowledge of all the key functions, from manufacturing and distribution to sales and marketing to administrative and financial. The firm will also require someone who is a quick study. Since every day is crucial for recovery, the turnaround specialist must be someone who can provide a timely analysis of the company problems and not become bogged own in analytical detail. Bold claims of managerial success can easily be checked out with a few well- placed telephone calls, so one should not take all the claims at face value. While the facts may be correct, they may not be complete. Beware of unemployed chief executive officers or chief financial officers who present themselves as turnaround managers. Serving as head of a business does not automatically qualify one as a good turnaround manager unless he or she has demonstrated success under fire. EXPERIENCE: THE BEST KIND IS FORGED IN THE HEAT OF BATTLE Of all the credentials and requirements of a successful turnaround manager, perhaps the most crucial is experience. Is it really that difficult to build a good record while operating in a growing industry or launching a new product in booming times? The true turnaround professional is a war general, a person who has been battled-tested when times are turbulent. Look for examples of crisis management on the resume. The heat of a battle is a great proving ground. Besides leading and providing vision, the turnaround specialist must move swiftly from one crisis to the next. They must move decisively and persevere in the face of adversity amid legions of doubters. They must exude confidence and reserve while others are allowing their emotions to get the best of them. During the interview one should look for candor and credibility. Without these qualities there cannot be a certain chemistry between the turnaround manager and the board and top management. Even though the turnaround manager will take the reigns of control, he or she must rely on management for key information and input. A person who operates as a lone eagle will become too isolated and make decisions on limited information, thereby lessening the chances for success. Before making any decision on a turnaround specialist, it is a good idea to become acquainted with the entire turnaround team, especially those that will operate on site. Find out how each will be involved and the nature of their work schedules. AN AMBASSADOR OF CREDIT Gaining confidence with creditors is crucial, and a turnaround specialist is powerless without the ability to win their favor. Contact the leading financial institution to find out the candidate's reputation. If the person is relatively unknown in the financial community, there's a good chance this person is lacking experience. The right turnaround specialist brings not only experience and expertise, but also credibility with lenders. In a typical scenario, a troubled business has promised to pay a creditor within a certain time and it doesn't. Management tells a lender that sales and profits will improve and they don't. When these events occur, credibility begins to ebb away. Finally, after so many unfulfilled promises, unreliable projections and empty talk, creditors and lenders stop listening. When a turnaround manager with good credibility arrives on the scene, it is a real plus. Trade creditors and suppliers should be more willing to help the company through this difficult time. New lines of credit may develop. If a lender has cut off the money supply, the turnaround specialist may be able to open it up again. Cash flow is the real lifeblood of a business, and it is possible that fresh sources of money may also be obtained. However, the new lender will probably require stricter covenants and restrictions because of the risk factor. Mending the relationship with the original lender and reestablishing credibility is therefore usually the best solution. But make no mistake, the success or failure of this strategy lies squarely on the shoulders of the turnaround specialist. ETHICS AND PROFESSIONALISM IN A TURNAROUND SPECIALIST Turnaround management firms are not regulated and professional standards are purely voluntary. A professional organization such as the Turnaround Management Association (TMA) requires its members to adhere to its Code of Ethics. By signing off on the TMA Code of Ethics, the turnaround specialist agrees to certain obligations to the client. In general, the turnaround manager pledges to serve the client independently, competently and professionally. More specifically, all financial relationships that may cloud or have the appearance of clouding the turnaround specialist's judgment are to be fully disclosed. Conflicts of interest or the appearance of such a conflict are not tolerated. Confidential information about the company is not to be disclosed, and no misleading statements about results can be made. The code prohibits profiteering on the side. For example, while searching out new sources of cash the turnaround specialist cannot receive a commission or a finder's fee from a lender. Nor can the turnaround manager receive any kickbacks from outside consultants brought in to assist the company. The TMA Code of Ethics also addresses equity participation, an issue that will be discussed later in this article. Engaging a turnaround specialist who has pledged to uphold these standards gives a company an implied guarantee of professionalism and moral conduct. However, an even greater measure of a candidate's professionalism is accreditation. The Association of Certified Turnaround Professionals (ACTP) maintains and monitors a certification program that is both comprehensive and challenging. More than anything else, the program provides an objective measure of expertise and helps to validate turnaround experience. To acquire the designation of Certified Turnaround Professional (CTP) one must have a minimum of five years of senior management experience, three of which are in turnarounds, and provide a number of professional references and confidential client confirmations. Moreover, the CTP candidate must pass a rigorous three-part exam to demonstrate a working knowledge of management, accounting and law. Support and adherence to the Code of Ethics is also mandatory. All in all, the CTP designation is an extremely valuable benchmark of practical experience, knowledge and professional ethics. Membership in the Turnaround Management Association, belief in its Code of Ethics and accreditation are all signs of a reputable turnaround specialist. These qualifications are extremely useful for a company shopping for one. THE ROLE OF PERSONAL CHEMISTRY After all other factors are weighed and a company narrows its choices of candidates, the final test should turn on the personality of the turnaround specialist. Charm, charisma, affability -- call it whatever you like -- these are abstract and immeasurable, yet they create the necessary personal chemistry between the turnaround specialist and the board of directors, owner or management team. Earlier it was mentioned that the turnaround specialist must be a team player with management. This applies to a much wider circle of players as the turnaround progresses. Rescuing a company from collapse requires a full team of company attorneys, secured credit attorneys, unsecured credit attorneys, bankers and accountants. Tact and diplomacy in dealing with this diverse group very well mean the difference between success and failure. Once a final selection has been made, the troubled company should request a written proposal. The proposal should address the turnaround specialist's initial findings, expectations in saving the company, professional fees and anticipated use of the company staff. It should also include a timeline. The timeline need not predict the actual date of recovery but it should assign reasonable expectations of time for each phase of the turnaround process. In general, this will give a business a feel for the length of engagement. Pay particular attention to the end of the timeline because it involves a sensitive and sometimes murky area. At what point does the turnaround managers withdraw and disengage? The company and the turnaround specialist should have the same answer to this important question. Some businesses prefer that a turnaround specialist conduct research, formulate a detailed recovery plan and then leave it to the company management to execute. In other cases it is left to the turnaround specialist to carry out the plan and oversee all operations relevant to the turnaround. Once all this is placed in writing and reviewed by the company attorney, a business can move ahead with the proper assurance and reasonable expectations. EQUITY PARTICIPATION: PROCEED WITH CAUTION As an incentive, some turnaround management firms may ask for a piece of a company as part of engagement. If so, the business must ask that the firm state its terms before any work begins. Any offer tendered after the turnaround manager has full access to the company files is unethical and a breach of the Turnaround Management Association Code of Ethics. The code further states: "equity independently held by parties affiliated with the member shall be aggregated with the member's direct interest to determining whether or not the member would control the client." Legal counsel representing the company should handle negotiations and documentation of any equity interest to be held by the turnaround specialist. It is possible that a vulnerable company may become so desperate that it will blindly agree to anything. In this dim atmosphere the terms imposed by a turnaround specialist could be so severe and costly the management could lose their company regardless of the turnaround. The careful company will select a turnaround specialist with no hidden agenda or interest in profiteering. ON-THE-JOB EXPECTATIONS OF THE TURNAROUND SPECIALIST Once a company has signed the necessary legal documents and engages the turnaround specialist, it has the right to expect regular written reports. These reports should be concise and timely. Not only do the reports force accountability on the part of the turnaround manager; they make it clear that while he or she may have temporarily taken over the helm, the company is still the employer. At all times the company should feel information is being kept confidential and it should always have access to the turnaround specialist. If any of these issues surface, the company should take immediate steps to correct it. CONCLUSION Whether formulating a turnaround plan or working on site to executing the plan, the best turnaround specialists will enter a company cleanly and leave it cleanly. They state their fee structure up front, make objective recommendations and/or decisions based solely on the company's best interest then exit the organization, leaving it fully in tact and capable of executing and/or maintaining the turnaround. Turnarounds are difficult under the best conditions. It is even more daunting if a company chooses the wrong turnaround specialist to carry it out. Unrealistic or false expectations on the role of the turnaround specialist can also impair success. By carefully selecting the candidates and making sure they hold the proper credentials and professional reputation, a company can significantly improve its chances of survival. |
