A Deep Dive Into How To Turn Around a
Troubled Business

Signs of a Troubled Business

Business owners who encounter corporate distress often go through the same emotional stages as dying people: denial, anger, bargaining, depression, and finally acceptance.

Executives who recognize and acknowledge the signs of trouble and get help in the earlier stages have a much better chance of a successful recovery for their company.

Most businesses in distress display more than one of these external and internal signs of trouble:

An Ineffective Style of Management. 

  • A president or founder of a company often is reluctant to delegate authority or refuses to do so.
  • Dishonesty or fraud may exist yet go undetected or unreported.

The board of directors may be non-participative and ineffective.

Over Diversification. 

  • The business has yielded to pressure to diversify to reduce risk.
  • Too much diversification may cause a company to spread its managerial, financial, and competitive resources too thin.

As a result, the business becomes vulnerable to loss of market share to better competition.

Weak Financial Function. 

  • A company with excessive debt, stringent covenants, and inadequate working capital is operating with little or no margin for error.
  • Credit is overextended, inventories are at high levels, and fixed assets are underutilized.

The current management team may engage in counterproductive attempts to grow the company out of its problems.

Poor Lender Relationships. 

  • A weakened financial condition leads the company to developing an adversarial and unproductive relationship with its lending institution(s).
  • Fearing that its loan relationships and facilities may be in jeopardy, the company tries to conceal financial information from its lenders.

This kind of a lender relationship only leads to more trouble and compounds the difficulty of managing the declining business operations.

Rapid Growth. 

  • Companies achieving fast growth from concentrating on increasing revenue often overlook the effects of that growth on the balance sheet and cash requirements.
  • High capital investment requirements in R&D, capacity, and working capital may be needed.
  • Leveraging a company to meet these increased funding needs means the management team must operate with little or no margin for error.

Growth has led to overwhelming the capabilities and effectiveness of the management team and the employees alike, who may not be able to work successfully at the new level.

Loss of Market Share. 

  • A problem lies in sales and marketing; the company hasn’t kept pace, doesn’t recognize the needs of the marketplace or have the ability to ship its products effectively to its customer base.
  • The source of the problem may be technology, equipment or products and services that have become obsolete.

Changes occurring in the marketplace have not been recognized, thus leading to decreasing sales and declining market share.

Customer Mix 

  • The business relies on a few big customers for most of its revenue.

The loss of just one of these key customers could put hundreds out of work and send the business into bankruptcy.

Lack of Operating Controls. 

  • The company is operating without adequate reporting, accountability, and responsibility documentation.

Management decisions based on inadequate, untimely, or inaccurate information can make a bad situation considerably worse.

Operating without a Business Plan

  • Management team often operates a growing company by intuition or by the seat of its pants. Its plan may change overnight because it is based on the management teams own “feel” for the market.
  • The business plan exists in everyone’s head rather than in writing.

The result is that plans are carried out according to individual interpretation.

The Five Stages of a Business Turnaround

Stage One: Changing Management 

Stage Two: Analyzing the Situation 

Stage Three: Implementing an Emergency Action Plan 

Stage Four: Restructuring the Business 

Stage Five: Return to Normal 

For details of each stage, view our blog post Five Key States of a Turnaround

Should You Hire a Turnaround Professional?

When evaluating the decision of whether and when to introduce a turnaround professional into a company, several important questions should be considered:

  • For how long will the services of a turnaround specialist be required?
  • Can the company pay the turnaround specialist’s fees?
  • Will the turnaround manager bring in other specialists?
  • Is the existing management team willing to work with the specialist?
  • What exactly is expected of the turnaround specialist, and are the goals in writing?
  • What are the chances of success in turning around the company?
  • Is the company willing to let an outsider liquidate or sell key units of the business if necessary?

Net Profit, Inc. is a full service Management Consulting Firm. Contact Jim Huntsman, President, at netprofit25@gmail.com or call him direct at 330-620-2761.

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