FAQ Turnaround Management for Boomers
FAQ: Turnaround Management for Boomers – More Than 90% of Small Companies That File Chapter XI Proceedings End Up in Liquidation
Quick Points on Turnaround Management
Bankruptcy usually isn’t a successful strategy for the smaller, troubled, company. Most small companies who use Chapter XI bankruptcies end up liquidating in a Chapter VII proceeding or are just wound up. The secret to a successful small company turnaround is to employ strategies to keep away from the Courts and the bankruptcy attorneys.
If your bank recommends a turnaround consultant, be wary. Ask the consultant how much of his/her business is from bank referrals. If the number is significant, ask yourself if the consultant might not have a serous potential conflict of interest.
The IRS can be a friend to the troubled company. While the bank may control the assets, the IRS can control the cash flow. Since neither bank nor IRS wants to put companies out of business, working with them can forge a successful turnaround strategy.
Don’t be bullied by collection agencies or attorneys. Try to re-establish a dialog with your creditors. At best (in most locations), the collection process can take years. You have time before any assets can be attached to get your company out of trouble. Buying off a bully in the early days can severely damage cash flow and hurt your chances of a recovery.
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What is a turnaround and how long does it take?
A turnaround is a collection of management interventions designed to take an ailing company and turn its fortunes around and get it back into a profitable mode. There are basically three approaches to turnaround: the “slash and burn” approach which strips the business down to its most valuable assets (from a salability perspective) without great attention to its long-term potential as a going concern with the intent of selling the assets for the benefit of the stakeholders; the “bankruptcy court” approach which places the company temporarily under the protection of the Court while it attempts to make a settlement with creditors and sheds unprofitable practices. The Court must approve most of its initiatives, including any settlement; and the “strategic workout” approach, which works with management and creditors to identify the business’s strengths and interests, stops destructive practices and rebuilds relationships in a negotiated environment. A typical turnaround can take anywhere from 6 to 48 months to complete.
Should I speak with a Bankruptcy Attorney?
You can speak with a bankruptcy attorney at any point to get his/her perspective, but remember his/her business is taking companies into Bankruptcy. It’s the solution s/he knows. Still, most good bankruptcy attorneys will tell you they are your last resort. You should only engage them when all else fails and you really have no place else to go. If you have a large company in trouble, your chances in Bankruptcy Court are better; most large companies survive a Chapter XI.
What do I look for in a turnaround consultant?
Ask any turnaround consultant a few key questions to see if s/he is the one to help you if you choose the turnaround route. 1) What’s your turnaround philosophy and why do you think it might work for my company? 2) Tell me about some of the turnaround work you have done for others [often this information will be “masked” to guard the other client’s identity but it will give you a feel for how the consultant would deal with your situation and you can check real references later]? 3) How do you get most of your business [if the consultant has been referred by your bank, watch out. And if the consultant, when asked, says s/he receives more than 40% of their revenue from bank-supplied leads, beware – loyalty may be a key issue]? 4) How do you work? As a consultant? As a temporary employee? Solo? Or with a team? And if you have tax problems, 5) Do you practice before the IRS? The answers will help you decide. And remember, the consultant is only
What kinds of expertise do I need on my team?
Your first need is strategic. You need someone to advise you on business decisions (including the personal implications of those decisions). An experienced turnaround consultant is your best bet here. You also need input from your accountant (and your tax advisor if your accountant doesn’t advise you here), your corporate attorney and your financial planner. Those are the key advisors you need for your team. People you should not include in your turnaround planning until you have made your strategic decision, and even then you should be guarded in what you share, are: your banker, your customers and your suppliers. Individual strategies for each of these groups are critical to the plan but prior knowledge could interfere with a successful turnaround if they are prematurely, or improperly, advised.
Who does the negotiating with creditors? The IRS? My bank?
Your turnaround consultant will advise you on this. Most turnaround consultants will do this as part of their engagement. Some will defer some of the negotiations to you [depending upon how friendly with, or alienated from, your creditors you are], some may ask your attorney to get involved. Keep in mind that attorneys can only speak with other attorneys if the creditor is represented and negotiation is not every attorney’s strong point. Your consultant, on the other hand, can speak with anyone. Once a creditor initiates litigation, however, the lawyer speaks with opposing counsel while the consultant continues to attempt a negotiated settlement. More than 90% of civil actions are settled before trial. As for negotiating with the IRS, whomever you have do this must be skilled in working with this Agency and authorized to do so. Revenue Officers can be reasonable and easy to work with if you treat them fairly and keep your commitments. Too many debtors over-commit and that leads to trouble. Put this one in the hands of a skilled professional.
What if the turnaround plan falters?
Most do, at some point in the process and your turnaround consultant should be prepared for it. That’s why s/he will usually back-load (pay more later) the plan so you can make the early payments as you fix the company. Creditors who have 3-6 months of good results under the plan usually understand a temporary fault and will make allowance for it so long as the plan is back on track within a reasonable period of time. The turnaround plan needs to be carefully crafted to avoid too many deviances from plan.
