Definitions of Turnarounds
We define turnarounds as returning an insolvent or potentially insolvent business to operational and financial stability, whilst maximising all stakeholders' interests.
- Proving core viability
- Restructuring skills and experience
- Turnaround finance
- Turnaround management.
- Turnaround Finance
- Turnaround Management
Although all turnarounds are different and one cannot prescribe a "format" for a turnaround, we feel that most (but not all) turnarounds require certain common ingredients.
We feel that once the core viability is proven, that the implementation of the turnaround is a bit like a 3 legged stool. If you try to implement a turnaround without including all 3 components of turnarounds, the stool will become unbalanced and fail.
For this reason, we specialise in providing all 3 key areas:
- It is unlikely that all of the existing management, which causes the financial crisis, are the appropriate people to initiate the turnaround, and
- Almost all management teams in distressed businesses have weak areas that must be addressed if the turnaround is to be effective.
- The process usually takes between 6 and 12 months. However, this period may be much shorter or longer given the nature of the crisis.
- The restructuring and finance legs are essentially concerned with strengthening the businesses' balance sheet, whereas the turnaround management process is about improving operational stability to generate sustainable profitability and cash generation.
- The value of the turnaround process is taking the business value from zero - which would be the case in terminal insolvency, to a going concern value. This is the added value that TMP are experts at providing.
In order to demonstrate the classic turnaround cycle, we have created a series of graphs.
In the above graph we see the start of the business cycle. The concept of "critical stability" is fundamental. Critical stability is the point where a company achieves both operational and financial stability. In this graph the business has grown successfully, but through "critical stability" and an event or a series of events has caused the business to be radically weakened.
At this stage, one of 2 things happens, either creditors commence enforcement actions (to get their money back) or directors initiate action by seeking out specialist advice.
This graph shows the impact of restructuring. By this we refer to restructuring creditors. This can involve a simple deferment of (for example) one creditor, or, it could involve a more complex insolvency restructuring. Examples of this (in the UK) are company voluntary arrangements (CVAs), administrations and “informal” creditor deals.
However, regardless of the procedure, our experience has shown that if one relies solely on the "restructuring", it rarely achieves a sustainable turnaround. This is because the business is not effectively stable. So while cosmetically balance sheets can radically improve, this in itself can often be insufficient.
It is commonly essential to insert either replacement or additional finance.
This is because turnarounds have a very high propensity to absorb funds at a greater rate than going concern restructurings. TMP are recognised leading experts in this field. Please see Finance Turnaround and TMP's Corporate Finance Services.
In virtually all cases (in our experience) the financial crisis are a result of management errors. The degree of error may be minor or fundamental, and the need for turnaround management may vary. We do not belong to the school of thought that says that all management of all financially distressed businesses should be replaced.
However, we believe that
Therefore, we believe that in almost all turnarounds, dedicated turnaround management support is required.
Our experience has been that not only do you need to focus on changing some or all of the people and for the focus of the management team – but we need to focus on changing the game plan.
We normally use a “bridge” statement which bridges the required steps from a current loss making to an operating profit. This change has to be possible to be effected in a short time – as little as 3 to 6 months. The bridge includes key (and perhaps obvious) steps like redundancies and onerous lease terminations.
However, we have been more aggressive than this traditional model, by moving some or all of the business offshore to a low cost developing market economy. Please see our offshoring section.
This graph shows the complete turnaround process. There are a number of observations.