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THE TURNAROUND TEST: ASSESSING A BUSINESS FOR TURNAROUND POTENTIAL

by Giles Campbell on 06 Apr 2016

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Business is full of ups and downs, but when do you know the tide has turned and you need to embark on a major transformation? Giles Campbell, Interim CEO and turnaround specialist, looks at how it pays to take a planned approach to assessing how far and how fast you need to change.

Business, by its nature, is fluid. There will be ups and downs, periods of growth, investment, consolidation and redirection. But when do you know you're staring down the barrel of a serious issue? When does a business decide it needs to radically change course or risk completely running aground? Turnaround specialist Giles Campbell looks at some of the lessons learned during a distinguished interim CEO career.

It's not always obvious when a business is in trouble, but there are often signs that alert boards and shareholders to choppy waters ahead.

When the signs of potential failure become apparent, I am often contacted by shareholders to review their business for their turnaround potential. They're nearly always seeking answers to three fundamental questions:

  • Can the business be fixed?
  • What will it cost to get us back on track?
  • Is it a price worth paying?

There's no magic formula for answering these questions definitively, but many years of turning failing business around has taught me that there's a six-step process that will help shareholders make these tough decisions.

1. Assessing the company properly

The primary objective for any turnaround leader is to develop a hands-on understanding of every component part of the business as rapidly as possible.

It is vital to identify the major liabilities and risks as well as the key assets from a strategic business standpoint, rather than simply a cash-value standpoint.

This knowledge, gained through research, relationships, intuition and experience, will be used in the creative planning process as well as the final evaluation of risk vs reward.

2. Assessing the Industry and understanding the commercial environment

I have lost count of the number of failing small-scale printing companies that I've been offered to buy over the years. Unsurprisingly they've all been turned down because it's a declining industry and unless you've got the cash to develop another moo.com, then you're unlikely to make any real money.

Getting under the skin of the sector the troubled business is in, together with the adjacent industries, is going to uncover potential areas of opportunity for future profit as well as give an overall picture of the likely direction of the company. It will also start to provide an indication of the scale of the challenge and the costs associated with getting back on a path to growth.

3. Assessing the capacity, culture and competence of the management team

This entails getting a detailed understanding of the management team's attitude, aptitude and skills.

The culture and ambition of an organisation are critically important factors in the turnaround analysis and will influence the entire future of the business.

Having the wrong people in the leadership team (CEO included) is the single biggest factor in companies failing.

4. Creative planning – plotting a course to long term success

The creative planning process involves assessing the 'box of bits' that the company consists of in order to figure out what can be done with it to make money in the short and longer term.

It is important to remember that these two commercial timeframes may generate different agendas, as short-term cash generative activities may not be sustainable or aligned well with the longer-term desired strong strategic market position. However, a dual focus on both may be necessary during the turnaround in order to minimise the cash cost of turning around the business.

For example, a manufacturing business that I turned around had a great core product range that was in need of major revitalization and we knew that the process of doing this was going to take several years of development work. In the short term there was a market opportunity in a fast-growing adjacent sector, which was likely to be short-lived because competition would heat up quickly. We realised that the rapid development of some carefully tailored products was perfectly practical and within nine months around half of the revenue of the company was coming from these products.

Without this pragmatic investment in short term products the company would not have survived – but at the same time we knew they were unlikely to be the long-term star product range, due to their relatively simple, easy to copy design.

Assessing whether this twin track tactical and strategic approach is necessary, practical and possible is often a key consideration for the turnaround leader.

5. Getting under the skin of the numbers

Turnaround financial estimates are difficult at best. Whilst some non-contributing costs may be cut, the transformation of the business is going to cost money and it is not something to scrimp on. If the transformation goes well then you may add hundreds of millions of pounds of value to the equity of the business.

New product lines and new markets are difficult to predict precisely and is therefore an area where more detailed analysis is unlikely to deliver a better understanding.

Often, big picture assessment is as accurate as you can get. I have yet to run a turnaround where I identified where all the skeletons were buried in my pre-turnaround assessment of the company, so it's important to leave some room for the contingent liabilities that you've not identified.

6. Turnaround evaluation – the final assessment

In the final assessment, the question has to be: Is it worth it?

You need to have a clear view on whether it is worth the cost, effort and risk of attempting a turnaround. You need to understand what the business would potentially be worth to the shareholders that are considering funding the turnaround. You need a road map setting out the estimated journey time and any potential pitfalls along the way.

Of course these are never going to be precise figures. At best they will be a rough estimate – because if there's one certainty about turnarounds, it's that they are messy and unpredictable.

This is the place where intuition and 'gut feel' come in the play. Ask the potential CEO what his gut feel is about the business. If he knows what he is doing then he can tell you, gut feel, if he can achieve the turnaround.

Giles Campbell is a turnaround CEO who has led the successful turnaround of a wide range of companies, from retail fashion to electronics manufacturing, from £2m turnover to £100m. Awarded European Turnaround of the Year 2013 for recovering a central London Ad Agency, he is a regular speaker on turnaround leadership and an advocate of hands-on company recovery.

How to approach your business transformation

Topics: company turnaround

Giles Campbell

Written by Giles Campbell