In business, from time to time you’ll hear the word turnaround, as in “this business is a turnaround.” You might be wondering what a turnaround is and why they take professional help to be successful. If so, you’re not alone. In this post I’ll discuss turnarounds and the things you need to know do avoid one in your own business.
What is a “Turnaround”?
I define a turnaround as a business whose trajectory is headed toward a bankruptcy in the next 12 months. If the direction of the business is not changed – is not turned around – the business will not be in existence a year from now.
Signs your business is headed toward turnaround status:
- Your stretching your vendors – you can’t pay them on time
- You worry about how you’ll make payroll
- You can’t bring yourself to fire underperforming employees
- You’re sick of the constant bickering and arguing in your office
- Your debt today is larger than it was a year ago and was used to pay operational expenses
- Your customers are going elsewhere
- Your bank refuses to increase your line of credit or has told you to bank somewhere else
- You’re working harder and harder to achieve less and less
- Your product or service line is outdated and you have no resources to update it
- You find your competitors to be more “in tune” with the market than you are
- Others are telling you things are not good, but you refuse to believe them
- You’ve lost passion and emotional drive for your business
If you have two or more of these signs in your business, then you’re headed toward bankruptcy. I’m not kidding.
What causes a business to be a Turnaround?
In the turnarounds I’ve been a part of, I find there are several common characteristics:
The business has lost control of cash. The owners do not know their cash position and do not know if they are building or burning cash. If they don’t know they are burning cash, then chances are good that over several months or years, the owner will incrementally accumulate enough debt that bankruptcy may be the only viable solution.
The business has outgrown the owner’s ability to effectively manage it. The owners are often the founders, but this doesn’t mean they have the skill set to run the business for the long-term. Most entrepreneurs are not gifted at growing and managing their business past a certain point. Different factors enter into this matrix, including size, number of employees, number of customers, annual gross sales, technology changes, inability to resolve conflict and so forth. While the elements are different in each situation, the overall conclusion is that the person running the business is likely not the right person to be running it in the future without changes in his/her performance, attention management, delegation skills and so forth.
Too many decisions route through the owner. I see this time and again: the owner has an opinion about everything and ends up making tons of decisions, thereby short-circuiting the professional and leadership development of his staff. When he does try to delegate decisions or projects to them, they come running to him for every decision – even minor ones – because they don’t know what their real level of authority is and besides, they don’t want to make a decision that might be overturned by the owner at a future date. This reinforces in the owner’s mind that his staff is immature, lazy and not talented enough to even take on small parts of running his business. So he is left have to work harder and harder as his business grows, consuming more and more of his time and energy. The sad part is that whatever top talent he has hired leaves for more healthy environments where professional growth and advancement are available, leaving him with mediocre talent that keeps him in this vicious cycle.
The owners have grown accustomed to a certain lifestyle funded by their business in addition to their salary and they don’t scale back their lifestyle when the business goes through a downturn – as all businesses do. Chances are good that the owner has a number of personal fixed expenses that are run though his/her business, such as car payments, club memberships, cabin improvements, business trips that include family vacations and so forth. They are written off as business expenses. For example, I know of one owner who pays himself $250K/year plus $10K/year to each of his children and his wife. He then has the business “gross up” his take-home pay by having this business pay all of his taxes. This adds an additional ~$250K/year of expenses. Guess how much cash he is burning each year: around $300K. If he’d simply learn to live on $200K gross, his business would be profitable. But he has a lifestyle now that his wife and kids have come to expect and he can’t disappoint them.
Sometimes, the owners refuse to believe the financial reports given to them. I know of one owner who refused to believe that her revenue was down from over $40M to under $34M in one year. She spent nearly $1M in consultants who combed through their records to find the missing $6M of revenue – revenue that was never missing in the first place because it never existed. She simply refused to believe the truth.
Finally, the owners refuse to ask for help even when the very existence of their business is at stake. I know of one company who lost $17M over three years while top-line revenue plummeted from $55M to $24M and the owner never once considered hiring an outsider to help them figure out the problem. They’ll say that consultant are too expensive, just line their own pockets and never add any value commensurate with their fees. While this is true for some consultants, it is not true for all of them.
What if Your Business is a Turnaround?
What should you do if your business is headed toward bankruptcy? From where I sit, the decisions are pretty clear – difficult, yes – but clear:
- Get help NOW – don’t wait until you feel like “its’ the right time”. You’ll never feel that way – get help now. That’s right – hire a good consultant. Frankly, you can start with me and the Platinum Group.
- Get control of cash. Learn what your cash break-even is, get under it and stay there.
- If necessary, scale back your total compensation package.
- Listen to your staff and develop leaders who can manage significant parts of your business – in other words, diffuse the decision-making processes in your business
- Work “on” your business as much as you work “in” your business
If you do these five things and listen to your advisors, you’ll end up (more than likely) with a profitable, growing business. If you choose to blow off these five things – you’ll do so at your own pearl.
Bill English, Publisher
Bible and Business
