Turnaround frequently asked questions

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General

Why does CRS Turnaround provide so much information on turnaround theory and practice - are you not giving all your information away to competitors?

We believe that the information, including that in the turnaround industry in South Africa section should be in the public domain.  It is in the interest of promoting the SA turnaround industry and educating the business community. 

No, we are not giving our trade secrets - our methodologies and toolkits are not included in the web site material.

 

Recognising the need for a turnaround

Just how good is the Z-Score at telling one about a company's financial health?

Even though the model is based on USA business failure statistics, we experienced the Z-Score to be a very reliable predictor of distress when applied to SA companies.

On a relative basis, using the trend in the Z-Score to forecast how soon the situation of a troubled company will become terminal in the absence of a turnaround, is dead accurate.

On an absolute basis, companies in the failing zone do fail within one year unless (1) kept afloat through funding by a benevolent holding company, or unless (2) successful turnaround action, accompanied by refinancing, takes place.

 

Turnaround plan

Surely any distressed company can be turned around?  Seems all one needs is strong turnaround leadership and a plan, right?

No, this is unfortunately not true.

Many a time over-optimistic or over-confident efforts found that one cannot squeeze blood from a stone.

If a company is in trouble due to not having a competitive strategy, or due to mismanagement, a turnaround is normally feasible.  That is provided the financial crisis can be overcome and support from stakeholders can be relied upon.

However, if the causes of distress are external to the company e.g. relating to market demand and/or a severe disadvantage relative to competitors, a turnaround may not be feasible.

In general, if there are too many causes of distress to deal with, and a lack of time, funding and stakeholder support, attempting a turnaround has a low probability of success.  Especially if key causes of distress cannot be easily reversed.

At CRS Turnaround, we prefer to be remunerated on an outcome-based basis.  Accordingly, will don't place our fees at risk if we don't think a turnaround is viable.

Who is best suited to manage a turnaround - a turnaround expert or an industry expert?

The answer is a turnaround expert with relevant industry experience. 

However, if your turnaround expert does not have industry experience, the general consensus is that it is still better to appoint the turnaround manager, who can contract in industry expertise, rather than appointing the industry expert.

Which are the most underrated components of turnaround strategy?

The most underrated components are those in the category of managing the turnaround i.e. the enablers of the turnaround.

Turnaround leadership:  One would think that since the press tend to equate turnaround success with a strong turnaround manager, this would be the norm in industry.  Many companies, however, embark on turnaround programmes with exactly the same old management structures associated with the troubles of the company.

Turnaround stakeholder management:  Many turnarounds focus exclusively on the technical or quantitative nature of the turnaround plan.  In our opinion, that is the easier part.  Turnarounds succeed or fail depending on the success of stakeholder support.

Turnaround project management:  A turnaround is complex.  Managing the planning, control, costs, benefits tracking and resources of the myriad aspects of the process cannot be effectively executed within the normal management structures.  In our opinion, it is best managed on a project basis interfacing with the day-to-day management functions.

What are the most common mistaken approaches to a turnaround?

The first common mistake has been addressed in the previous question - lack of recognition for the importance of the enablers associated with managing the turnaround.

Especially those with financial/accounting backgrounds are often guilty of trying to attempt a turnaround through financial engineering alone rather than addressing the fundamental strategic, organisational and operational aspects of a distressed situation.

Cost cutting normally plays an important role in a turnaround.  In exceptional cases, where the sole cause of distress is wastage, cost cutting alone may suffice.  However, cost cutting, while necessary, is seldom sufficient.  Even though a company can be returned to the black through cost cutting alone, the "turnaround" will still fail in the long run if the underlying strategic, organisational and operational causes of distress are not addressed. 

What went wrong with Coleman Andrews' turnaround at SAA?

There has been much debate about the technical merits of the turnaround (or turnaround attempt depending on your point of view).  Was it real or accounting window dressing?  Were parts of the turnaround successful and other parts not?  What about Coleman Andrews' compensation? 

We believe that whatever good was done or could have done, failed on grounds of poor stakeholder management.  When the exercise became a political issue, support from the sponsors waned.  An unsympathetic press, enraged by being kept at arms' length, put the final nail into the coffin.

 

Stages in a turnaround

Why not just do a normal due diligence to assess the viability of a turnaround?

Due to time constraints in a crisis situation, a proper due diligence normally takes too long.  Also, a conventional due diligence tends to be rather general, containing a lot of information not relevant to short-term survivability and longer-term viability. 

Based on best practice overseas, and our own experience in SA, we devised the Diagnostic Review as a specialised due diligence aimed at the particular requirements of struggling and distressed companies.

 

Turnaround industry

Whenever one reads about a company liquidation, one invariably finds a bank with a claim, or a bank that triggered the liquidation.  Are banks not supportive of turnaround action?

In our experience, corporate and commercial banks, as well as other financial institutions, are indeed very supportive of turnarounds as a rule.

Banks follow a process called an informal creditor workout by the legal fraternity, or simply workout, in which it engages management to come up with a plan to reduce its indebtedness - either through restructuring, turnaround or both.

Banks will only follow the liquidation route as a last resort.  After all, a liquidation dividend seldom covers the exposure of a bank. 

Why don't banks drive a turnaround?

As a creditor, a bank cannot dictate turnaround action, since the rights of other creditors such as trade creditors may be prejudiced.  Banks, however, normally have considerable influence on a turnaround by negotiating a workout with management.

Obviously, should the bank become the owner of a business by virtue of exercising its security over the shares and/or assets of the business, it may decide to first initiate and fund a turnaround of the business before selling it.


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