7 strategies of turnaround

In uncertain times, and at any time, we know that businesses can face financial struggles due to market changes, poor decisions, or other reasons. We also know that the quicker they take action and seek expert help, the better the outcome.

If you have a client whose business is in crisis, turnaround can help them get things back on track. Importantly, every business and situation requires a different approach, but the basic steps and strategies in a business turnaround are the same.

These steps include crisis stabilisation, leadership cuts and reshuffling, gaining stakeholder support, redefining strategic focus, making organisational change, enabling critical process improvements, and financial restructuring.

1. Crisis Stabilisation

When a business is experiencing financial problems, swift action must be taken to resolve the situation and turn things around. But what exactly is involved in a successful business turnaround? And what actions need to be taken?

We identify seven critical turnaround strategies that can be implemented to guide a business back to black. The first and most critical step is crisis stabilisation.

What is crisis stabilisation?

Crisis stabilisation refers to the measures used to immediately ease the financial stress a business is experiencing. The faster crisis stabilisation can begin the better the chances of business survival.

The key objectives of crisis stabilisation are to:

• Conserve cash in the short term
• Rebuild stakeholder confidence by demonstrating that senior management has taken control of the situation
• To begin to reintroduce predictability into business operations

Understanding the crisis stabilisation process

As soon as crisis stabilisation begins, things must move very rapidly in order to take control of the situation and start aggressive cash management.

The first step is to collect and review all the businesses financial documents, including:

• Balance sheet comparable for the last three years
• Profit and loss comparable for the last three years
• Budget versus actuals
• Cash flow forecast
• Business plan or strategic plan
• Organisational chart
• Aged receivables and payables
• ATO running account

These documents provide an opportunity to adequately assess the situation and help determine where the business currently sits and how severe the situation is. With these insights, effective actions can then be taken.

If a business doesn’t have these documents readily available, they need to pull them together as quickly as possible.

1. Conserving cash flow

After the initial review, conserving cash flow is the next step in crisis stabilisation. Maximising a business’s cash flow boosts its ability to service debts and gives banks and other lenders confidence to offer assistance. 

Conserving cash flow includes cash management, quick asset reduction, short-term financing and first-step cash reduction.

Some of the main ways to do this when a business is in crisis include:

• Sale of non-core current assets or disposal of surplus plant and machinery
• Establishing financial controls, including  putting new processes and procedures in place
• Implementing immediate cash flow changes, including:
  • Liquidating surplus stock
  • Improving debtor collection and stretching creditor payments
  • Putting all capital expenditure (except essential) on hold
  • Increase prices or run a promotional event (this should be done by exception only)

In addition to this, the business’s finance team should draft a weekly and 13-week cash forecast. Plus, their finance broker should look to revise their funding mix and introduce short-term funding solutions.

2. Rebuilding stakeholder confidence

In crisis stabilisation, taking control of the emotional response of employees and other stakeholders is just as important as taking control of cash flow and finances.  

With the business in trouble, employees may be feeling uncertain and worried that they’ll be out of work. Suppliers might also be on edge, thinking they won’t get paid.  

The best way to manage this is to demonstrate that senior management is taking control of the situation and keeping the communication lines open. This will help rebuild confidence in the business.

Be direct, open and honest and acknowledge any concerns. But, at the same time, don’t make early promises you’re unable to keep.

A good way to communicate the message is to identify influencers in the business, ensure they’re on board with the situation, and ask them to spread the message.

If employees know what’s going on and that clear action is being taken, it will prevent dissent and ensure they continue to work to their best ability. It will also deter suppliers and other stakeholders from pulling back or taking action.

3. Reintroducing predictability

Another vital part of crisis stabilisation, once the finances are under control and stakeholder confidence is being managed, is to reintroduce predictability into the business.

Predictability can mean a number of things, including ensuring that people can see the future course of their interactions with the business and that business continues as usual, as much as is possible.

Job responsibilities and reporting lines should also be reaffirmed so that people are clear on what they should be doing as the crisis is handled.

Important elements of crisis stabilisation success

There are five key elements critical to crisis stabilisation success:

1. Taking control of the situation – This means grabbing hold of these levers and nailing down hard on targets, measuring results and being vigilant.
2. Tough decision-making – Financial decisions are never easy, especially in times of crisis when the pressure is on, but they must be made fast.
3. Maintaining visible leadership – Leaders should be active, participate in meetings and communicate frequently, demonstrating they’re still leading.
4. Delivering quick wins –Actions that swiftly lead to ready cash flow and an easing of the financial strain will improve the situation and attitudes.
5. Dealing with dissent – Directors and other stakeholders will have differing opinions on what to do. They must be quickly aligned. 

2. Leadership cuts and reshuffling

If a business is struggling but still viable, these seven turnaround strategies can be put into motion to help turn things around. 

Once the business is stable, attention should quickly turn towards the business leaders.

Let’s start with the CEO

Alongside market causes, inadequate senior management is frequently cited as one of the top causes of small business corporate decline. Because of this, many, but not all, turnaround situations require a new chief executive officer (CEO).

It’s something you commonly see when failing big companies hit the news. The CEO is typically the first one out the door – whether they want to go or not.

This is because CEOs are the ones in charge of making the major corporate decisions and managing the company’s overall operations and resources. They’re also the point of communication between the directors and the operations.

When a business finds itself in crisis, they’re the person who was steering the ship leading up to the failure. This makes them accountable and suggests inadequate management. 

Inadequate management could mean failings in areas such as strategic planning, poor decisions and financial management. It could also mean being resistant to change or being a cause of conflict negatively impacting the business.

Some argue that replacing the CEO isn’t a necessary move, but in our experience, it often is.

Identifying problem leaders and staff

As well as letting go of the CEO, you also need to look at other senior management and the rest of the workforce to identify underperformers and those resistant to change.

During a swift period of assessment, meetings with management and other staff should be made to determine their value to the business and what capacity they have. Through these discussions, it’s possible to draw out the details of the business’s struggles and put all problems on the table.

Once decisions have been made, they need to be communicated to those affected and all levels of the business, quickly and with clarity. It’s important that the reason for the change and the need for new results are explained.

Passing the buck of staff cuts

Making these sorts of leadership changes internally is inherently tricky. This is because leaders and managers are too close to the business – and each other.

Plus, they have a vested interest in keeping themselves employed – even if they’re the cause of some of the company’s issues.

Because of this, calling in an independent turnaround expert to make necessary leadership changes is a smart move. They can come in with fresh eyes to assess the senior management teams and make any tough decisions.

They also have no emotional ties to the business or people and can remain calm, confident and utterly determined and dispassionate when making cuts.

Building a new top team

Replacing the CEO and other senior management with new talent from outside the business can help inject fresh thinking into it and enable the company to focus on new strategies to lead the turnaround.

It also sends a strong message of confidence and change through the business and to external stakeholders – something is being done.

Once this leadership change has happened, the focus needs to turn to the task of building a top team. Once you’ve figured out everybody’s skillsets and capabilities, you can put them in the best position in the business – and identify new leaders.

You also need to build commitment across the workforce. It’s crucial that everyone is motivated at an early stage and on board with the new direction, goals and expectations.

The priority at this point is to prevent good people from leaving and start mobilising the organisation for the challenge ahead. Close monitoring and reviewing is essential.

3. Stakeholder support

During a business turnaround, once the initial crisis has been stabilised and leadership has been replaced or realigned, the next step is managing the company’s stakeholders – those with a vested interest in its success.

Ensuring stakeholders are on board with a turnaround plan is crucial. Not only do supportive stakeholders have the power to accelerate improved performance, but their backing, or lack of, can be the difference between feat and failure.

But what exactly needs to be done to turn negative perceptions around, obtain stakeholder support, and get those key relationships back on track?

Identifying business stakeholders

The first and most obvious action in gaining stakeholder support in a turnaround is identifying who those stakeholders are. Most businesses can quickly identify them.

Common examples of business stakeholders include:

• Financial (debt and equity)
• Creditors
• Customers
• Unions and employees
• Government
• Board of directors
• Press
• Communities

Prioritising stakeholders in a turnaround

Once a company’s stakeholders have been identified, the next step is to figure out how important a part they play in the business – and how central their support is for turnaround success.

It can be easy to assume that it’s only financiers you need to focus on in a financial crisis, but it’s important all stakeholders are included.

However, each stakeholder or group will have different interests, attitudes, and priorities – and varying things at stake. Financial and creditor stakeholders, for example, will be focused on payment, employees would have jobs and income on the line, while government may be worried about tax payable.

To figure out which stakeholders to prioritise, a good exercise to carry out is stakeholder mapping. This involves plotting your stakeholders according to both their interest and their influence or power.

Stakeholder mapping can help highlight the characteristics of the stakeholder groups.  Questions to ask include:

• How do they fit into the business?
• How could they hinder the turnaround?
• Are they more or less influential in certain areas?
• Do they have legal rights?
• What responsibilities does the business have to them?
• Could they easily be replaced?

In a normal trading scenario, customers will be the primary focus. However, during a turnaround, this shifts to stakeholders impacting supplies, capital and other elements that will positively impact cash flow in the short term.  

A turnaround expert can help analyse and understand what’s at stake for each stakeholder in this situation. 

Rebuilding relationships in a turnaround situation

Quite often in a crisis situation, communication between a business and its stakeholders will have broken down or can be notably fractious. In some instances, the relationships can be past the point of no return.

The challenge is often convincing these stakeholders that turning around the business will be a better option than termination and winding up.  This involves being honest and sharing clear and concise information with them.

Often CEOs and senior management don’t have the knowledge to deal with financiers effectively in a crisis situation. Because of this, having a turnaround expert to negotiate and communicate on their behalf can be highly beneficial.

They’ll work to rebuild confidence, bridge any knowledge gaps and reinstate the relationships so appropriate communications can be actioned.   

Developing a communications strategy

Once relationships have been initially smoothed and the lines of communication are open, a plan should be developed for ongoing communications.

Managing competing interests is often a complex and delicate task. It requires timely communication of relevant information throughout the turnaround period.

The process of stakeholder mapping and determining stakeholder and stakeholder group characteristics, interests, and influence can help identify the most suitable communications for each and how to structure them. 

With this in mind, a communications strategy needs to be developed and agreed upon. This should include the channels to be used, the frequency of communications, and the information to be shared.

An effective communications strategy will ensure that the information they receive is relevant to their needs, so messaging should be tailored accordingly. It should also build positive attitudes towards the company and the turnaround process.

Mapping out your communications plan

A stakeholder communication matrix or grid is a good way to plan it out. This grid should cover the following:

• Which stakeholders you’re communicating with
• What message you’re going to communicate
• When and how often you will communicate
• What channels/methods of communication you will use

High interest and influence stakeholders, such as creditors and employees, will need more in-depth financial updates. They’ll also need more regular communications.

There are a range of communications channels you can use, including:

• In-person (individual or group)
• Virtual face to face meetings
• Phone
• Email and newsletters
• Social media
• Online platforms

Communication with critical stakeholders is often best done in person or face to face. This makes them feel prioritised and also enables two-way conversations, so you’re not just talking at them.

Our top tips for gaining stakeholder support

• Understand each stakeholders agenda
• Don’t judge what your stakeholders’ value; understand why
• Manage perceptions and expectations
• Make sure all communications are honest, factual and concise
• Only share relevant information – how are their interests being resolved?

4. Strategic focus

If a company is in financial crisis, the initial priorities in a turnaround involve dealing with threats to survival.

Once these critical aspects are handled, the coin then flips from ‘survive’ to ‘thrive’ and a focus on strategy. Focusing on strategy allows a business to exploit available opportunities and set itself up for success during the crisis and further down the line.

It may seem illogical to focus on strategy when the future of a business is uncertain, but it’s actually during crisis when strategic focus is needed more than ever.

Redefine the core business

Redefining the core business (or businesses) – the primary area or activity the company was founded on – is the most fundamental form of strategic change.

While doing so presents significant risks, it can also offer numerous rewards, including increasing market share, attracting new customers, securing competitive advantage and unlocking valuable new sources of revenue (PWC).

In a crisis situation, the proceeding strategic analysis will have to be quick and dirty. During the process, the long-term goals and objectives change, the management mindset shifts and the business is reimagined.

A diversified multi-industry conglomerate may become an industry-specific focused business; a vertically integrated company may split, or a multi-process organisation could restructure around a single core process.

Downsize or right-size the business

Downsizing a business involves digging into its layers to determine where the real work is done and eliminating the unproductive workers and divisions. This requires a lot of detective work. How many layers are removed depends on the structure you’re looking to achieve.

Right-sizing, on the other hand, involves restructuring a business to make it more efficient, profitable and better able to meet its new objectives. Like downsizing, it may include terminating employees, but right-sizing isn’t just about reducing expenses; it’s about getting the business to its optimal size.

Ultimately, downsizing is a reactive or cost-cutting measure, whereas right-sizing is more proactive and getting the business to the right place for future success. 

Strategic divestments

During crisis stabilisation (covered in part 1 of the blog series), divesting involves liquidating current assets or the disposal of surplus plant and machinery to make quick cash. However, at this point in turnaround, divesting is a little different.

Decisions may be made to cut out product lines, customers, or whole areas of the business, which are then liquidated or divested. The focus here is the disposal of significant parts of the company (division or operating subsidiaries).

This type of divestment is about eliminating unrelated, unprofitable or unmanageable operations. It may involve spinning off a portion of the company, selling it to another organisation, or closing it. Its purpose is to enable growth and secure a better competitive position.

Growth via acquisition

Acquisitions are most commonly used to turn around stagnant firms: firms not in a financial crisis but whose financial performance is poor. However, growing by the acquisition of firms in the same or related industries rather than organically means turnaround can be achieved faster.

Realistically, it’s a strategy available to few firms in a crisis situation because they lack the necessary financial resources to purchase. However, once their survival is assured, acquisition may be part of the strategy to achieve sustainable recovery.

Product-market refocusing

Less radical than a complete redefinition of the business, but still involving fundamental strategic change, is a refocusing of the product-market mix. This occurs at the operating-company or business–unit level and involves the firm deciding what mix of products or services it should be selling to what customer segments.

In many cases, businesses lose their focus and have spread themselves too thin by adding products and customers while continuing to compete in all their historical product or market segments. To figure out if this is the case, the Pareto (80:20 Rule) can be applied.

Pareto analysis quickly shows when there is an excessively broad product range and customer base – which consists of loss-making or low-margin business. Once identified, they can be dropped, and efforts refocused on more profitable products and customers.

Outsource processes

More and more Australian businesses are outsourcing non-primary business processes to third parties to reduce costs, improve efficiencies, eliminate growth bottlenecks and enable transformation – a strategy with benefits that also pay off in a turnaround.

During a crisis, the focus should be on profitable processes where the company has a relative advantage in the market. The remainder of the processes, from IT to HR or finance, can then be outsourced to third parties, including overseas providers, who can perform them more effectively.

5. Organisational change

Turnaround requires strategic focus, which often means revisiting and realigning existing strategy to improve the status quo. From this point, significant changes can be made internally to align with the new direction.

Winston Churchill once said, “To improve is to change…” – a quote just as relevant in business turnaround as it is in politics. By changing up how a company does things – how it operates – you can increase efficiencies and future success.

One of the most visible signs of a troubled company we see is people problems. Common symptoms of people problems include a confused organisational structure, a paralysed middle management, resistance to change and demoralized staff. This is where change should focus.

Organisational restructuring

A sound organisational structure that defines the different roles, how they interact, and how things get done to achieve business objectives is crucial to success. If it’s confused or doesn’t align with strategy, failure is more likely.

Some often-seen examples of poor organisational structure include:

• Steep hierarchy – Top management don’t interact with workers regularly. This can lead to a mismatch in understanding.
• Role confusion – If people don’t know what they’re doing, they won’t be as productive or may double up, wasting resources and profits.
• Procedural problems – Out of date or unclear procedural rules and guidelines can drastically reduce productivity.
• Silo working – If all parts of a company work separately and not towards the same goal, they will fail to meet it.

Organisational redesign begins with understanding what isn’t currently working well.  Sometimes this is obvious; at other times the signs may be more subtle.

A revised structure that facilitates clear accountability and responsibility will make the implementation process much more straightforward. It’s also a powerful way to rapidly change the operations of an ailing business.

Key people changes

One of the big factors in business success is people.

People are the ones who drive production, innovation, sales and more. They are even more important than structure. That’s why when there are business problems, there are usually people problems.

Capable and motivated employees are critical to an effective turnaround. After all, they’re the ones who will have to implement whatever recovery plan is agreed on.

Making key people changes involves assessing employees in the organisation, particularly the management, and deciding who, if anybody should be changed. We covered leadership changes in detail in blog two of this series.

Signs of a poor performing employee include:

• Do the bare minimum
• Less productive than colleagues
• Make excuses
• Overly assertive
• Cause drama and friction
• Don’t get along with others

The type of people a business needs are those who conduct themselves well and have the experience, attitude and dedication to make the turnaround a success.

Improving communications

In blog three on stakeholder support, we talked about the importance of a communications plan in achieving stakeholder support. But communication doesn’t stop here. Improving how the business communicates internally day-to-day is also critical.

Past research has shown that businesses with highly effective internal communication practices enjoy 47 per cent higher returns than organisations with poor communication.

But as well as increasing your profits, improved communications can also increase employee engagement, build stronger teams, and boost the company’s competitiveness –  factors critical in turnaround.

Some proven ways to improve communication include:

• Facilitate open dialogue (two-way-discussion)
• Invest in online project management tools
• Prioritise teambuilding events
• Use the right communication channels
• Make company goals and values visible

Building commitment and capabilities

Building commitment is crucial when it comes to people. For a turnaround plan to succeed, staff must be behind the plan and the revised business strategy.

Commitment means two things. Firstly, that they’re engaged with the business and their work. Secondly, they’re committed to seeing the company thrive.

Creating engaged workers and a high-commitment workplace isn’t necessarily straightforward. But if we were to summarise it, we would say it boils down to ensuring the business is communicating a compelling future vision, creating the right ‘open’ culture, driving performance and carving compelling career paths.

Alongside commitment, capabilities also need to be built. This means ensuring adequate training is in place to support the change program. In other words, that everyone has the skills they need to step up. It can also help boost commitment.

To help guide this change, a formal, written training plan that describes what training and assessment will be carried out is essential.

Changing employment T&C’s

Often a turnaround plan involves revisiting the company’s terms and conditions, such as hours, paid leave, notice of termination for all grades and staff. It’s important that any changes made align with the new direction and roles and are put out to staff for consultation. 

An effective rewards system can play a major role in tackling the people problems of a business. Therefore, the entire organisation should be given strong incentives to implement the recovery plan, which means a change in the rewards system.

There are many different types of rewards businesses can offer their employees, from office perks to free parking spaces, lunches out and free tickets – all which work to some extent.

However, it seems obvious to us that people who feel they have a stake in the business, and who are financially motivated to implement a recovery plan successfully, are more likely to put in their best efforts than those who aren’t.

6. Critical process improvements

As well as having organisational issues in the form of people problems, substantially underperforming companies typically also have serious problems with both their core and support processes.

These process problems are often characterised by high cost, poor quality, and lack of flexibility/responsiveness. To rectify these issues, turnaround often demands critical process improvements – the key to productivity and profit gains.

Identifying critical process issues

Because business processes are often complex, identifying problem areas isn’t always easy. It begins with business process mapping and auditing.

By identifying and analysing existing processes, shortfalls will become clear. This analysis should consider the impact of the process on existing growth, stakeholders, employee motivation factors, customers, suppliers, and revenues of each process.

Market data and employee feedback can also be sought. This can offer good insights into what procedures are causing delays or affecting quality.

A board workshop should take place to challenge the relevance of each process on the existing business strategy and identify current strategic priorities. A turnaround expert can run this objectively and effectively.

The key assumptions driving financial performance should be analysed. Plus, there needs to be a drill down on budget and a reality check against historical performance.

Understanding what improvements to make

Business process improvements generally fall under the following:

• Time improvements: Typically, the focus is to make the organisation more responsive and more flexible by reducing the time taken to bring a product to market or reducing manufacturing lead times.
• Cost improvements: The approach is to simplify processes to reduce both fixed and variable costs.
• Quality improvements: This is self-explanatory and is about reducing the level of rework by systematically analysing the reasons for non-conformance and putting in place corrective actions to improve processes.

Once the problem areas have been identified, improvements need to be made, quantifiable goals set, and metrics determined to see if the changes applied to each process work over the next 12 months. 

The five critical areas of CPI

The key to critical process improvement success is to focus on a few processes that can be fixed and implemented quickly. This approach will have a bigger impact on cost-cutting, increase working capital and improve quality and customer responsiveness.

There are five crucial areas we recommend a business focuses on when making critical process improvements. These are

• Improved sales and marketing
• Cost reduction
• Quality improvements
• Improved responsiveness
• Improved information and control systems

These can be further grouped into three overarching areas of focus: demand generation, demand fulfilment and support systems.

Demand generation

Assuming that product-market refocusing decisions have been taken, improving the selling process and the effectiveness of the salesforce is a key area for critical process improvement quick-wins.

Marketing mix improvements include brand management/repositioning, promotions and, particularly, pricing. New product development and improved customer responsiveness may also provide important improvement opportunities.

Although this area tends to be more critical in enterprise transformation than turnaround situations, increasing innovation rate and improving product engineering are important longer-term initiatives.

Demand fulfilment

This is typically the core area for process improvements and involves substantial cost reduction and improved effectiveness in procurement, manufacturing/conversion, logistics, and after-sales service.

Simple procurement initiatives can reduce cost, working capital and inventory risk and improve quality and service.

Gaining control of the shop floor and improving efficiency typically involves layout changes and the introduction of cellular manufacturing, just-in-time (JIT) and Kanban principles.

Support systems

The introduction of a production planning function to balance the supply-and-demand side of a business is an essential generic response to a very common business problem.

Other improvements are targeted at head-office functions and include introducing new performance measures, improvements to the management of the physical infrastructure, and restructuring the finance department to deliver timely, relevant and accurate information.

Building process improvement teams

Once a critical process improvement plan has been agreed on, project teams should be created to assemble action plans for each of the five crucial areas.

Interdisciplinary, multi-skilled, and management-supported process improvement teams are one of the key success factors of Six Sigma – a set of proven techniques for process improvement. This team needs to be able to effectively affect the change in the business and enable a cultural shift.

Often the ‘champion’ or leader of the team will be the person in charge of the process in question. This champion must then make sure the rest of the team are clear on the objectives of their critical process improvement objectives, why it’s a priority and what’s expected of them.

Monitoring implementation of the process improvement plan

Once each team’s primary efforts are completed, each new process must be constantly monitored and controlled to ensure efficiency.

To do this, teams should continually measure process outcomes against the previously defined metrics. This can help eliminate problems and identify risks. Teams can then become part of the solution, creating action plans to devise solutions.

7. Financial restructuring

Irrespective of the health of the underlying business, if the operating cash flow cannot finance the debt and equity obligations, a company will remain fatally wounded. In these circumstances, the only solution is a financial restructuring.

Financial restructuring is the process of reshuffling or reorganizing the financial structure of a business. It usually involves changing the existing capital structure and/ or raising additional finance through borrowing or asset reduction.

While financial restructuring can be challenging, it’s an effective catalyst in improving a business’ performance and sustainable growth.

Financial issues foreshadowing turnaround

Companies needing turnaround typically suffer from one or more of the following:

• Cash-flow problems – Insufficient future funding or an inability to pay debts as and when they fall due
• Excessive gearing – A larger proportion of debt than equity
• Inappropriate debt structure – For example,excessive short-term/on-demand borrowing and insufficient long-term debt
• Balance-sheet insolvency – When a company’s total liabilities outweigh its total assets

Financial restructuring can help tackle and resolve these issues.  

The first steps in financial restructuring

The first step in financial restructuring is to make a quick but thorough assessment of the businesses short-term cash requirements (typically 13 weeks).

The second step is to identify and map all relevant stakeholders, such as lenders and shareholders, to understand their agendas and tailor communications to secure agreement for the restructuring. See our previous blog in the series on stakeholder support.

The objectives of any financial restructuring are to:

• Restore the business to solvency on both cash-flow and balance-sheet bases
• Align the capital structure with the level of projected operating cash flow
• Ensure sufficient financing in the form of existing and new money is available to finance the implementation of the turnaround plan

Entering a standstill agreement

When restructuring is considered over an insolvency appointment, it’s a good idea for the business to enter into a standstill agreement.

A standstill agreement is a formal agreement between a company and its creditors. The agreement prevents creditors from taking legal action for any losses while the restructuring is planned, providing much-needed breathing space.  

The benefit of a standstill agreement is that relationships are preserved and the stakeholders have the prospect of the business paying off its debts and liabilities and become a profitable paying client again, rather than a bad debt.

Often the creditor parties must be convinced that the standstill agreement is the best option for both parties, which involves expert negotiation.   

Exploring value options

To address a company’s financial issues, capital restructuring and asset reduction options should be explored. This includes considering the advantages and disadvantages of each.

An independent financial broker should be brought in to create a plan for the restructuring. They can offer expert financial guidance on the best options for the business. They’ll also be on the businesses side and save them time and money.

Capital restructuring

Capital restructuring involves changing the mix of the debt and equity in a company’s capital structure.

It usually involves an agreement between the ailing firm and its creditors (usually the banks) to reschedule and sometimes convert interest and principal payments into other negotiable financial instruments.

The raising of new funding may involve additional debt, typically from the existing lenders, who may be persuaded that the best prospect of recovering their existing lending is via the provision of further lending.

The provision of new equity from existing shareholders via a rights issue or from outside investors (vulture funds, etc.) frequently accompanies new bank lending.

Existing funders may accept a financial restructuring even if progress in the other key turnaround strategies isn’t good because they believe restructuring represents the best option for recovery of their investment.

To attract new money from new investors, there must be a convincing plan and a real prospect of appropriate returns in the restructured company.

Asset reduction

If a company is far from its breakeven point, asset reduction, or asset sale, is a good way to bring things in line by quickly reducing debt and injecting cash flow.

Assets and the business should be valued to determine their value – or the fair value market value of the business’ total assets deducting liabilities.

The key is to identify assets that are surplus to requirements and dispose of them at the highest possible value. How they are sold depends on the assets. For example, equipment can be sold on the second-hand market, while selling a part of the business may be more difficult and requires expert negotiation.

The process of asset valuation may also mean you can borrow more against an asset where its value has increased or additional equity has been generated by paying down a debt previously.

Undertaking financial restructuring

Even the most experienced, capable business leaders typically need additional support to address the significant challenges of financial restructuring. 

A turnaround expert can determine the extent and urgency of the liquidity issues and identify appropriate restructuring options. They can also help the business execute the restructure in an efficient, effective way. Plus, they’ll monitor its progress once in place.

That’s turnaround strategies ticked

While some strategies naturally follow on from another, it’s important to note that they can be employed in any order, depending on the individual situation of the business.

If you have a client facing financial difficulties and needs to turn things around, contact us today to set up a meeting. We’re experts in financial restructuring and in the other turnaround strategies needed to get a business back on track.