Saving Distressed Companies is Survival Management

SAVING DISTRESSED COMPANIES IS A CASE OF DO OR DIE SURVIVAL MANAGEMENT

… for many companies, it will be the last throw of the dice

Survival Management is about saving distressed companies. Distress can be a fatal ailment. There are two critical imperatives for saving distressed companies: time & cash flow money. Both are usually in very short supply in distress situations.

So if your company is facing the ailment of distress, or about to face the ailment of distress, be sure to call the doctor early! Chiron! the business doctor.™.

Warning: There is a considerable amount of information here about saving distressed companies. I hope your company never becomes distressed. But if that unfortunate circumstance arises, I understand how important this information will be to you when making up your mind as to who can best help you at the time. Consequently, as the guide covers a lot of ground, expect a long read.

Be warned: a Company in trouble or distress dispenses the sickness widely

Hello there! Thank you stopping by at my webpage on turnaround or survival management. Let’s get straight down to business on this very topical subject.

In survival management, your cash flow is priceless! If your cash flow is under threat, then your business is probably already in trouble; worse, your business could be in distress. A company in trouble or distress may already be fatally wounded. A company in trouble or distress is a case for Chiron! the business doctor.™, although no one can guarantee that a company in distress can be saved.

No guarantees. There are just too many variables to make predictive announcements in advance for favourable outcomes. Within that context, you can call on Chiron! the business doctor.™ for some crucial support when you most need it!

Trouble or distress situations create a ripple effect

How far does the ripple travel. If your company gets into trouble or becomes distressed, it’s a big problem. It’s a big problem because if things go badly, you personally will not be the only person to be hurt by it:

  • If your company gets into trouble or becomes distressed, it can hurt your customers and clients who rely on you for necessary products and services. After all, they are your customers and clients because you are probably the best in your field and they know it. Therefore, they will want to keep your service to maintain their own competitive edge. That’s a major reason why your customers and clients will be hurt.
  • If your company gets into trouble or becomes distressed, it can hurt your suppliers. That is because you are probably an important customer to them, and losing you may adversely affect their own cash flow. No one likes losing a paying customer, because paying customers are a valuable asset.
  • If your company gets into trouble or becomes distressed, it can hurt your shareholders, who stand to lose all or part of their financial investment in your company, as well as their possible reliance on the dividends you pay.
  • If your company gets into trouble or becomes distressed, it can hurt your directors and senior managers. But hey – are there dark forces at work here? Perhaps your directors and senior managers contributed to your company becoming troubled or distressed or were in part responsible for your company becoming troubled or distressed. I will have more to say about this group later; they may have a lot to answer for.
  • If your company gets into trouble or becomes distressed, it can hurt your advisers such as your external accountant and solicitor. No one likes losing a paying client.
  • If your company gets into trouble or becomes distressed, it can hurt your loyal employees. Your loyal employees are probably quite innocent in relation to how your company got into trouble or distress. They will unfortunately have to face a period of uncertainty not knowing whether their jobs are safe or whether they will have their employment terminated. This uncertainty doesn’t help the turnaround process when you need the benefits that flow from high employee morale and esprit de corps.
  • Last but by no means least, if your company gets into trouble or becomes distressed, it will dramatically hurt not only your own precious family, but also the families of your loyal employees. Those families are just as precious to the employees who work for you, as your family is to you. None of these families, including your own, deserves to suffer hurt and heartbreak, and that is not to mention the indignity and embarrassment if they lose their homes.

Trouble or Distress: the difference is one of degree

A question of degree. As you read this webpage, you will come to understand that the difference between trouble and distress is one of degree. Troubled companies can usually be turned around, but distressed companies must be saved. Often, that is simply not possible. In principle then, it is easier to turnaround a company in trouble than it is to save a company in distress. In this webpage, I explain how I go about turning around a company in trouble or saving a company in distress.

Monitor your business health fundamentals. After you absorb all the information here, and I warn you in advance, it will be heavy going at times, you will probably want to look at your company in a different light. You will probably look much more closely at your economic fundamentals than you have been doing up ‘til now. By fundamentals, I mean your five vital economic health signs (viz., your cash flow, productivity, international competitiveness, profitability and shareholder value).

Beware of the unexpected. Before we get into the heavy stuff however, I am going to ask you to picture yourself three years from now. I will ask you the same questions again later, after you have taken in all the material in this webpage. In three years’ time, where do you want your business to be? In three years’ time, where do you expect your business to be? Are you absolutely sure that your company, as it is operating today and will continue to operate tomorrow, will continue to give you and your family the lifestyle they deserve? Can you be absolutely sure that there isn’t a ‘black cloud’ lurking around the corner, just waiting to attack you without warning?

Saving distressed companies: the importance of cash flow

Cash flow: the lifeblood of a distressed company. Profitability is precious because it is the basis of shareholder value. Shareholder value is the oxygen needed to maintain that most important commodity, shareholder confidence. Shareholder confidence reflects the substance of business life. Shareholder confidence is even more important when you are the major shareholder in your own business. While shareholder value is the oxygen supporting your business, cash flow is the lifeblood that keeps your business afloat. More businesses fail because of cash flow problems than any other reason. Note that and put it in the back of your mind so you can reflect upon it from time to time:

More businesses fail because of cash flow problems than any other reason.

As the major shareholder in your business, you have the ultimate understanding of, and appreciation for, the how and the why you need a positive cash flow to keep your business operating successfully.

Saving distressed companies: How many companies are there that actually need saving?

Let’s look at the past to get a feel for the problem.  Specifically, let’s look at the past decade:  from 1999 to April 2012. During this period, profitability, cash flow and shareholder value meet reality in the statistics issued by the Australian Securities & investments Commission that show that between 1999 and 2011, 88,674 companies went into external administration for one reason or another. This year, from January to April, 3524 companies have already entered external administration.

Here’s the sad statistics drawn from ASIC: Insolvency Statistics: Series 1 Companies entering external administration

Reference:http://asic.gov.au/asic/asic.nsf/byheadline/Insolvency+statistics+-+Series+1+Companies+entering+external+administration?openDocument

Table 1: Period 1999 to 2011 – Companies Placed in External Administration: Australia

PeriodCompanies Placed in External administration

  • 1999-2000: 4,206
  • 2000-2001: 5,967
  • 2001-2002: 6,411
  • 2002-2003: 6,581
  • 2003-2004: 6,549
  • 2004-2005: 6,624
  • 2005-2006: 7,818
  • 2006-2007: 7,487
  • 2007-2008: 7,907
  • 2008-2009: 10,005
  • 2009-2010: 9,281
  • 2010-2011: 9,829
  • Total: 88,674
  • Average per annum 1999 – 2011: 7,390
  • Average per month 1999 – 2011: 616

Table 2: Period January 2012 to July 2012 – Companies Placed in External Administration: Australia 

PeriodCompanies Placed in External administration

  • January 2012: 518
  • February 2012: 1,123
  • March 2012: 1,014
  • April 2012: 869
  • May 2012: 884
  • June 2012: 799
  • July 2012: 930
  • August 2012:  996
  • September 2012: 881
  • October 2012: 981
  • November 2012: 897
  • December 2012: 739
  • Total 2012 year to date: 10,324
  • Average per month 2012 year to date: 866

Tough statistics. What these statistics tell us is that in the twelve years 1999 to 2011, an average of 616 companies went into external administration every month. This period includes the Global Financial Crisis and its aftermath. However, in 2012, that average has increased to 866! Think about that number; it means that over the decade to 2012, the average number of companies going into external administration was 616 per month. Over 2012, the number is 866 per month. That means that during this year, the number of companies that have gone into external administration is 250 per month more than the average for the past decade. This leads to the inevitable conclusion that there are a great many businesses in trouble or distress today. Statistically, most of these troubled or distressed businesses will fail!

Few are saved. Of course, many of these troubled or distressed businesses may return to good business health if they retain a business doctor such as Chiron! the business doctor.™. A Chiron consultation is only a telephone call away and the doctor’s clinic is always open. Sadly, saving distressed companies is one of Chiron! the business doctor’s™ functions. Sadly is the right term here because no happiness ever flows out of a distress situation.

Hidden realities. I know these very disturbing statistics have got you thinking about your own situation. However, there a most unsettling point hidden away behind these disturbing statistics. The point is that not all troubled or distressed companies show obvious adverse symptoms of ill health in the early stages of their ailment. A business doesn’t have to be on its’ knees gasping for cash flow breath to have its business health improved. A business can have sufficient working capital, be covering its routine operating expenses, actually be making a small profit, and still be under threat. I hope that’s not you!

Nevertheless, as you begin to take in all this information, are you beginning to see how I can help your company in tough times? Turnaround management, survival management is management in tough times.

Every small and mid-size business owner deserves a Medal of Honour

SMBs are admired. I don’t want small and mid-size businesses to financially hemorrhage to death with all the attendant heartbreak that that entails because I am genuinely admiring of the personal commitment you and all business owners have made to starting and running your own business – I am after all a small businessman myself.

SMBs have heart & soul. From my perspective as a consultant to small and mid-size business enterprises, I am of the fervent belief that businesses are not just collections of physical assets such as land, buildings and machinery, and neither are they just numbers in an accountant’s records. Businesses are the realisation of actual persons’ dreams, aspirations and purpose in life. Businesses therefore are a vision for the future and a pathway to a fulfilling and substantial vocation. If that were not true, why ever would any business be started in the first place?

Businesses in trouble or distress for whatever reason therefore deserve more than the ignominy of the cold and impersonal epitaph in the ASIC corporate records: ‘Business Liquidated’.

Survival management is a two stage survival process

Survival management is tough. I help businesses like yours to manage for survival in tough times. A business in distress faces tough times; make no bones about it. This is my one service that I sincerely hope never to see you as a client! Using the worst-case scenario as a case study, managing for survival in tough times involves a two-stage survival management strategy: resuscitation followed by resurrection.

1. The first stage to recovery: resuscitating the distressed company

Apply emergency first aid. The first stage in the resuscitation of a company is the quick application of emergency first aid to maintain corporate viability. In practical terms, corporate viability means the generation of an adequate cash flow sufficient to keep the business alive for a few days. In serious cases, a few days is generally all that that we can expect in the circumstances.

Emergency first aid is a short-term palliative. This simply reflects the reality that all turnaround management activities are subject to an intense time-based pressure. Time therefore is a valuable commodity, and its availability in turnaround situations is always in short supply. Emergency first aid however, is only a short term palliative, but during this brief period, we must create the foundation for the second stage of the turnaround process.

2. The second stage to recovery: resurrecting the distressed company

Detailed assessment. The second stage, the resurrection of a company, is the pragmatic result of a more detailed assessment of the company’s five vital economic health signs (cash flow, productivity, international competitiveness, profitability and shareholder value). This assessment permits a diagnosis based on the symptoms exhibited by the distressed company that appear to be the cause of the company’s adverse commercial situation.

Prescription & treatment. The diagnosis will lead to the prescription of a suitable course of action as the treatment necessary to return the company to good business health. Importantly, any treatment prescribed will (and obviously must be) capable of implementation from the company’s own available in-house resources.

3. Companies in distress may require surgery to their structure or operations

Analogy with the family GP. Application of the two separate elements within a survival management strategy shows that I deal with troubled or distressed companies in a similar manner to the way respected Medical Practitioners assess and diagnose sick patients and then prescribe a course of treatment to return the patient to good health. The course of treatment prescribed by a Medical Practitioner for his or her patient may of course involve essential surgery of one kind or another.

Treatment can sometimes hurt. Troubled or distressed companies cannot escape similar treatment where necessary and appropriate. The application of the surgeon’s knife to these companies occurs through a restructure of their commercial activities in one way or another. Often this restructuring will hurt, but it must be borne stoically if the business is to survive. I refer to this medical analogy here because it illustrates the point – as my masthead slogan states: genuinely, Chiron! the business doctor.™ relieves business pain!™.

All treatments prescribed to restore business health must come from internal resources

Solutions are in-house. Within the context of the turnaround strategy outlined above, any treatment prescribed for your company will necessarily have to be capable of implementation from within your company’s own resources. That is fundamental to my ‘modus operandi’. After all, it will be of little help to your company if the prescribed course of action to turn your company around is incapable of implementation for any reason. In any event, there will probably be no additional money available to do anything with, anyway.

Consequently, any treatment prescribed will involve the practical application of a suitable combination of enterprise restructuring, process improvement and performance management specifically designed to first stabilise and then improve your company’s vital health signs.

A word about money! In survival management, money is not a panacea

Money is not the answer. Most owners and managers of troubled or distressed companies sincerely believe that a business loan or investment of new capital will solve their problems. Experience shows that by and large, money will not be the underlying cause of a company’s troubles and a dollop of money will generally not secure the company’s long-term future. While a dollop of money may help achieve some short-term goals, it is only one element in a comprehensive recovery plan.

Without a comprehensive recovery plan, additional money will generally only raise the debt level (undesirable) and/or dilute existing shareholders’ equity (also undesirable). If your company gets into trouble or distress, remember that more money probably won’t help but it sure can make things a lot worse.

If you’re in distress, you need a survival manager

Action time! Saving distressed companies is not easy. If you’re in distress, you must do two things without delay. Firstly, you must act very quickly to preserve your existing cash flow, and secondly, you must put your turnaround management into the hands of an independent person in whom you can have trust and confidence to execute a survival strategy. Why, you may ask?

Conflicts of interest. Because your current advisers (your accountants, lawyers, consultants and managers) will most likely have serious conflicts of interest in helping you to return your business to good health. After all, they may have contributed in a substantial way to your company becoming troubled or distressed. Consequently, they may no longer be in a position to give you impartial or objective advice or undertake important survival management responsibilities that will involve difficult (and sometimes, emotional) decisions.

Richard Sloma (in his ‘The Turnaround Manager’s Handbook’) pointed out that

“Turnarounds [generally] fail because they are initiated and implemented in the same manner and by the same people who allowed the firm to get into trouble in the first place”.

Mark Goldston also drew attention to this in his book ‘The Turnaround Prescription’ but expressed it more succinctly when he said

“Businesses do not decline on their own; they are managed into and through the process”.

If you feel that you want to call me to confidentially discuss your situation on a ‘no obligation’ basis, and I recommend that you do because it will only cost you the price of a phone call, then don’t hesitate. I am here to help.

You know that there are a great many benefits to be obtained from a fresh and independent look at your company’s operations. That is true whether your company is in trouble or not. You don’t need me to tell you that.

There is no glamour and no glory in failure! But failure pervades all business life

There’s no praise in failure. As an owner of a company that fails, you will not see yourself praised for your good judgment, business acumen and wisdom on the front page of ‘The Australian’, ‘The Age’ or the ‘Sydney Morning Herald’; unless of course, the magnitude of your losses sets a new record for business mismanagement. And who in their right mind would want to be remembered for setting such a dubious record?

Business failure is endemic. However, from another perspective that you may not have yet considered, the fact that many businesses everywhere are in trouble or distress is quite normal. Put another way, business failure is everywhere around us, and that fact is given credence by the business failure statistics I referred to earlier. That business failure is both endemic and everywhere is as it should be in a free economy in a democratically governed country.

There is a right to fail. One of the fundamental rights of a free economy is the right to fail. Think about that for a moment. After all, is it not the purpose of business competition and competitive business strategy to eliminate or at least substantially reduce competition so that customers and clients will only turn to your products and/or services to satisfy their wants and needs?

Failure is the inherent death in business life. Doesn’t business competition and competitive business strategy mean that some businesses will fail to ensure the success of others? Isn’t the history and tradition of business riveted in failures just as it is in successes?

Saving distressed companies: don’t neglect your security

Pay attention to security matters. Unfortunately, most companies facing a trouble or distress situation do not pay nearly enough attention to their own security needs. Overlooking the serious and important subject of security as an essential component of a turnaround strategy can contribute significantly to a company’s demise.

Be proactive. Owners and managers seem to react only when a problem occurs: for example, they overlook or ignore small acts of theft, embezzlement and fraud and other breaches of security. A company in trouble or distress is, in reality, in greater need of a higher level of security than at any other time of its existence.

Unique problems. Troubled and distressed companies face unique problems with security: these problems include, but are not limited to the courteous discharge of employees, the termination of commercial contracts and operations and the effective disposal of physical assets. Of particular concern and profound significance is the protection of confidential information and proprietary information, some of which may pertain to, or affect the commercial operations of third parties, such as your customers and clients.

Protect your IP. Most important of all perhaps is the protection of your intellectual property. It is often the case that your intellectual property will be the most valuable asset you have. It must be professionally safeguarded from commercial predators who may think that they can acquire it for a fire sale price. This is yet another reason to have Chiron! the business doctor.™ manage your turnaround strategy.

Last point: if you decide to engage a turnaround manager, make sure you protect yourself

Unique advice: heed it! Here is some advice that you probably will never hear from other consultants involved with saving distressed companies. You will see why in a moment. If you are ever faced with the unfortunate situation where you need to engage a survival manager (like me, for instance), then there are some ground rules that you need to be aware of to protect yourself. I include these client protections in the survival management agreements that I submit to clients for discussion and agreement prior to my accepting an assignment.

Ethics. I do this because my ethical standards prevent me taking advantage of persons who may not be able to think rationally while they are under intense financial pressure and business stress and in a vulnerable personal situation.

Points for action. I have set out below the points that you need to take into account for your own protection. The list is neither exhaustive nor exclusive, and because the individual situations surrounding different companies in distress are unique, you yourself may think of additional important points:

  • You must ensure that your confidential trade secrets are protected; and you must take action to prevent their unauthorised disclosure by employees, customers or clients, or suppliers.
  • You must ensure that your intellectual property is protected, so as to prevent its transfer at a fire sale price.
  • You must limit the scope of any turnaround management assignment agreement to ensure that the assignment is not open-ended.
  • You must require disclosure of any conflicts of interest between the turnaround manager and you and your company.
  • You must confirm all instructions, understandings, rulings and decisions between you and the turnaround manager in writing.
  • You must keep copies of all instructions, understandings, rulings, decisions and other related documents.
  • You must make sure that the turnaround manager has a published code of professional conduct and ethical standards and that you understand the code’s limitations and controls.
  • You must negotiate a fee structure with the turnaround manager that will include a payment in advance component. Where appropriate, you could include a bonus or contingent fee to be paid where agreed benchmarks are achieved.
  • You must accept that a turnaround manager, generally speaking, will not be your bosom buddy. The turnaround manager is in business to make a profit (no surprise there!). The turnaround manager therefore will only serve you as long as you keep paying for the service.
  • Here is the most important of all the points in this list, please heed it without question! You must make sure that you never let the turnaround manager become an angry creditor. The turnaround manager could mortally wound you with his or her inside knowledge of your trading and financial situation.

The next move is yours

If your company is troubled or distressed, make your next move a positive one: call me – I’m only a telephone call away. I respect the fact that it takes a great deal of guts and courage on your part to accept the reality that your company is in trouble or distress and that you urgently need a positive recovery plan. It takes a great deal of guts and courage because the very act of asking Chiron! the business doctor.™ to initiate a recovery plan is an admission to yourself that without such a plan, your company will undoubtedly fail.

Be prepared. Remember that I earlier asked you to picture yourself in three years time. Now that you have had time to take in all the material in this webpage, will you be looking at your company with a different set of eyes, perhaps from a different perspective? Can you still say with any degree of certainty that your company, in three years time, will continue to give you and your family the lifestyle they deserve? Are you still absolutely sure that there isn’t a trouble or distress situation lurking around the corner?

Act expeditiously. Can you see now how your company can benefit from my help? Don’t delay calling me if you think you may be facing a trouble or distress situation. Remember that in turnaround management, time is a very precious commodity and it is always in short supply. The time you delay in calling may significantly contribute to your company failure because not enough time is available to implement an effective recovery plan. I have no objection to your calling me at any time.

Please Note This Personal Limitation. As a sole-practitioner, I simply cannot accept every assignment I receive. There are unfortunately not enough hours in each day. That’s why, if you can see the advantages of you and I working together to improve your business, you must call me without delay on (+61) 0404 631 230. For fairness, I must operate on the ‘first up, best dressed’ principle. Why not call me now, this minute, and go for it! Thanks again for visiting my website.

Yours sincerely,

Graham  Segal

Chiron! the business doctor.™ ... relieves business pain!™ 

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© Graham Segal, Author. March 2013. All Rights Reserved

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This website and the associated webpages content are produced by Graham Segal trading as Chiron! the business doctor.™. They are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License based on Graham's work at http://chironthebusinessdoctor.com.

Date this webpage was last reviewed/updated: 30 May 2013

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