by Bob Cohen
Ohio TMA News – February 2012
There are numerous methods with which a financially challenged company can assess the magnitude of the difficulties facing the organization. This article addresses an evaluation method that provides a rapid and clear understanding of the key issues and a timetable to determine the approximate time the company has to implement correction action before failure. Focusing upon the behavior of company management is often the key to assessing its financial condition— specifically COMMUNICATION FAILURE, DENIAL and BLAME.
The Certified Turnaround Profession will initially look to three issues. First, is there a core business? Second, is there adequate management in place to effectuate a turnaround? Third, are there adequate financial resources available to fund the turnaround process? Unfortunately, the turnaround professional is engaged by the company so late in the deterioration process that an effective turnaround is most difficult to successfully implement. The turnaround professional is typically engaged after the secured lender, the accountant and the attorney for the company all have agreed that the company is in crisis—very late in the process, thereby limiting the options available to the turnaround professional to effectuate a successful turnaround.
The most effective method to quickly assess the status of a company is to observe the behavior of company management. Applying a rather simple formula for all professionals as well as company management will serve as an effective benchmark to determine status of a company in crisis. The key elements are COMMUNICATION FAILURE, DENIAL and BLAME.
1. COMMUNICATION FAILURE—Ineffective communication is the first step in the downward spiral. It can be defined as either ineffective speaking or ineffective listening on the part of company management of its employees. Once ineffective communication exists within a company without some other intervening correction, the company will likely fail within two years.
Example: A Chief Financial Officer of a $50 million manufacturing company asked a turnaround professional what the most obvious indication of a failing company. The turnaround professional stated that ineffective communications was the key element. The CFO noted that he did not have that problem at his company. He noted that the problem at his company is that the employees did not take the initiative to do the right thing. The turnaround professional responded saying, “Did management ever tell the employees that it was OK to take the initiative?”
2. DENIAL—Management of a failing company have a tendency to see their business through rose colored glasses, even as the company progresses to the second step in the downward spiral. Management typically has experienced both good times and bad times in their careers and in most cases, successfully navigated companies through crisis situation. Unfortunately, management most often believes that they are capable of overcoming all challenges and obstacles by following the courses of action that they have taken in the past. Management is often convinced that under their leadership, the problem is not insurmountable and they will overcome the challenges facing the company. Once the management team is in denial with regards to the status of the company, the company will likely fail within six months.
Example: “This is just a bump in the road.” “We have been here before and have done just fine.” “You are overstating the problem.” “Don’t worry.”
3. BLAME—Management now realizes that the company is failing as it proceeds to the third and final step of the downward spiral. Typically, management will seldom accept personal responsibility of the failing company, and reaches out to find blame to preserve their emotional and professional stature. Once management establishes that the failing company is the cause of someone other than themselves, the company will likely fail within thirty to sixty days.
Example: “It’s the bank’s fault because they wouldn’t lend us any more money.” “The CFO stole the money.” “The computer provided us inaccurate information.” “The Sales Manager stopped selling.”
The earlier in the process that action is taken, the greater the likelihood there is that a successful outcome for all parties will be achieved. All parties involved with the company, including management, legal counsel, accountants, vendors and the bank/secured lender must take a step back from traditional analysis from time to time and observe management’s behavior to understand the depth of the problem and how soon failure will occur based upon this simple assessment.
