Can it be fixed? What will it cost? Is it worth it?

by Giles Campbell, CEO of Red Pike Capital

I’m frequently asked by shareholders of failing companies to review them for their turnaround potential, seeking the answer to a few key questions: Can it be fixed? What will it cost? Is it worth it?

Assessing the company

The primary objective is to develop a hands-on understanding of every component part of the business as rapidly as possible. To identify the major liabilities and risks as well as the key assets from a business standpoint, rather than a cash-value standpoint. This knowledge will be used in the creative planning process as well as the final evaluation of risk vs reward.

Assessing the Industry

I cannot count the number of small-scale printing companies that I’ve been offered to buy. It’s a declining industry and unless you’ve got the cash to develop another moo.com, then you’re unlikely to make any real money. Assessing the industry of the business and the adjacent industries is going to uncover potential areas of opportunity for future profit as well as give an overall picture of the likely direction of the company.

Assessing the management team

Your assessment of the management team’s attitude, aptitude and skills is a critically important factor in the turnaround analysis and will influence the entire future of the business. Having the wrong people in the team (ceo included) is the core cause of companies failing.

Creative Planning

The creative planning process involves assessing the “box of bits” that the company consists of in order to figure out what can be done with it to make money in the short and longer term. These two timeframes may generate different agendas, as short-term cash generative activities may not be sustainable or aligned well with the longer-term desired strong strategic market position, but both may be necessary in order to minimise the cash cost of turning around the business. For example, a manufacturing business that I turned around had a great core product range that was in need of revitalisation. This process of revitalisation was going to take several years of development work. In the short term there was a market opportunity in a fast-growing adjacent sector. The opportunity was likely to be short-lived as competition would heat up quickly but the rapid development of some carefully tailored products was perfectly practical and within 9 months 50% of the revenue of the company was coming from these products. Without them the company would not have survived, however, they were unlikely to be the long-term star product range either, due to their relatively simple, easy to copy design.

Financial Estimates

Turnaround financial estimates are difficult at best. Whilst some non-contributing costs may be cut, the transformation of the business is going to cost money and it is not something to scrimp on. If the transformation goes well then you may add hundreds of millions of pounds of value to the equity of the business. New product lines and new markets are difficult to predict precisely. This is an area where more detailed analysis is unlikely to deliver a better analysis. Big picture assessment is as accurate as you can get. Leave some room for the contingent liabilities that you’ve not identified. I’ve not run a turnaround yet where I identified where all the skeletons were buried in my pre-turnaround assessment of the company.

Turnaround Evaluation – the final assessment

In the final assessment, the question has to be: Is it worth it? Is it worth the cost, effort and risk of attempting a turnaround? What will the business potentially be worth to the shareholder that are considering funding the turnaround? What will it cost to get there? How long will it take and what are the risks? These are not going to be precise figures. At best they will be a rough estimate, as one thing is certain in turnarounds – they are messy and unpredictable. Ask the potential CEO what his gut feel is about the business. If he knows what he is doing then he can tell you, gut feel, if he can achieve the turnaround.

Giles Campbell is a turnaround CEO who has led the successful turnaround of a wide range of companies, from retail fashion to electronics manufacturing, from £2m turnover to £100m. Awarded European Turnaround of the Year 2013 for recovering a central London Ad Agency, he is a speaker on turnaround leadership and advocate of hands-on company recovery.

Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.