I recently engaged with American restructuring and insolvency specialists who were complaining about the practicalities around their Chapter 11 process.
Their observations were that the restructuring timeframes are so tight and stakeholders’ expectations are for their fees to be so low, that the parameters within which they are forced to work only allow for a balance sheet restructuring of sorts, and not a comprehensive operational turnaround.
This has often given rise to repeat Chapter 11 processes being undertaken for the same company with relatively short intervals in between, or what they jokingly refer to as Chapter 11 and then Chapter 22 and then Chapter 33.
Operational Turnaround
American corporate culture is known to be fairly “bankruptcy friendly”, which perhaps means that such practices are ingrained in the fabric of their corporate society. Justifications would include for example “It is not good for companies to be in prolonged bankruptcy or legal restructuring processes… it should be done decisively and quickly”. This is difficult logic to argue with. However, it gives rise to the unintended consequences as set out above.
The reality is that the only way to fix a company properly, in the long run, is through an intensive operational turnaround process conducted by operational turnaround experts. The operational turnaround may possibly (but not necessarily) include a sale of the business or company to better-suited owners.
Operational Turnaround Experts
Competent operational turnaround experts are fairly hard to come by. For large turnaround assignments, a dynamic multi-disciplinary turnaround team is best suited to carry out the job, which should take in the region of 12-18 months.
The individuals in the team have worked together extensively; they can leverage off each other’s strengths and compensate for each other’s weaknesses; they know how to engage the staff of the distressed business for maximum effectiveness; they have a common goal to fix the company and deliver stakeholder value; and they trust each other.
Multi-disciplinary team
“Multi-disciplinary” means that the team possesses all the business skills to plug the inevitable skills deficits in the distressed entity and that these skills have previously been applied by the team in several complex distressed situations. The distressed environment is very different to the “business as usual” environment, and therefore the team’s experience within distressed environments is quintessential.
The skills required for a properly executed operational turnaround include (in varying proportions from one case to the next) leadership, strategy, entrepreneurship, finance, production, legal and litigation, sales and client relationship management, HR, project management, PR and communication, and more.
It is impossible for an individual turnaround expert to have all these skills, hence the ideal being a multi-skilled team that can operate fluidly and dynamically as a unit, applying their unique individual capabilities as and when required, in varying proportions as required from case to case.
Once the operational team has done their work and demonstrated results (usually in the form of achieving business profitability), then the team will have a very good feel for the normalised earnings that the company can achieve and sustain into the future. Knowing what the normalised sustainable earnings are, and properly understanding the drivers thereof, is the most critical element to ensuring a successful balance sheet restructuring.
A balance sheet restructuring can then be executed within a fairly short timeframe, resulting in the final product of a “turned around” business which is repositioned to thrive and to endure any surprises that the future may hold.
Author: Ian Fleming