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Business Restructuring and Turnaround

Business Restructuring and Turnaround

What is a turnaround and restructuring?

Turnarounds and restructuring are fairly recent concepts which are both aimed at rescuing a business and avoiding the business going into liquidation. In September 2017, Australia included Safe Harbour provisions in the Corporations Act to allow directors some protections from personal liability while working at achieving a better outcome than placing a company into administration. This has encouraged directors to look at more informal measures to rescue their company.

Investopedia defines business turnaround as the financial recovery of a company that has been performing poorly for an extended time. Turnarounds mark a period of improvement while bringing stability to a business’ future. It is hands-on and first requires acknowledgement of the business’ problems, consideration of required changes, and the development and implementation of a problem-solving strategy. Turnarounds are pre-insolvency and informal actions taken by the business.

Restructuring is however a range of formal insolvency processes aimed at helping businesses in severe financial distress. It focuses on the capital structure of the business (both debt and equity), the cash generation and debt carrying ability, and the valuation of the business and its components. While formal in the sense it often requires putting the company into voluntary administration, it is still a process to avoid liquidation. The formal process allows different negotiations with creditors compared to the informal turnaround. To use a gardening analogy, I think restructuring is like a hard prune to get rid of dead wood and disease parts of the plant. Turnarounds are more like tending to the plant: light prune, better soil, mulch, regular watering, etc – all aimed at trying to stabilise the business, resetting it and allowing it to flourish.

How does a business turnaround work?

Business turnaround is a crisis management in how it is approached. The first step is a triage of the situation. The skilled turnaround consultant assesses the degree of distress, which is done through a diagnostic review of the entire business and then prioritising the areas that need immediate attention, those that need attention but not immediately, and then the areas that either do not need attention or are unsalvageable. Usually, this is best done by an experienced turnaround consultant. After the triage review and the problems identified by the directors, company management and the turnaround consultant will agree a strategy to address and remedy the issues. Business turnaround is more operational, hands-on, and more of a ‘team game’ than a restructure.

It typically involves a comprehensive evaluation of the company’s operations, identification of underlying issues, and implementing strategic measures to address those challenges. Here are some key considerations and steps involved in business restructuring and turnaround:

  • Assessment and Diagnosis: Conduct a thorough assessment of the company’s financial health, operations, market position, and competitive landscape. Identify the root causes of the company’s underperformance, such as poor financial management, ineffective cost control, outdated business models, weak market positioning, or operational inefficiencies.
  • Develop a Turnaround Strategy: Based on the assessment, develop a turnaround strategy that addresses the identified issues. The strategy may include elements such as cost reduction initiatives, operational improvements, product/service portfolio adjustments, market repositioning, financial restructuring, or strategic partnerships.
  • Financial Restructuring: Analyze the company’s financial position and explore options for financial restructuring. This may involve renegotiating debt terms with lenders, raising additional capital through equity or debt financing, divesting non-core assets, or pursuing debt restructuring methods such as debt-for-equity swaps or refinancing.
  • Cost Control and Operational Improvements: Implement measures to reduce costs and improve operational efficiency. This can include streamlining operations, optimizing the supply chain, implementing lean processes, improving inventory management, and reducing overhead expenses. Focus on enhancing productivity, eliminating waste, and maximizing operational performance.
  • Market Repositioning and Business Model Innovation: Evaluate the company’s market positioning and consider potential changes to the business model. Identify emerging market trends, customer needs, and competitive advantages. Adjust the product/service portfolio, explore new market segments or geographies, and develop innovative strategies to meet changing market demands.
  • Organizational and Leadership Changes: Assess the company’s leadership and management team. If necessary, make changes to the management structure, recruit new talent, or bring in external expertise to lead the turnaround efforts. Align the organization’s culture, values, and structure with the new strategic direction.
  • Communication and Stakeholder Management: Communicate the turnaround plan to all stakeholders, including employees, customers, suppliers, investors, and creditors. Transparent and effective communication is crucial in gaining support, managing expectations, and maintaining trust during the restructuring process.
  • Implementation and Monitoring: Execute the turnaround strategy with a clear action plan, timeline, and performance indicators. Regularly monitor progress, track key performance metrics, and make adjustments as needed. Maintain a disciplined and proactive approach to ensure the successful implementation of the restructuring measures.

When a company gets into financial distress, a turnaround or restructuring consultant is sometimes brought into the firm. You might have seen them – they wear a black overcoat, a black hat, dark glasses and carry an axe with them – hatchet men. But this, apart from being a false stereotype, bundles turnaround and restructuring consultants together. 

However, there are differences between turnaround consultants and restructuring advisors.

What is a turnaround and restructuring?

Turnarounds and restructuring are fairly recent concepts which are both aimed at rescuing a business and avoiding the business going into liquidation. In September 2017, Australia included Safe Harbour provisions in the Corporations Act to allow directors some protections from personal liability while working at achieving a better outcome than placing a company into administration. This has encouraged directors to look at more informal measures to rescue their company.

Investopedia defines business turnaround as the financial recovery of a company that has been performing poorly for an extended time. Turnarounds mark a period of improvement while bringing stability to a business’ future. It is hands on and first requires acknowledgement of the business’ problems, consideration of required changes, and the development and implementation of a problem-solving strategy. Turnarounds are pre-insolvency and informal actions taken by the business.

Restructuring is however a range of formal insolvency processes aimed at helping businesses in severe financial distress. It focuses on the capital structure of the business (both debt and equity), the cash generations and debt carrying ability, and the valuation of the business and its components. While formal in the sense it often requires putting the company into voluntary administration, it is still a process to avoid liquidation. The formal process allows different negotiations with creditors compared to the informal turnaround. To use a gardening analogy, I think restructuring is like a hard prune to get rid of dead wood and disease parts of the plant. Turnarounds are more like tending to the plant: light prune, better soil, mulch, regular watering, etc – all aimed at trying to stabilise the business, resetting it and allowing it to flourish.

How does a business turnaround work?

Business turnaround is a crisis management in how it is approached. The first step is a triage of the situation. The skilled turnaround consultant assesses the degree of distress, which is done through a diagnostic review of the entire business and then prioritising the areas that need immediate attention, those that need attention but not immediately, and then the areas that either do not need attention or are unsalvageable. Usually, this is best done by an experienced turnaround consultant. After the triage review and the problems identified by the directors, company management and the turnaround consultant will agree a strategy to address and remedy the issues. Business turnaround is more operational, hands-on, and more of a ‘team game’ than a restructure.

 

It’s important to note that each business turnaround situation is unique, and the specific steps and strategies will vary depending on the company’s circumstances. Engaging with experienced professionals such as turnaround consultants, financial advisors, and legal experts can provide valuable expertise and guidance throughout the restructuring process.

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As a Startup Specialist and the founder of Aditya Group, Thailand, Ande Aditya is often hired as a Business Advisor to assist business owners to execute their vision.

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