Description
In this description advisory alert business turnaround, its time to take action.
DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
© 2014 Kevane Grant Thornton LLP All rights reserved.
Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide
partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not
liable for one another’s acts or omissions. Please visit www.kevane.com for further details.
Advisory Alert: “Business turnaround,
it’s time to take action”
The sustained periods of economic downturn
and financial distress facing Puerto Rico and
its economy, have created a climate in which
no business can take stability for granted.
There continues to be an increase in the
number of organizations facing financial
distress. Those organizations generally have
viable businesses and have been around for
some time.
As once-stable, profitable, and competitive
organizations struggle to maintain operational
and financial performance, the need for
engaging in revitalization “or turnaround”
initiatives is becoming more evident and in
many instances, critical.
Organization leaders who encounter
corporate distress often go through the same
emotional stages as a terminally ill person:
denial, anger, bargaining, depression, and
finally acceptance. The last stage is when most
organization leaders voluntarily seek
turnaround initiatives.
Si gns of t r oubl e i n your busi ness
Recognizing and acknowledging the signs of
trouble and taking action in earlier stages give
a much better chance for a successful
recovery and turnaround effort.
The first signs of distress usually manifest as a
significant decline in profitability, which
negatively impacts cash flow. Over time, the
liquidity drain from underperformance can eat
away at the financial well-being of the
company and ultimately result in:
• Constraints that limit the company’s ability
to operate efficiently and meet obligations
on a timely basis
• Debt covenant violations that accelerate
liquidity issues
• Limited access to traditional debt and
equity capital sources
• Overleverage that causes key stakeholders,
including vendors, customers, and
employees, concern and potentially
motivates them to reassess their
relationships with the company
Family run businesses deal with a set of
challenges that are similar to those facing
other businesses; however they tend not to
take action early enough to avoid a crisis, and
they also have to deal with intergenerational
transfer issues.
St ages of a Tur nar ound
A typical turnaround process has five stages:
• management change
• situation analysis
• emergency action
• business restructuring
• return to normal
The process is designed to first stabilize a
situation, which is done by addressing
management issues, assessing situation, and
implementing emergency actions. The
restructuring process begins with preparations
during the emergency action phase.
Contact us
For assistance in this matter,
please contact us via
[email protected]
Adding true value means exceeding
our clients’ expectations, anticipating
their needs and being proactive and
innovative in the accounting
profession.
Through the Kevane Grant Thornton
business and tax application for
mobile devices you will have access
to our Alerts, Tax News and other
related matters, plus a customized tax
calendar for individuals, businesses
and other entities, thus providing an
excellent tool to manage filing and
payment due dates with government
agencies in Puerto Rico.
Download for free the application.
Available for iPhone, Motorola and all
tablets.
December 8, 2014
Page 2
DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
© 2014Kevane Grant Thornton LLP All rights reserved.
Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the
member firms are not a worldwide partnership. Services are delivered by the member firms independently.
Positioning for growth starts with
restructuring and grows when the normal
stage is reached.
St age one: management c hange
Management change can begin only when
organization leaders have decided and commit
that changes are necessary. To accomplish a
turnaround, an organization must make a
concerted effort to change how it operates.
During this stage or after Stage two —
situation analysis—steps need to be taken to
replace any top managers who might impede
the turnaround effort.
St age t w o: si t uat i on anal ysi s
Before making any major changes, it is
necessary to determine the chances of the
business’s survival, identify appropriate
strategies, and develop a preliminary action
plan.
This means that an initial fact-finding and
diagnostic is necessary about the scope and
severity of the organization’s ills. Is it in
imminent danger of failure? Does it have
substantial losses but its survival is not yet
threatened? Or is it merely in a declining
business position? A more detailed assessment
of strengths and weaknesses is necessary in
the areas of competitive position, finances,
marketing, operations, organizational
structure, and personnel, etc.
In the meantime, it is often necessary to deal
with various constituencies and vested interest
groups. The first and often most vocal of the
groups are angry creditors who may have
been kept in the dark about the organization’s
financial status. Employees are confused and
frightened, and spend more time worrying
about their own job security than fixing the
business. Customers, vendors, and suppliers
are wary about the future of the organization.
It is recommended to be open and frank with
all these audiences.
Once the major problems are identified, a
strategic plan with specific goals and detailed
functional actions is prepared. The plan needs
acceptance by all key parties in the
organization, including the board of directors,
the management team, and employees.
Presenting the plan to key parties outside the
organization—bankers, major creditors, and
vendors—could restore confidence that the
business can work through its difficulties.
St age t hr ee: i mpl ement i ng an
emer genc y ac t i on pl an
When the condition of the organization is
critical, the plan is simple but drastic.
Emergency surgery is performed to stop the
bleeding and enable the organization to
survive, as such, at this time emotions run
high. Cash is the lifeblood of the business. A
positive operating cash flow must be
established as quickly as possible. In addition,
a sufficient amount of cash to implement the
turnaround strategies must be sourced.
The plan typically includes financial,
marketing, and operational actions to
restructure outstanding debt obligations,
improve working capital management, reduce
operating costs, improve budgeting practices,
correct product line and customer mix
pricing, prune product lines, and accelerate
high-potential products.
Accounting considerations
A debt restructuring may be achieved as
part of the turnaround process, by
repaying or exchanging existing debt with
new debt with the same lender or
otherwise amending the terms or cash
flows of the arrangement. In some cases,
the existing debt will be partially or fully
settled. In other cases, interest expense
will be affected prospectively. In either
event, the accounting treatment for new
and existing debt issue costs and costs
paid to the lender will need to be
considered.
December 8, 2014
Page 3
DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
© 2014Kevane Grant Thornton LLP All rights reserved.
Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the
member firms are not a worldwide partnership. Services are delivered by the member firms independently.
St age f our : r est r uc t ur i ng t he busi ness
Once the bleeding has stopped, losing
divisions have been sold, and administrative
costs have been cut, turnaround efforts are
directed toward making the remaining
business operations effective and efficient.
The organization must be restructured to
increase profitability and its return on assets
and equity.
In many ways, this stage is the most difficult
of all. Eliminating losses is one thing, but
achieving an acceptable return on the
organization’s investment capital is quite
another.
The financial state of the organization’s core
business is particularly important. If the core
business is irreparably damaged, the outlook is
bleak. If the remaining organization is capable
of long-term survival, it must now
concentrate on sustained profitability and the
smooth operation of existing facilities.
During the turnaround, the product mix may
have changed, requiring the organization to
do some repositioning. Core products
neglected over time require immediate
attention to remain competitive. In the new
and leaner organization, some facilities might
be closed; the organization may even
withdraw from certain markets or target its
products toward a different niche or market
segment.
St age f i ve: r et ur n t o nor mal
In the final step of a turnaround, an
organization slowly returns to profitability.
While earlier steps concentrated on correcting
problems, the final stage focuses on
institutionalizing an emphasis on profitability
and return on equity, and enhancing
economic value-added.
For example, the organization may initiate
new marketing programs to broaden the
business and customer base and increase
market penetration. It may increase revenue
by carefully adding new products and
improving customer service. Strategic alliances
with other organizations may be explored.
Financially, the emphasis shifts from cash
flow concerns to maintaining a strong balance
sheet, securing long-term financing, and
implementing strategic accounting and control
systems.
This final step cannot be successful without a
psychological shift as well. Rebuilding
momentum and morale is almost as important
as rebuilding return on investment. It means a
rebirth of the corporate culture and
transforming negative attitudes to positive,
confident ones as the organization maps out
its future.
Rol e and benef i t s of t ur nar ound
spec i al i st s
Turnaround specialists have no political
agenda or other obligations to bias the
decision-making process, allowing them to
take sometimes unpopular, yet necessary,
steps required for an organization’s survival.
Like an emergency room doctor, a turnaround
professional must make critical decisions
quickly to staunch the financial bleeding and
give a patient the best chance for recovery.
For a troubled organization, no decision may
be more crucial than hiring a turnaround
manager. Yet, with all the pressures and
distractions building within a troubled
organization, this decision must be made at
the worst possible and most stressful time.
Time, indeed, is often of the essence.
Kevane Grant Thornton assists organizations
in need of turnaround, recovery and
reorganization. Call us to make an
appointment with one of our experienced
advisors. Consultations are completely
confidential.
Please feel free to contact us should we
can be of assistance with this or any other
matter.
December 8, 2014
doc_931734525.pdf
In this description advisory alert business turnaround, its time to take action.
DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
© 2014 Kevane Grant Thornton LLP All rights reserved.
Kevane Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide
partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not
liable for one another’s acts or omissions. Please visit www.kevane.com for further details.
Advisory Alert: “Business turnaround,
it’s time to take action”
The sustained periods of economic downturn
and financial distress facing Puerto Rico and
its economy, have created a climate in which
no business can take stability for granted.
There continues to be an increase in the
number of organizations facing financial
distress. Those organizations generally have
viable businesses and have been around for
some time.
As once-stable, profitable, and competitive
organizations struggle to maintain operational
and financial performance, the need for
engaging in revitalization “or turnaround”
initiatives is becoming more evident and in
many instances, critical.
Organization leaders who encounter
corporate distress often go through the same
emotional stages as a terminally ill person:
denial, anger, bargaining, depression, and
finally acceptance. The last stage is when most
organization leaders voluntarily seek
turnaround initiatives.
Si gns of t r oubl e i n your busi ness
Recognizing and acknowledging the signs of
trouble and taking action in earlier stages give
a much better chance for a successful
recovery and turnaround effort.
The first signs of distress usually manifest as a
significant decline in profitability, which
negatively impacts cash flow. Over time, the
liquidity drain from underperformance can eat
away at the financial well-being of the
company and ultimately result in:
• Constraints that limit the company’s ability
to operate efficiently and meet obligations
on a timely basis
• Debt covenant violations that accelerate
liquidity issues
• Limited access to traditional debt and
equity capital sources
• Overleverage that causes key stakeholders,
including vendors, customers, and
employees, concern and potentially
motivates them to reassess their
relationships with the company
Family run businesses deal with a set of
challenges that are similar to those facing
other businesses; however they tend not to
take action early enough to avoid a crisis, and
they also have to deal with intergenerational
transfer issues.
St ages of a Tur nar ound
A typical turnaround process has five stages:
• management change
• situation analysis
• emergency action
• business restructuring
• return to normal
The process is designed to first stabilize a
situation, which is done by addressing
management issues, assessing situation, and
implementing emergency actions. The
restructuring process begins with preparations
during the emergency action phase.
Contact us
For assistance in this matter,
please contact us via
[email protected]
Adding true value means exceeding
our clients’ expectations, anticipating
their needs and being proactive and
innovative in the accounting
profession.
Through the Kevane Grant Thornton
business and tax application for
mobile devices you will have access
to our Alerts, Tax News and other
related matters, plus a customized tax
calendar for individuals, businesses
and other entities, thus providing an
excellent tool to manage filing and
payment due dates with government
agencies in Puerto Rico.
Download for free the application.
Available for iPhone, Motorola and all
tablets.
December 8, 2014
Page 2
DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
© 2014Kevane Grant Thornton LLP All rights reserved.
Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the
member firms are not a worldwide partnership. Services are delivered by the member firms independently.
Positioning for growth starts with
restructuring and grows when the normal
stage is reached.
St age one: management c hange
Management change can begin only when
organization leaders have decided and commit
that changes are necessary. To accomplish a
turnaround, an organization must make a
concerted effort to change how it operates.
During this stage or after Stage two —
situation analysis—steps need to be taken to
replace any top managers who might impede
the turnaround effort.
St age t w o: si t uat i on anal ysi s
Before making any major changes, it is
necessary to determine the chances of the
business’s survival, identify appropriate
strategies, and develop a preliminary action
plan.
This means that an initial fact-finding and
diagnostic is necessary about the scope and
severity of the organization’s ills. Is it in
imminent danger of failure? Does it have
substantial losses but its survival is not yet
threatened? Or is it merely in a declining
business position? A more detailed assessment
of strengths and weaknesses is necessary in
the areas of competitive position, finances,
marketing, operations, organizational
structure, and personnel, etc.
In the meantime, it is often necessary to deal
with various constituencies and vested interest
groups. The first and often most vocal of the
groups are angry creditors who may have
been kept in the dark about the organization’s
financial status. Employees are confused and
frightened, and spend more time worrying
about their own job security than fixing the
business. Customers, vendors, and suppliers
are wary about the future of the organization.
It is recommended to be open and frank with
all these audiences.
Once the major problems are identified, a
strategic plan with specific goals and detailed
functional actions is prepared. The plan needs
acceptance by all key parties in the
organization, including the board of directors,
the management team, and employees.
Presenting the plan to key parties outside the
organization—bankers, major creditors, and
vendors—could restore confidence that the
business can work through its difficulties.
St age t hr ee: i mpl ement i ng an
emer genc y ac t i on pl an
When the condition of the organization is
critical, the plan is simple but drastic.
Emergency surgery is performed to stop the
bleeding and enable the organization to
survive, as such, at this time emotions run
high. Cash is the lifeblood of the business. A
positive operating cash flow must be
established as quickly as possible. In addition,
a sufficient amount of cash to implement the
turnaround strategies must be sourced.
The plan typically includes financial,
marketing, and operational actions to
restructure outstanding debt obligations,
improve working capital management, reduce
operating costs, improve budgeting practices,
correct product line and customer mix
pricing, prune product lines, and accelerate
high-potential products.
Accounting considerations
A debt restructuring may be achieved as
part of the turnaround process, by
repaying or exchanging existing debt with
new debt with the same lender or
otherwise amending the terms or cash
flows of the arrangement. In some cases,
the existing debt will be partially or fully
settled. In other cases, interest expense
will be affected prospectively. In either
event, the accounting treatment for new
and existing debt issue costs and costs
paid to the lender will need to be
considered.
December 8, 2014
Page 3
DISCLAIMER: This update and its content do not constitute advice. Clients should not act solely on the basis of the material contained in this
publication. It is intended for information purposes only and should not be regarded as specific advice. In addition, advice from proper consultant
should be obtained prior to taking action on any issue dealt with this update.
© 2014Kevane Grant Thornton LLP All rights reserved.
Kevane Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the
member firms are not a worldwide partnership. Services are delivered by the member firms independently.
St age f our : r est r uc t ur i ng t he busi ness
Once the bleeding has stopped, losing
divisions have been sold, and administrative
costs have been cut, turnaround efforts are
directed toward making the remaining
business operations effective and efficient.
The organization must be restructured to
increase profitability and its return on assets
and equity.
In many ways, this stage is the most difficult
of all. Eliminating losses is one thing, but
achieving an acceptable return on the
organization’s investment capital is quite
another.
The financial state of the organization’s core
business is particularly important. If the core
business is irreparably damaged, the outlook is
bleak. If the remaining organization is capable
of long-term survival, it must now
concentrate on sustained profitability and the
smooth operation of existing facilities.
During the turnaround, the product mix may
have changed, requiring the organization to
do some repositioning. Core products
neglected over time require immediate
attention to remain competitive. In the new
and leaner organization, some facilities might
be closed; the organization may even
withdraw from certain markets or target its
products toward a different niche or market
segment.
St age f i ve: r et ur n t o nor mal
In the final step of a turnaround, an
organization slowly returns to profitability.
While earlier steps concentrated on correcting
problems, the final stage focuses on
institutionalizing an emphasis on profitability
and return on equity, and enhancing
economic value-added.
For example, the organization may initiate
new marketing programs to broaden the
business and customer base and increase
market penetration. It may increase revenue
by carefully adding new products and
improving customer service. Strategic alliances
with other organizations may be explored.
Financially, the emphasis shifts from cash
flow concerns to maintaining a strong balance
sheet, securing long-term financing, and
implementing strategic accounting and control
systems.
This final step cannot be successful without a
psychological shift as well. Rebuilding
momentum and morale is almost as important
as rebuilding return on investment. It means a
rebirth of the corporate culture and
transforming negative attitudes to positive,
confident ones as the organization maps out
its future.
Rol e and benef i t s of t ur nar ound
spec i al i st s
Turnaround specialists have no political
agenda or other obligations to bias the
decision-making process, allowing them to
take sometimes unpopular, yet necessary,
steps required for an organization’s survival.
Like an emergency room doctor, a turnaround
professional must make critical decisions
quickly to staunch the financial bleeding and
give a patient the best chance for recovery.
For a troubled organization, no decision may
be more crucial than hiring a turnaround
manager. Yet, with all the pressures and
distractions building within a troubled
organization, this decision must be made at
the worst possible and most stressful time.
Time, indeed, is often of the essence.
Kevane Grant Thornton assists organizations
in need of turnaround, recovery and
reorganization. Call us to make an
appointment with one of our experienced
advisors. Consultations are completely
confidential.
Please feel free to contact us should we
can be of assistance with this or any other
matter.
December 8, 2014
doc_931734525.pdf