Description
Typically, the root causes of a companys problems stem from an insufficient response to the risks facing the business. An optimal outcome of the corporate renewal process, whether an actual turnaround and survival of the business in its historical form or a downsizing, sale, or orderly liquidation that preserves value, requires an understanding of the companys problems in the context of risk. A number of risks must be addressed in the turnaround process.
I
t has been said that turnaround profession-
als can turn around absolutely any organi-
zation, regardless of its financial condition,
as long as they have enough money and
enough time. Of course, it is seldom the case
that sufficient time and money for a turn-
around are readily available when a crisis
manager first arrives on the scene. Inevitably,
additional resources are required. However,
lenders and other stakeholders had already
begun showing a sharply declining appetite
for a long turnaround process even before the
Great Recession.
Therefore, once a turnaround professional
has been able to stabilize a company’s situa-
tion sufficiently to begin determining the
strategic alternatives available to the business,
the focus shifts to identifying the risks and
resources attendant to each alternative. There
may be a turnaround plan formulated that is
blindingly brilliant, but the time and resources
necessary to accomplish it simply aren’t avail-
able. Lenders seem willing to rent their money
only to a sure bet, owners are loathe to put
chips back on the table, and funds quickly lose
interest if there are no earnings before interest,
taxes, depreciation, and amortization (EBIT-
DA) to multiply for a valuation.
So, when is a turnaround complete? When
can a turnaround professional declare victory
and go home? While the goalposts have clearly
moved, the turnaround process is still all about
risk. It is through understanding, identifying,
reducing, managing, and monitoring risk that
the turnaround process occurs.
A first step is understanding the root causes,
not the eventual symptoms, of the company’s
problems. For example, a heart attack is not
the root cause of death; it is a symptom of
underlying disease, heredity, or a set of
lifestyle choices. For a turnaround to be suc-
cessful, there must be a reasonable belief that
the root causes of the company’s problems
are understood and have been or are being
adequately addressed. “We can do better!” is
Distressed businesses, even when they are
recovering and are in turnaround mode, are
inherently more unpredictable and therefore
more risky than companies that are not under
such duress. Providers of capital may take
more than the usual amount of time for due
diligence, even as a business continues to
teeter. The rate of return they require will per-
force be higher, and they will likely require
that the company have excess cash or loan
availability — “dry powder” — to meet con-
tingencies, which effectively increases the cost
of capital to the business.
Accounting Risk. The information used by a
turnaround professional is in the language of
accounting, and accounting risk involves
issues such as whether a company’s systems
and controls are adequate and the information
that they produce is reliable. This may be a
function of the level of scrutiny provided by
outside auditors (e.g., audit vs. review) and
whether there have been GAAP and revenue
recognition issues.
Past accounting reports notwithstanding,
history may be less relevant, inasmuch as sub-
stantial change is implicit in the turnaround
plan. More important may be accounting trend
analysis that will feed into future projections.
Turnaround professionals concern themselves
with the quality of a company’s earnings and
whether there are potentially overstated assets
or unreported liabilities, and they must confirm
that systems and controls are up to speed.
Because any turnaround plan is predicated on
the future being different than the past, the pro-
jections and forecasts that provide the road
map for the turnaround should have clearly
stated assumptions that have been stress-tested
and sensitivity-analyzed.
Cash will still be king, but metrics such as
pipeline and contract balance reports will be as
important as projected profit and loss. The
valuation of a business — both present and
projected — is also expressed in the language
not a turnaround strategy. There are no risk-
free strategies; there is just risk management
— or a lack of it.
Typically, the root causes of a company’s
problems stem from an insufficient response
to the risks facing the business. An optimal
outcome of the corporate renewal process,
whether an actual turnaround and survival of
the business in its historical form or a down-
sizing, sale, or orderly liquidation that pre-
serves value, requires an understanding of the
company’s problems in the context of risk.
A number of risks must be addressed in the
turnaround process.
1 • Oct ober 2010 Tur nar ound Management Associ at i on
continued on page 2
Turnaround Process
Is All About Risk
BY HOWARD BROD BROWNSTEIN, CTP, PRESIDENT, BROWNSTEIN CORPORATION
ANALYZI NG THE TURNAROUND
Financial Risk. The most conventional and
well-understood type of risk is financial risk,
involving issues such as whether cash flow will
be sufficient, the capital structure involves too
much leverage, and the company can meet its
obligations as they fall due and inspire stake-
holders to support the company financially.
If there is to be an injection of new debt or
equity, the assessment of financial risk requires
a determination of how much is really at stake
and how much more might have to be com-
mitted if—as inevitably seems to occur — the
future does not proceed as projected.
For how long will the new debt or equity
capital be committed, and what milestones
have been defined to provide measurability
and accountability to the process? What is the
cost of the capital being utilized, and what rate
of return is required by its providers? Have the
maturities of sources and uses of capital been
properly matched? The landscape is littered
with the corpses of businesses that borrowed
short-term to finance long-term projects.
Distressed businesses, even when
they are recovering and are in turn-
around mode, are inherently more
unpredictable and therefore more
risky than companies that are not
under such duress
CorpRenOct10Brownstein.qxd 10/5/10 3:02 PM Page 12
2 • Oct ober 2010 Tur nar ound Management Associ at i on
of accounting, and if there has been a buyout
as part of the turnaround, there is a danger of
future fraudulent conveyance claims. Just as
with financial risk, accounting risk can deter-
mine ultimate outcomes.
Market Risk. A company’s future depends on
selling its products or services, and there is
market risk involving whether overall demand
will continue or grow and whether existing
customers will remain loyal or defect to com-
petitors. The products or services may be
dependent on technology and intellectual
property advantages, so there is risk concern-
ing the competitiveness and defensibility of
the company’s offerings.
On what does the turnaround plan depend:
market growth, increasing market share, key
customers? Concentration in sales can be a
two-edged sword: how many turnaround
professionals have seen their clients’ margins
evaporate as their bargaining power shifts
when they take on behemoth customers like
Wal-Mart? Is future success dependent on
fashions and trends? An assessment of market
risk is key to declaring a turnaround successful.
Organizational Risk. The key assets of most
businesses go home every evening. Organi-
zational risk is inherent in whether the
management team will remain intact and be
capable of implementing the company’s plans
successfully. Who is a turnaround professional
counting on and what is the person being
depended upon to do? How ready are the
company’s people for what lies ahead, down to
plant level? How well do managers understand
the company’s strategy and vision? How have
the company’s problems affected the organiza-
tion’s morale and ability to execute? Have
there been key layoffs or defections, and did
former key individuals join competitors and
take key relationships with them? Are compen-
sation and incentives appropriately designed to
obtain the performance desired, or should
these be reset — e.g., to reward “hitting
singles” —thereby reducing risk?
Other Risks. Businesses do not operate in a
vacuum and are susceptible to economic and
political risks in the countries in which they
operate. They also encounter regulatory risk, in
that federal, state, and local governments hav-
ing jurisdiction over a company’s operations
may pass new laws and regulations that affect
the business, or they may begin enforcing old
laws and regulations differently. And legal risk
may involve the outcome of pending or threat-
ened litigation, as well as such issues as
whether intellectual property claims can be
upheld or defended, whether competitors
might infringe or claim they have been
infringed upon, etc. The national pastime isn’t
baseball — it’s litigation.
Systematic Consideration
Each of the foregoing types of risk must be
considered systematically so that turnaround
professionals can accurately gauge their
progress and know when the corporate renew-
al process has been successful. Risks can never
be eliminated altogether. But if they have been
completely identified and understood, effec-
tively reduced or contained, and are being
aggressively managed and monitored, then a
judgment that the turnaround process has
progressed is more reliable.
Howard Brod Brownstein,
CTP, is president of
Brownstein Corporation,
a turnaround and crisis
management firm headquar-
tered in Conshohocken,
Pennsylvania, near Philadel-
phia. He serves on the board of directors of
P&F Industries, Betsey Johnson LLC, and
the American Bankruptcy Institute, and on
the governing board of the Commercial
Finance Association Endowment Fund.
continued from page 1
TURNAROUND IS ALL ABOUT RISK
CR
CorpRenOct10Brownstein.qxd 10/5/10 3:02 PM Page 14
doc_750413816.pdf
Typically, the root causes of a companys problems stem from an insufficient response to the risks facing the business. An optimal outcome of the corporate renewal process, whether an actual turnaround and survival of the business in its historical form or a downsizing, sale, or orderly liquidation that preserves value, requires an understanding of the companys problems in the context of risk. A number of risks must be addressed in the turnaround process.
I
t has been said that turnaround profession-
als can turn around absolutely any organi-
zation, regardless of its financial condition,
as long as they have enough money and
enough time. Of course, it is seldom the case
that sufficient time and money for a turn-
around are readily available when a crisis
manager first arrives on the scene. Inevitably,
additional resources are required. However,
lenders and other stakeholders had already
begun showing a sharply declining appetite
for a long turnaround process even before the
Great Recession.
Therefore, once a turnaround professional
has been able to stabilize a company’s situa-
tion sufficiently to begin determining the
strategic alternatives available to the business,
the focus shifts to identifying the risks and
resources attendant to each alternative. There
may be a turnaround plan formulated that is
blindingly brilliant, but the time and resources
necessary to accomplish it simply aren’t avail-
able. Lenders seem willing to rent their money
only to a sure bet, owners are loathe to put
chips back on the table, and funds quickly lose
interest if there are no earnings before interest,
taxes, depreciation, and amortization (EBIT-
DA) to multiply for a valuation.
So, when is a turnaround complete? When
can a turnaround professional declare victory
and go home? While the goalposts have clearly
moved, the turnaround process is still all about
risk. It is through understanding, identifying,
reducing, managing, and monitoring risk that
the turnaround process occurs.
A first step is understanding the root causes,
not the eventual symptoms, of the company’s
problems. For example, a heart attack is not
the root cause of death; it is a symptom of
underlying disease, heredity, or a set of
lifestyle choices. For a turnaround to be suc-
cessful, there must be a reasonable belief that
the root causes of the company’s problems
are understood and have been or are being
adequately addressed. “We can do better!” is
Distressed businesses, even when they are
recovering and are in turnaround mode, are
inherently more unpredictable and therefore
more risky than companies that are not under
such duress. Providers of capital may take
more than the usual amount of time for due
diligence, even as a business continues to
teeter. The rate of return they require will per-
force be higher, and they will likely require
that the company have excess cash or loan
availability — “dry powder” — to meet con-
tingencies, which effectively increases the cost
of capital to the business.
Accounting Risk. The information used by a
turnaround professional is in the language of
accounting, and accounting risk involves
issues such as whether a company’s systems
and controls are adequate and the information
that they produce is reliable. This may be a
function of the level of scrutiny provided by
outside auditors (e.g., audit vs. review) and
whether there have been GAAP and revenue
recognition issues.
Past accounting reports notwithstanding,
history may be less relevant, inasmuch as sub-
stantial change is implicit in the turnaround
plan. More important may be accounting trend
analysis that will feed into future projections.
Turnaround professionals concern themselves
with the quality of a company’s earnings and
whether there are potentially overstated assets
or unreported liabilities, and they must confirm
that systems and controls are up to speed.
Because any turnaround plan is predicated on
the future being different than the past, the pro-
jections and forecasts that provide the road
map for the turnaround should have clearly
stated assumptions that have been stress-tested
and sensitivity-analyzed.
Cash will still be king, but metrics such as
pipeline and contract balance reports will be as
important as projected profit and loss. The
valuation of a business — both present and
projected — is also expressed in the language
not a turnaround strategy. There are no risk-
free strategies; there is just risk management
— or a lack of it.
Typically, the root causes of a company’s
problems stem from an insufficient response
to the risks facing the business. An optimal
outcome of the corporate renewal process,
whether an actual turnaround and survival of
the business in its historical form or a down-
sizing, sale, or orderly liquidation that pre-
serves value, requires an understanding of the
company’s problems in the context of risk.
A number of risks must be addressed in the
turnaround process.
1 • Oct ober 2010 Tur nar ound Management Associ at i on
continued on page 2
Turnaround Process
Is All About Risk
BY HOWARD BROD BROWNSTEIN, CTP, PRESIDENT, BROWNSTEIN CORPORATION
ANALYZI NG THE TURNAROUND
Financial Risk. The most conventional and
well-understood type of risk is financial risk,
involving issues such as whether cash flow will
be sufficient, the capital structure involves too
much leverage, and the company can meet its
obligations as they fall due and inspire stake-
holders to support the company financially.
If there is to be an injection of new debt or
equity, the assessment of financial risk requires
a determination of how much is really at stake
and how much more might have to be com-
mitted if—as inevitably seems to occur — the
future does not proceed as projected.
For how long will the new debt or equity
capital be committed, and what milestones
have been defined to provide measurability
and accountability to the process? What is the
cost of the capital being utilized, and what rate
of return is required by its providers? Have the
maturities of sources and uses of capital been
properly matched? The landscape is littered
with the corpses of businesses that borrowed
short-term to finance long-term projects.
Distressed businesses, even when
they are recovering and are in turn-
around mode, are inherently more
unpredictable and therefore more
risky than companies that are not
under such duress
CorpRenOct10Brownstein.qxd 10/5/10 3:02 PM Page 12
2 • Oct ober 2010 Tur nar ound Management Associ at i on
of accounting, and if there has been a buyout
as part of the turnaround, there is a danger of
future fraudulent conveyance claims. Just as
with financial risk, accounting risk can deter-
mine ultimate outcomes.
Market Risk. A company’s future depends on
selling its products or services, and there is
market risk involving whether overall demand
will continue or grow and whether existing
customers will remain loyal or defect to com-
petitors. The products or services may be
dependent on technology and intellectual
property advantages, so there is risk concern-
ing the competitiveness and defensibility of
the company’s offerings.
On what does the turnaround plan depend:
market growth, increasing market share, key
customers? Concentration in sales can be a
two-edged sword: how many turnaround
professionals have seen their clients’ margins
evaporate as their bargaining power shifts
when they take on behemoth customers like
Wal-Mart? Is future success dependent on
fashions and trends? An assessment of market
risk is key to declaring a turnaround successful.
Organizational Risk. The key assets of most
businesses go home every evening. Organi-
zational risk is inherent in whether the
management team will remain intact and be
capable of implementing the company’s plans
successfully. Who is a turnaround professional
counting on and what is the person being
depended upon to do? How ready are the
company’s people for what lies ahead, down to
plant level? How well do managers understand
the company’s strategy and vision? How have
the company’s problems affected the organiza-
tion’s morale and ability to execute? Have
there been key layoffs or defections, and did
former key individuals join competitors and
take key relationships with them? Are compen-
sation and incentives appropriately designed to
obtain the performance desired, or should
these be reset — e.g., to reward “hitting
singles” —thereby reducing risk?
Other Risks. Businesses do not operate in a
vacuum and are susceptible to economic and
political risks in the countries in which they
operate. They also encounter regulatory risk, in
that federal, state, and local governments hav-
ing jurisdiction over a company’s operations
may pass new laws and regulations that affect
the business, or they may begin enforcing old
laws and regulations differently. And legal risk
may involve the outcome of pending or threat-
ened litigation, as well as such issues as
whether intellectual property claims can be
upheld or defended, whether competitors
might infringe or claim they have been
infringed upon, etc. The national pastime isn’t
baseball — it’s litigation.
Systematic Consideration
Each of the foregoing types of risk must be
considered systematically so that turnaround
professionals can accurately gauge their
progress and know when the corporate renew-
al process has been successful. Risks can never
be eliminated altogether. But if they have been
completely identified and understood, effec-
tively reduced or contained, and are being
aggressively managed and monitored, then a
judgment that the turnaround process has
progressed is more reliable.
Howard Brod Brownstein,
CTP, is president of
Brownstein Corporation,
a turnaround and crisis
management firm headquar-
tered in Conshohocken,
Pennsylvania, near Philadel-
phia. He serves on the board of directors of
P&F Industries, Betsey Johnson LLC, and
the American Bankruptcy Institute, and on
the governing board of the Commercial
Finance Association Endowment Fund.
continued from page 1
TURNAROUND IS ALL ABOUT RISK
CR
CorpRenOct10Brownstein.qxd 10/5/10 3:02 PM Page 14
doc_750413816.pdf