Last night at Venture Cafe, I sat in on a talk by Peter Kurzina, a senior lecturer at MIT Sloan. One of the things that made his talk unique (and refreshing) was that Kurzina did not rely on PowerPoint slides. As a result, I found myself completely engaged in what he was saying, as opposed to distracted by a lot of text and cartoons flying across a screen on the other side of the room. Plus, he kept his talk down to an hour, answering questions afterwards for those who wished to hang around. I appreciated still having time to slip back out into the cafe, grab a drink and socialize.
But let me get back to the talk. Kurzina’s discussion, entitled “Lessons Learned by Troubled Companies,” was a quick synopsis of what he learned over 33 years working as a turnover manager for companies in crisis, his career before becoming a lecturer at Sloan in 2003.
Hopefully these lessons will shed light on some of the pitfalls you want to avoid in running any business. What follows are the key points Kurzina covered in his talk.
What is a troubled company? A troubled company, quite simply, is one that is in financial crisis. When a company depletes all of its funds, it has no chance for survival. It is dead.
“The number one job of a CEO is to make sure his company doesn’t run out of money,” Kurzina emphasized.
Financial trouble is an indication that a company’s leadership is frozen and decisions are not being made. The CEO might be in a state of denial, or maybe there is no CEO. He or she may have died, gotten thrown in jail, or been fired, in which case, nobody is running the show.
How does a turnaround firm get hired? The majority of time, the bank calls in the turnaround team. When you sign a loan agreement, you give the bank the right to all of your financial information. The bank keeps tabs on what is going on. It may send in an audit team to verify things are in order. When the banks detects its loan is in trouble, it will take your loan account away from the loan officer (the nice fellow who plays golf with you and takes you out to dinner) and passes it over to the workout department.
“The people in the in the workout department are not the hail-fellow-well-met your loan officer is,” warned Kurzina. “They have one job and that job is to get the bank’s money back, and they will do anything to get that money back.”
The bank’s workout department, in an effort to prevent your loan from going into default, will give you a choice of turnaround firms and tell you to pick one.
What does a turnaround firm do? The first job of a turnaround firm is to assess a troubled company and determine if it is salvageable. If a company cannot be salvaged, the turnover firm calls in “the liqidator” (a term that made me think of “the cleaner” in the movie “Pulp Fiction”), but in most cases, according to Kurzina, a company can be saved.
In the first few days of that assessment, the turnaround firm may uncover several of the common warning signs of a company in trouble. Key employees have started to leave. Your customers are talking to your competitors. Suppliers are raising costs because you are slow in paying bills. Your company’s credibility is beginning to slip. Your relationship with the bank is deteriorating. Employees have lost interest in their jobs, and most critically, you are running out of money.
How does a company ever manage to reach this stage?
“In most cases, a big part of the problem is the CEO,” said Kurzina. “He is the guy who made the decisions that led the company to the situation that it is in.”
Often the CEO is in denial. His company has done well in the past, and he wants to believe it will continue to do well. Other times, the CEO is in total shock, frozen like a deer in the headlights, unable to act. Sometimes there is unwarranted optimism. For instance, deep down, the CEO knows the numbers are bad, but hopes things will improve. Sometimes, top management is clinging to an unrealistic hope in a future event (a big order that will come through “any day now”) that will erase the problem.
“You can’t run a business on hope for tomorrow,” Kurzina said. “Hope is not an effective strategy for a company. You have to run a company on cold, hard facts and figures.”
It is not an easy thing, taking responsibility for having run your ship aground. The CEO may deflect blame onto the lenders. In some instances, there is an inability to see the big picture. For example, a CEO may claim he is in the midst of slashing all kinds of expenses, like company picnics and free coffee for employees, while ignoring big costs like the fleet of Mercedes in the parking lot. Sometimes a CEO will justify expenses by saying, “This is how we have always done it in the past.”
“That is the wrong answer,” Kurzina said. “There has to be a willingness to do things a different way.”
Secrets also help to topple a company. Top management often thinks they know things that nobody else knows, but in reality, they are only fooling themselves.
“I always like to talk to the janitor on up, because you learn the darndest things,” said Kurzina. “The employees know how much the boss earns. They know who is stealing from petty cash and how much. They know which administrative assistant is sleeping with the CFO.”
What does a turnaround firm do to fix a troubled company? Kurzina uses three words to sum up a turnaround: cash, communications and control.
Cash is the lifeblood of a company. When a turnaround team steps in, they immediately put together a detailed cash flow, which is initially reviewed on a daily basis.
“You live off that daily cash flow and question every new purchase. The company only spends money on things that are essential to its operation,” said Kurzina.
The turnaround team also takes measures to preserve cash, such as calling suppliers to ask for extended terms. You may have to eliminate certain deals with customers, reject unauthorized credits and stop processing orders for anyone who owes you money. You also have to cut out expensive cars, unproductive travel, and sell anything (excess inventory and equipment) that is not absolutely essential to the running of the business.
In a troubled situation, you also must keep the lines of communication open with employees, customers, suppliers, vendors, and the bank.
“The best way to counter the inevitable rumors that will be flying about your company, because your competitors are out there telling everyone, spreading all kinds of evil stuff, is to communicate with your constituents,” stressed Kurzina.
The importance of being earnest cannot be overlooked.
“Always tell the truth, and always be consistent in what you are saying, particular in this day of tweets and email and everything else,” said Kurzina. “You cannot be telling your employers one thing and the banks something else. It doesn’t fly.”
And finally, control. The turnaround process starts with a focus on cash and broadens as the turnaround team puts a real turnaround plan in place. This is where the tough questions come into play. What business are you in and what businesses should you be in? You look at each product line and decide what to continue and what to cut. You take a look at your organization chart and decide who to keep and who to fire, and you review every policy and procedure on the books.
“It is the turnaround manager’s job to lead the company out of trouble. The control is the implementation of the plan,” noted Kurzina.
There are lots of things in a turnaround you should be doing in your business every day. What a turnaround team brings to the table is objectivity, because unlike the CEO, a turnaround team is not tied to the decisions that brought about the bad results.
To be a good turnaround manager, you should be objective, have a lot of good judgment, an ability to make hard decisions, and be possessed of strong leadership skills so people will want to follow you.
“All of these things are the same things an entrepreneur needs to have,” said Kurzina.