December 4, 2020

You’re the Boss: How Small Companies Get in Trouble

Transaction

Most of us have an image of the turnaround guy. For some, the term can conjure up images of an unfeeling taskmaster, exemplified by Albert Dunlap, known as Chainsaw Al, who applied his famously ruthless methods to companies like Scott Paper and Sunbeam in the 1980s. Recently, however, I had the good fortune to meet not one but two men who put to rest my stereotype of the turnaround guy as Rambo in pinstripes.

John Newman recently retired from turnaround work after 15 successful engagements. His efforts took him across the country, where his clients ranged from closely held businesses to some of the largest agricultural cooperatives in the United States. Lynn Hartrick has been helping midmarket business owners with turnarounds, transitions and liquidity events for 14 years. Both men have many of the same outward qualities, including impeccable listening skills and a genuine desire to fix broken companies. I asked them about the work they do and what advice they have for small-business owners.

Do you see common mistakes or patterns that lead to the need for a turnaround?

“The troubled company pattern looks like this,” Mr. Newman wrote in a prescient 1999 article Good Times Make You Stupid. “When the company is starting out, the owner lives frugally, often taking no salary for the first few years. Then they hit some good times. The owner buys an expensive car, joins

the country club, buys a fancy house … then the luxuries become necessities.” In this scenario, the company’s survival becomes largely dependent on the owner’s personal financial flexibility. According to Mr. Newman, the edge of bankruptcy is often the point at which the owner accepts that change is necessary.

Mr. Hartrick offered a caveat. “It would be unfair to generalize that all turnaround situations are the result of owner mistakes,” he said, citing market shifts and economic factors as other causes. “When it is owner-driven, it is oftentimes due to the business ‘getting away’ from the owner. He has taken his eye off what made the business successful in the first place or failed to keep pace with the change around him.”

Mr. Newman pointed to denial — or what he likes to call “ostrich management” — as another common denominator leading up to many turnaround scenarios. “Turnarounds require painful decisions,” Mr. Newman explained. “It is human nature, although not necessarily good leadership, to try to avoid such actions.”

Both men also included lack of planning and incomplete reporting as hallmarks of a business in a downward spiral — “when owners fail to track and use metrics for performance and prediction, don’t set priorities or lose connections with customers and employees, then trouble is not far off,” Mr. Hartrick said.

(For a detailed account of a business that faced these kinds of issues, see a recent case study and  follow-up post describing the turnaround of First Quality Music.)

You ask people to make difficult decisions. How do you get them to act on your advice?

“While some owners are reluctant, reality usually rules the day,” said Mr. Hartrick, citing pressures like dwindling cash, threats from bankers and vendors shutting off deliveries. “Few businesses get into trouble over night. There is usually a history of no planning, poor management, failure to recognize the need to make tough decisions and a reluctance to communicate and seek collaborative support from employees, creditors and bankers.”

Mr. Newman takes the time to hear that history. “I spend most of my time listening, to learn and develop trust,” he said. “When I talk, I speak the truth about the limited options.” Two likely options, he said, are selling a division or otherwise downsizing the business, and yes, sometimes, letting go of employees — even good ones and especially at the top.

In a 2005 article, Mr. Newman described a particularly turbulent day of meetings between bankers and top executives at a client company. At the end of the day the chief executive stepped down voluntarily, then stayed with the company to train his successor. The turnaround was successful and the incoming chief executive was considered a hero. “But to me,” said Newman, “the departing C.E.O. was equally a hero in the way he conducted himself.”

How does an owner decide whether to sell the business — or to try to turn it around?

“Turnarounds require a burst of energy from top leadership,” Mr. Newman said. “If the owner is already burned out, he would do well do sell it.” Some owners seek an alternative strategy by taking a back seat and hiring a manager, although he added that this method rarely works.

“There is a decision point, and I think it varies in every case,” Mr Hartrick said. “Is the business salvageable? Is there sufficient capital and time to effect a turnaround? Does the owner have the talent and energy to slug through what is required?”

If good times make you stupid, I asked Mr. Newman, what do bad times do? “Folks who go through a turnaround learn lessons that stay with them for a long time,” he said. “I’ve seen companies make major changes specifically because of the depth of the crisis. The crisis became an ally.”

Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.

Article source: http://feeds.nytimes.com/click.phdo?i=659460d8b725d2678cd144f0cd717e98

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