Just because a business isn’t performing as well as it should be doesn’t mean it’s time to throw in the towel. With the right help and perspective, a failing business can be turned around and made profitable again. To learn more about this process, we spoke to Paul DelFino, principal of Opportunity Inc., and author of Avoiding Skewed Entrepreneurial Strategies. He has spent the past two decades assisting entrepreneurs in growing their businesses, responding to economic downturns, and assisting with mergers and acquisitions.
Small Business Center: At what point is a business in need of turnaround services?
Paul DelFino: When any key performance metric signals deterioration and the business owner doesn’t know why, or they don’t have a plan to change or correct the trend, an outside resource should be immediately considered. Just like with human health, one problem can lead to others. That’s true whether the problem is declining revenue, cost of goods explosion, overhead growth, quality deterioration, declining margins, or market share loss. Speed of accurate diagnostics and attention — along with corrective action that considers the totality of the enterprise — are the key to reversing the trend. Remember, correction is easier when it’s done earlier.
How important is it to get outside help with the process?
Entrepreneurs and small businesspeople are normally driven, prideful, and passionate about what they do, and they know their business extremely well. But, surprisingly, most have never run or managed any other business. They may not have the best view of what’s wrong, what should be improved, and how. That’s why an outside unbiased perspective is invaluable. Additionally, when problems surface, it’s normally evident to the employees, vendors, investors, lenders, and eventually the customers. When outside help is brought in, they take comfort as they see corrective actions being implemented.
How long does it generally take to turn around a company that is doing poorly?
Depending on the root cause of the problem and the control the small-business owner has over the solution, recovery can be expected in months or years. Emergency action plans can help short-term crises like not meeting payroll, but more often than not, true corrective action requires new personnel, a system change, product re-engineering, revised pricing strategies, or revised distribution programs.
What type of financial analyses should be done before a small-business owner embarks on a turnaround effort?
Too often business owners don’t manage “by the numbers” or take advantage of published industry information about standard ratios. Seeking out industry standards is one of the first things I do when I get a call about a troubled business. Trend analysis of all typical financial performance ratios is advisable on an ongoing basis, but it’s critical when entering into a diagnostic, pre-turnaround initiative.
Should small-business owners inform their employees of the turnaround plan?
In most cases, the employees should be apprised that a consultant has been retained, but I counsel business owners to avoid the term “turnaround” when communicating with employees. In nearly every case, turnarounds involve interaction with the team, so the business owner must evaluate the ability of the consultant to interact with their team constructively. Employees are typically skeptical of outsiders and change, so specialists who enter the company have to sell themselves to the team as a whole to truly expedite corrective action.
What factors should business owners use to set goals for this process?
The goals should be mutually set by the business owner and the consultant. Once the short-term emergency corrective actions are implemented, it’s necessary to set reasonable timelines and stages using as much industry data on norms as possible. However, it’s critical that the evaluation covers the complete span of traditional business measurements because it’s easy to focus on any single dimension of the business without noticing that a new problem is being created.
If business owners have suffered damaged relations with their vendors and suppliers, how can they repair them?
If the vendor relationship has not deteriorated, I find that an honest, direct dialogue works best. Taking the offense with the vendor and explaining that a consultant has been secured to correct the problem usually helps because it shows the business owner is concerned, committed, and wants to continue the relationship. Most experienced suppliers understand that their best probability of getting paid and continuing a profitable relationship is to cooperate. This is most often best communicated as a team with the small-business owner and the consultant.
What about the relationships with banks and other lenders?
As a former banker and lender, I know that what bankers dislike the most are surprises and the feeling that something is being hidden. When dealing with them, proactive, aggressive communication of the issues and plans is a must. Bankers have concerns beyond repayment. They are highly regulated, and open communication with them helps them to be in compliance. Bankers take comfort when outside business specialists participate in a turnaround and recovery. In fact, the specialist could take the lead in communications with bankers in partnership with the business owner.
Should the business owner do anything about customer relations during the turnaround period?
They should do more than usual. Turnarounds require focus, which cause the business owner and employees to sacrifice time in other aspects of the business. It’s critical that there not be a deterioration in customer relations, customer service, or quality during implementation of the plan. That being said, it is possible that the expenses required in order to attain service levels and quality standards are too high. In these cases, care must be taken to implement the changes gradually to minimize customer defection.
What is the first sign that the business is recovering?
Some metric helped identify the problem, such as revenue, margin, customer loss, cost ratios, returns, rejections, inventory expansion or reduction, or a cash deficiency. In any plan there should be an intense monitoring of “the dials,” that is, those key metrics. When all critical dials are showing improvement, without taking another metric out of the target, then the recovery has begun. When all metrics are in an acceptable range for a period of three months or more, it means recovery is probable.
What is the biggest mistake you see small-business owners make when trying to turn around their companies?
Waiting too long to ask for help. The doctor-patient analogy is best applied here. When the symptoms begin to surface, it’s time to get a physical. Likewise, when you see revenue dropping, margins shrinking, a loss of customers, and service quality crashing, consider having an independent specialist come in and do a diagnostic. The faster the root causes of the problems are diagnosed, the quicker the solution. And that means less financial and long-term damage to a business.