The Turnaround Playbook: 5 lessons from a distressed asset investor

With so many business owners facing what has already been the fight of their lives, there are a number of decisions to take when striving to come back from low or zero revenue and a heavily impacted P&L. The financial instruments to aid business recovery have been well covered of late, and indeed there is a surge in demand for the expertise of distressed and special interest investors. But what’s in the investor’s tool-kit to make what otherwise would be a failing business a success? I talked to John Walsh, Founding Partner at ReSolve Capital Partners, to find out more about distressed investing and turnaround for media and information businesses. The playbook is also applicable to many business as usual situations too, and more so highlights the keys to ensuring long term and sustainable growth.

John started his career in the Royal Navy as an engineer before cutting his project and operational management teeth in the construction industry. Quickly learning what it meant to streamline, upskill, and supercharge efficiencies to drive business results, he was offered a position in the investment industry. After a number of successful exits, John entered a new career that’s different to traditional investment and Private Equity houses out there. Rather than focusing on leverage and backing more clear winners, John and his founding team would seek out troubled businesses who’d hit a bump in the road and needed operational, and strategic input – not just capital. Together with Cameron Gunn, Mark Supperstone and Ken Browne, he formed ReSolve Capital Partners.

Daniel: Distressed investing has certain connotations attached. What are the common myths you’ve experienced when working with distressed businesses?

John: Whilst it’s true that the value of a business can be found in the company balance sheet, the ongoing trading success of any business will be found in the cash flow forecast. It is this focus on the balance sheet that leads investors to believe the way forward is to go through some form of insolvency process to clean up the balance sheet, offload debt and thereby improve value. Whether the business is distressed, in a special situation such as Growth or Downsizing, or caught in a global pandemic, only cash preservation will get you through it. This should become the number 1 obsessive focus.

It is a fallacy to believe that burning creditors is the panacea to saving cash. It is much better to take your creditors with you on a consensual journey. Not to do so will result in automatic proforma payment terms, ransom payments, lack of trust, lack of credit insurance, damaged reputation and an elongated period before an exit can be considered. The conversation with key creditors and the supply chain required to support the business going forward can be exactly the same via both a solvent and an insolvent solution.

Daniel: What is your underlying thesis for turning a business around?

John: Transparency – both internally and externally across all stakeholders. All companies vary, but fundamentally there are 3 core elements to any business – sales, operations and finance. It would be an extraordinary CEO/MD who is capable of driving all 3 factors at the same rate linked like carriages on a speeding train. Normally when businesses have become stressed is when at least one of these carriages has become disconnected and without correction could cause the entire train to derail. The key to overcoming this is to ensure transparent reporting across all elements of the business, identifying trends, establishing KPI’s and understanding influences and fluctuations together with their resultant impact across all departments and above all else, BELIEVE THE NUMBERS!

It is also consistently a pleasant surprise that solutions to the various challenges that businesses face, can come from the least likely of sources and it is for this reason that we believe a level of transparency and openness should extend not only across all staff but across all stakeholders. Nobody likes surprises, so regular dialogue with banks, clients, suppliers, even competitors, on all elements of the business, can be healthy. Dynamics will be changing in their organisations too so delivery periods, quantities, margins, payment terms, contract terms should always be considered as flexible through dialogue and never cast in stone. So many people second guess an answer before they have even asked the question!

Daniel: Walk us through your playbook, and any advice you have for Founders/CEOs who are striving to succeed through these extremely difficult times but perhaps don’t have a partner like RCP onboard?

John: There’s a great deal to consider (capital injection aside) – and probably best to break it down into 4 main areas to frame the most important elements which combined go into driving long term success.

Financial best practice

• One can anticipate three natural phases from a distressed position: turnaround, consolidation and growth. 
• It is reasonable to anticipate that these phases could take up to a year each to execute.
• Financially, when one is looking at the first year it is very important to monitor and forecast cash and understand the debt profile of the business. 
• 13-week cashflow forecasts together with 52 week cashflow forecasts to understand the cyclic nature should be an absolute minimum. 
• Closely monitoring aged debtors and aged creditors is key. Reducing aged Debtors should become an obsession!
• A particular feature of COVID has been CBILS loans, Bounce back loans and HMRC Time To Pay. Together these will in themselves be building a bow wave of debt and factoring in their repayments will be key.

Operations and company structure

• Operationally the business should be focussed on being the right size. In that I mean the right size to meet secured sales. Many businesses flounder because they ramp up overheads in anticipation of better times ahead. However, in a distressed situation it is key to focus on the here and now. 
• Increased sales are a champagne problem that can be managed. 
• Allow for scale – good times ahead can and should be factored into the structure of the workforce and management to ensure scalability. 
• The easiest way to do this is start with the revenue earners and work up the pyramid. If for every 5 revenue earners, a supervisor is required and for every 5 supervisors a manager is required then these ratios should be established and adhered to. It will then become obvious what is required to scale up the business and when. 
• It is always very important to work to productivity KPIs but even more so following slow or quiet periods. People will “feel” busy long before they are overstretched. 
• Over-stretching should be combatted by increased efficiency. Increasing resources is an easy but dangerous cop-out. 
• Move from fixed to flexible overhead through hiring plans rather than buying or contracting resources rather than employing directly.

Management Team and People

• When it comes to people and management, transparency comes into its own. 
• Everybody should have a platform to get their ideas heard. A silo mentality has to be smashed through.
• The plan should be bought into by all heads of department, committed to and referred to in every decision making process. This will make decision making more agile whilst remaining focused. 
• When businesses are in challenging situations, they can’t afford to travel too far in a wrong direction. There shouldn’t be any need to make assumptions or second guess. 
• Ensure the finances in the board pack are sufficiently detailed and transparent to influence the decision making, not just keeping score. Ensure the finance function is able to lead the narrative when appropriate. 
• Ensure every plan has an associated cash flow within its business case. 
• The entire workforce needs to be focussed on keeping everything the business needs but nothing that it doesn’t.

Product and Market

• This is a vast subject and understanding the full extent of your addressable market is key. 
• In a distressed situation increasing product lines can be dangerous so it is important to ensure all outlets for existing products have been exploited. 
• Expanding overseas should never be considered until one has saturated existing markets. 
• Investing in overseas expansion creates an uncomfortable combination of cash requirement and uncertainty. 
• Understanding why you may have lost out to competitors is also crucial. It may be that working with, rather than against, competition can broaden the offering and become more attractive to client spend. 
• Looking at vertical integration opportunities is something which should also be fully explored.
• Asking questions such as how do you make your Sales and Marketing effort more effective? Who are your hunters and who are your farmers? Who are the door openers and who are the closers? Both very different skills and not necessarily both found in the same individuals.
• Believe the numbers. Measure your Lead:Tender:Conversion ratios.

Daniel: In a buoyant economic market, it becomes easier for businesses to lose sight of what it really is that is driving their business growth – and some would see COVID as a wake-up call, and an opportunity to really nail the fundamentals of your business. The pandemic has forced businesses to look long and hard at their operations, their customers, how to increase efficiencies, how to save costs, improve products and services – and overall become better. How do you see businesses adapting and using the current situation to evolve?

John: Something to consider is how to leverage the impact of COVID as an opportunity to reposition the business entirely. COVID presents a classic case for moving from a physical presence to a virtual presence. Is this an opportunity for your business to pivot from its history towards a bright new future? Develop new products and services which better meet your customer’s needs, or operate a more well-oiled machine, and to focus on the right KPIs which drive success and stop focusing on everything else that just simply gets in the way or slows you down.

 

For any Founder/CEO seeking to improve their business, ensure sustainable growth, or indeed succeed in turning the company around and away from a critical situation in challenging market conditions, there are 5 main takeaways from the playbook to pay special attention to and adopt:

1. Transparency with internal and external stakeholders
2. Rigorous cashflow forecasting
3. Focus on the core business and products, and avoid internationalising operations
4. Think about efficiencies, not new resources
5. Have a strong plan you refer to constantly and are accountable to delivering

We certainly hope you found this interview useful, and if you have further questions or ideas you’d like to share about your current business we’d be pleased to hear from you and happy to share further insights from our own experience over the years.