Focus on value creation and guide the company to a new plateau. Your advantage is that of an objective focus, untarnished by the situation at hand. You bring a perspective that does not reside within the company because the players lack experience with their new situation. You are the teacher, the stakeholders are the pupils and together you rebuild in a new direction. You effectively manage “change control.”
Install a CEO or board with transition experience in value-building situations. This leader will demonstrate expertise in:
• Managing crisis, transition, and rebuilding processes;
• Shaping business strategy and financial structure;
• Developing management talent, building caliper teams, utilizing and growing existing resources;
• Growing sales and market share;
• Maximizing return on capital;
• Linking management performance to ultimate goals;
• Developing incentive-based compensation programs.
This leadership must get directly involved in making decisions to achieve the ultimate goal — sale at increased valuation. They must be held accountable for performance and timely results. Most importantly, they must get things moving. On the revenue/sales side, look at where and how revenue is generated and keep it coming. On throughput/production, get product or service out the door. How else can you bill for it?
The final step to complete the turn is to hire a marquee manager to lead the enduring team. This permanent team adds to the value equation.
Your investing goals are a shorter-term high multiple return (for the risk) while allowing ongoing longer-term returns for the buyers providing you an exit. Implement long-term strategies which will survive that exit.
While situations differ, one essential strategy is to drive revenues; growth cannot occur without more sales. The strategy must address the problems plaguing the company and provide a roadmap to revitalization. If all you can do is think of strategies tried before — don’t invest.
An effective strategy is key to implementing change. You must establish a new vision, distill this direction into concrete goals and objectives and create a guide for everyone to follow. Rebuilding momentum is critical to success.
Build quality management team
The value of a company increases sharply with a strong, permanent, credible team who can demonstrate their ability to produce consistent sales, profit and cash flow results. Establish continuity in the organization to allow everyone to expect orderly change and opportunity.
Capitalize on available under-utilized human capital — those remaining middle managers. Chances are they are dedicated to the company and its success. Guide them to their next level, and they will take the company the next big step.
Acquire new business/sales
There are only two ways to increase sales — 1) sell new products to existing customers, or 2) sell existing products to new customers. Most under-performers have forgotten, or never had, the basics of marketing and promotion. Clearly promote what your products and services can do for your customer to satisfy their needs; differentiate why your product stands apart from the competition.
Become market driven, adapt to changing conditions and improve your competitive position. Deliver only what they are willing to pay for.
Establish sound capital structure
Create reasons for investors to invest and buyers to buy. A sound strategy with a viable marketplace, efficient delivery and production vehicles coupled with a cohesive management team will entice the investment community. Securing new capital becomes much easier when investors see high probability of return and a viable exit strategy.
As important to infusing cash for working capital needs is to make certain cash won’t be diverted into past commitments. Establish relationships with creditors so they will work with the new management team — give them upside when the turn is complete. Consider a “creditor’s committee” approach to keep them plugged in and participating. Pre-packaged bankruptcies are also available to ensure cooperation. You can always purchase assets out of bankruptcy to ensure a clean structure, a strategy being utilized more often as buyout funds get more comfortable with the process. In many ways this approach can be considered alternative and complimentary financing.
Use systems and processes to drive the business and control the day-to-day environment, which allows management to run the critical elements of the company. Many managers waste time on tasks where results would be essentially the same, managed or not. Focus on the important things — controlling cash and costs, increasing sales and enhancing value creation. Manage these.
Processes define guidelines and expectations — watch for the benefits derived from communicating what is expected. This will re-establish delegation of authority and expectation to those who can turn the events of the company. When results are recurring this stimulates value.
Leverage all resources —people/facilities/advisors — to complete the turn. Often the key resource is the employee: Set up an incentive structure paying only when they accomplish the goals set forth in your long-term strategy. A robust incentive structure shares the risk; if successful all will gain. If not, you’re not subsidizing poor performance. Your incentive for investing is return when the sale occurs. Their incentive should be based on performance that will take the company beyond its sale. After all, they are a key asset your buyer is looking for.
Know when to ‘cash-out’. The greatest ROI comes when the turn is complete and the company is ready for the next tranche investment to fund growth. At this point there are many new investors who will want to participate. Remember:
Earnings and cash capacity +
achieved X multiple on investment +
demonstrated Improvements +
functioning management Team in place = time to sell.
Success in investing recognizes that a small Xr growth in revenues can yield many Xn returns on invested equity. Revenue in excess of controlled fixed costs drops substantial incremental profits [cash] to the bottom line, which in turn drives valuation.
Leverage opportunities to take advantage of distressed level asset pricing in distressed situations; the risk to reward ratio is high. Take operating control in all entities to make certain that those decisions that few understand are made to influence the Xn multiple outcome. Install leadership with extensive experience and success records revitalizing and restructuring entities, operating and executing financially successful exit strategies.
Buy, invest, manage, renew with one thing in mind — maximizing value for resale. When the process is completed, only one result can occur: Value creation and Xn multiple returns.
Read more: Is All Growth “Good Growth”?