building enterprise or shareholder
value. Success on the sunny side is
normally not defined in terms of simple
survival or a sale in which senior debt
is repaid without any meaningful
payment to junior creditors or equity.
The distressed world is much different.
In a distressed situation, a successful
outcome might be a par recovery
by senior debt or an asset sale in
which all debt receives less than par.
But, that may be the best recovery
available under the circumstances.
threats of lawsuits can distract those
unfamiliar with the process. Employees
feel an overriding sense of doom. The
purchasing department is told by a
vendor that they are on credit hold and
cannot order products. This information
trickles out to the rest of the staff and
the next thing senior management
knows, rumors are flying that the banks
are going to lock the doors and the
company is preparing to file bankruptcy.
adept at addressing their concerns and
the behaviors that are common when
their equity is threatened. Human
beings are commonly motivated
alternately by fear and greed. But
effective leaders must be more balanced
and much more disciplined, even
in the most stressful situations.
Managers in distressed situations must
have specific skills and knowledge, and
the experience to define success in
keeping with their circumstances. They
must be adept at handling the unique
challenges that exist in the troubled
company environment. Although the
skills used to manage in a distressed
insightfulness, and motivation—are
similar to those required of leaders
throughout the business world, their use
and application are much different than
when managing on the sunny side.
An inexperienced manager might simply
deny the rumor or berate the brave
employee who asks about it. This is
not the time to deny reality. Employees
should not be treated as if they are
naïve or ignorant. While they may not
know the full story for certain, they
surely appreciate that there usually is at
least a kernel of truth in every rumor.
This balance is easier to achieve when
leadership has a deep understanding of
the environment in which they work. For
example, bankruptcy is an option that
is very disruptive. One of the primary
reasons is that most business executives
have no real understanding of the
process. Further, what they think they
know might be inaccurate. As a result, an
accurate explanation of the bankruptcy
process is essential to effectively lead
a company through a turnaround.
Middle market companies present
interesting issues. Due to their smaller
scale, there are fewer management levels
and, hence, fewer buffers between the
distress and employees. Also, middle
market managers maneuver closer to
the ground, so there is less margin for
error; when the company runs low on
cash, payroll could be threatened.
Rumors regarding the company’s
financial health and stability are usually
based on the buildup of common
markers of distress—credit holds,
deferred maintenance, restrictions on
travel and entertainment, uncoordinated
and hasty layoffs, desperate sales
promotions, stern faces on managers,
and many more closed-door meetings
than normal. When a company is
nearing distress or is already distressed,
a better course of action is to engage
employees in a reasonable dialogue
about the condition of the business.
Another characteristic of distressed
company situations is the urgency
with which decisions must be made.
Typically, a company operating under
sunny skies has time to contemplate
and analyze major initiatives to a
meaningful level of comfort. Almost
by definition, distressed companies do
not have that luxury. There is a high
degree of urgency for most important
decisions, and the company must
quickly and deliberately deliver results.
Another important element may be
that the shareholder’s entire net worth
and that of his family may be tied
to the company. A business failure
could have a devastating impact on
the family’s lifestyle. These situations
place leadership skills into sharp relief;
distress is the crucible of leadership.
To do this, leadership must have
a balanced sense of urgency. The
leadership must know the right things
to do and not just focus on doing
things right. Effective leadership is a
function of the environment. A pure
sunny day attitude usually does not
work in a distressed situation because
the employee base already knows
something is amiss. By the same token,
an unnecessarily downbeat attitude
is likely to be just as ineffective.
Senior leadership can fall into a malaise
induced by distress. Different people
react differently, but one common
response to distress is to bury one’s head
in the sand and pretend the problems
don’t exist. Some acknowledge distress,
but conclude that if they can only get
more sales, everything will be fine.
This is the corporate equivalent of
race car drivers simply giving it more
gas whenever they find themselves in
difficult situations. Sometimes this is an
appropriate reaction, but at times it is not.
In fact, sometimes it is exactly the wrong
thing to do. Indiscriminate application
of the throttle can lead to more trouble.
How can a manager convince the
ablest people to remain on board to
turn a company around? Most of the
time, the best employees have other
career options and must be convinced
to remain at the troubled company.
To provide effective guidance, the
leader must have experience with
distressed situations so he or she
can speak persuasively about the
potential outcome and the chances
for a successful turnaround.
It’s simply much more difficult to lead
well when cash flow is tight and difficult
decisions must be made to prioritize
payments. The juggling of resources
and relationships required can create a
raft of unintended consequences. It’s
worse, however, to avoid making these
difficult decisions in these circumstances
because they are then made by default.
The same is true in business. The most
talented turnaround managers know
how to detect and work through all
of these management reactions.
The strain on the management staff
grows, and the potential for lawsuits and
Since shareholders typically have a large
role in middle market private companies,
skilled turnaround leaders must be