their jobs, and recruits will be leery of
joining a company with open issues.
unsecured debt exceeds its tangible book
value. Equity is essentially worthless.
Operating margins are theoretically
substantial, but have shrunk recently,
and the trend appears to be negative.
The company is losing money on
an accrual basis and is cash-flow
negative for the most recent quarter
Of course, the turnaround advisor must
be candid. Surely, the chances for a
successful turnaround can be neither 100
nor 0 percent. Irrespective of the odds,
the advisor must communicate his or
her sense of whether the company can
be turned around. The discussion should
address, when appropriate, the factors
that would make turnaround more or
less likely and the process through which
the return to profitability would occur.
This is not to suggest that all employees
will choose to remain at the company
to participate in the turnaround.
Many will choose to seek alternatives.
Since the most talented people will
have the best options for moving on,
leadership must be sensitive to team
dynamics and should have some
understanding of the disruptions that
will be caused by the departure of
some or all of the essential team.
One of the basic truths is that if the
CEO had the skills necessary to manage
this crisis, he probably would not have
gotten to the point that the company is
overleveraged, has shrinking operating
margins, and has no net equity value.
So the first challenge is to convince
the CEO that a consultant has the
skills he lacks and can help him out.
When the company is in distress, the
challenge is to get better performance
from people who underperformed when
the business was doing well. Sometimes,
it is not easy to replace underperforming
employees. They want to hold on to
This hypothetical company provides a
typical example of a distressed business.
A 45-year-old manufacturing concern
has $50 million in annual revenue. The
company makes a variety of products
that are sold to a large number of
customers, but all of its products are
tied to one industry. The company has
six shareholders, all of them related to
one another—a father, mother, brother,
and three children. The father serves as
the CEO, and his brother works in the
research and development department.
The CEO leverages the company to
the point that its total secured and
The turnaround consultant should
begin the initial assessment process
by establishing that the company’s
operating margins are sufficient. This
involves a disciplined review of the
company’s historical financial statements