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Driving value in a turnaround: Have end game in mind

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Is your company facing a turnaround?

Does it need a financial recovery after performing poorly for an extended time?

To effect a turnaround, a company must acknowledge and identify its problems, consider changes in management and develop and implement a problem-solving strategy, according to Investopedia.

What should you focus on to reverse the fortunes of your business and build the value of your company?

Start with the end in mind. Every business will have an exit event, either one you planned or one you didn’t.

Once you acknowledge this, your mindset naturally will tend toward value creation.

Financial performance is a key driver of value, and the first order of business is to “right” the financial ship.

Focus on improving cash flow.

Can payables be stretched while receivables are shortened? Can you flip your cash flow cycle by collecting payment upfront?

Margins must be improved, but how? Can your suppliers provide better pricing? Can existing liabilities with vendors be restructured to improve cash flow (more or less an informal bankruptcy achieved through open communication and perhaps a third-party mediator)?

Can nonproductive assets be liquidated to raise cash? Can existing bank financing be restructured? Can additional working capital be secured through bank or nonbank sources?

The simple fact is inadequate capitalization and poor cash flow are a prime reason behind business failure.

TRUE PERFORMANCE

On a more mundane note, implementing sound financial reporting systems will provide the tools needed to effectively manage your business.

Consider getting “prepared” or “audited” financial statements as opposed to simple tax return preparation.

At the very least, make sure your internal accounting systems are current.

Work with your internal or external accounting adviser to create a report that shows the true economic performance of your business.

SALES FORCE MOTIVATION

Chances are that if your business is in a turnaround situation, growth has been at best flat and most likely declining.

If growth is declining, so is value – and value is driven by growth.

Can you sell another product or service to existing customers? Would your business work in another geographic area? Do you have a sales force? Is it productive?

Remember, it is difficult to motivate a sales force of one; most salespeople need competition to thrive.

DIVERSIFY

Diversification of customers, suppliers and even employees is key to value creation. Buyers are wary of businesses with a high percentage of sales to a few customers.

Likewise, having only one key supplier leaves you vulnerable.

And relying on one or a very few key people – that includes you – makes your company less attractive to a buyer, and therefore less valuable.

RECURRING REVENUE

Can you create recurring revenue streams in your business?

A company with a recurring base of revenues will have a higher value than a similar company with nonrecurring revenues but the same cash flow.

Your first instinct may be along the line of, “Oh, that wouldn’t work in my business.”

Ignore that instinct and really give this some thought. You’ll be surprised.

SATISFACTION OF CUSTOMERS

Fundamental to creating a recurring revenue stream and value creation is customer satisfaction. Without customer satisfaction, you will not achieve recurring revenue or create value or stay in business.

According to Fred Reichheld, author of “The Ultimate Question,” the answer to one simple question is a very, very high predictor of customer satisfaction: “On a scale of 0 to 10, how likely are you to refer our company to a friend or colleague?”

Reichheld has created the “net promoter score” based on the answer to this question, a tool that very large strategic buyers use as a screening mechanism for acquisition candidates.

ABOUT THE TEAM, NOT YOU

Finally, you must build a team.

Doing so makes the business less about you and is attractive to buyers – meaning a business run by a solid team is more valuable than a business run by a one-person “Mr. or Ms. Incredible.”

Consider an employee bonus plan with short- and long-term incentives, but not stock options.

Focus on problem prevention instead of problem solving.

Take a vacation. Does the business continue to run smoothly?

WHAT WILL IT TAKE TO SELL?

Manage your turnaround with the goal of selling your business to a buyer in the future.

What will it want? What will it value?

This focus will drive value creation in your company and assure that your turnaround is successful.

Tom Hewlett is managing director for eastern Pennsylvania at A Neumann & Associates LLC, a mergers and acquisitions adviser and business brokerage firm that is affiliated with national networks of qualified investors and sellers. He has 30 years of experience in valuation, business transfers and mergers and acquisitions and can be reached at t.hewlett@neumannassociates.com.

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