Implementing a Response to COVID-19: Keys to a Successful Turnaround Plan

July 22, 2020  |  By Marc Sullivan  |  3 Minute Read

Crises can take many forms including the loss of a large customer, the failure of a significant acquisition, or the sudden loss of market share to a disruptive competitor.  While the potential to face those challenges and others remain, COVID-19 adds a new and particularly unpredictable factor to the already constantly changing strategic and competitive landscape.  So far, many management teams and boards of directors have not had to forge a response to the current crisis.  Instead, they have relied on government assistance and lender forbearance to weather the storm.  Soon that unprecedented support will end.  When that happens, management will be forced to grapple with the ongoing impact of the pandemic.  For many companies borrowing availability will have evaporated, debt will have ballooned, and free cash flow will be negative.  

With little time to spare, management will be responsible to create a plan to right the ship.  Here are the key aspects of a successful turnaround plan:

1. Flexible

There has never been a more critical time to have plans that can be quickly changed as the operating environment changes.  So too is flexibility important in the creation of a turnaround plan.  The key to flexibility is the creation of realistic scenarios accompanied by trigger points to make additional changes as the need arises.  For example, any plan currently being created should take into account the possibility of large parts of the country having to close in response to COVID-19 in the fall and/or winter and lay out strategies for corporate survival should that happen.  Keep in mind that scenarios and trigger points should not only consider negative outcomes but also the possibility of specific positive outcomes.

2. Decisive

The best way for management and the board to ensure that employees maintain their jobs, that the company continues to contribute to economic activity, and that all parties minimize litigation is to maintain the company’s solvency or to return the company to solvency as quickly as possible.  It is shocking how often the turnaround plan presented to the board reflects improvement from the current situation but falls short of returning the company to solvency.  This strategy is a recipe for failure as it merely kicks the proverbial can down the road.  Competent turnaround managers create and present turnaround plans that return the company to solvency.

3. Rooted in Financial Reality

One of the contributing factors to corporate distress is the tendency for managers to overstate expectations for future performance.  Sadly, that tendency also manifests in most turnaround plans.  Management and the board must realize that the turnaround plan is often the last opportunity to save a company either from requiring court supervision to survive or from liquidation when it is already in a court supervised process.  This is not the time to make unrealistic statements about expected future outcomes.  Frothy projections are often based on unrealistic assumptions.  If the plan requires money for investment, does the company have the money or is it likely that a stakeholder would be willing to provide financing?  If the answer to those questions is “No”, then management should accept that the investment is not going to happen which will likely lead to less favorable projections.  There is no point in creating a plan that cannot realistically be executed.

4. Actionable

Turnaround plans are by their very nature mission critical.  The creation and dissemination of a turnaround plan is not just about convincing stakeholders to support the board and management team, but about the very survival of the company.  As a result, they are only useful if they can actually be implemented.  That said, some plans contain elements that are clearly not realistic in the operating environment in which they are created.  For example, some plans may contemplate the sale of a type of asset for which there is at least in the short term no viable buyer.  A turnaround plan is not meant to sit on a shelf.  It is worthless unless it is actionable.

5. Comprehensive

Finally, any good turnaround plan should address all, or virtually all, of the problems that led to financial distress.  With that in mind, layoffs and other employee cost reductions alone are not a turnaround plan unless all of the company’s problems can be solved by reducing the workforce or the cost of labor.  For a plan to be comprehensive, it should address not only the workforce, but strategy, operations, financing, management, and governance with a particular emphasis on the short-term working capital required to achieve the plan.  In addition, the plan should address root causes, not symptoms.  For example, many management teams believe that the problems with lenders are the reasons for distress.  In reality, addressing internal challenges is the solution to stakeholder problems including those with lenders.

Over our 35-year history, Phoenix’ professionals have worked with countless management teams and boards to successfully create and implement actionable turnaround plans that have been used to gain stakeholder support in virtually every industry.  Our professionals work quickly to identify opportunities to reduce cost and improve profits.  At Phoenix, we believe to make it through the COVID-19 pandemic, businesses cannot take a wait-it-out approach; rather they must take actionable steps to ensure solvency. Meet our team and tap into our extensive experience in creating successful turnaround plans.

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