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Frequently Asked Questions

Q. What is the difference between turnaround consulting and traditional business consulting?

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Specialization.  Pure and Simple.  The world is full of business consultants who claim to be experts in thirty different aspects of business.  By definition, it is hard to be an expert in human resources one day and an expert in marketing the next.  This is far too prevalent in business today.

A turnaround consultant will identify very specific issues and attack them with a nearly obsessive approach.  These issues might include working capital, debt structure, cost reduction, cash flow management, and creditor relations.

If your turnaround consultant also provides expertise on employee handbooks, you do not have a turnaround consultant.  If a local accountant or attorney offers to fill the role, ask for a portfolio of successful turnaround projects they have been involved in.  Experience matters in turnarounds.
Q.   What are the common warning signs of a company in need of a turnaround consultant?

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A lender calls a loan or loans in default.  Payroll is missed or in danger of being missed.  Employee benefits have not been paid in a timely basis.  Vendors have cut off credit.  Customers are leaving due to missed orders.  Checking account fees soar due to ongoing overdrafts.  Agencies such as the IRS are not being paid.  Collection notices in the daily mail.  Daily calls from vendors regarding overdue payments. 

Any or all of these warning signs are common for a company in distress.

Q.   How does a business retain a turnaround consultant?

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Often times, the lender will provide the name of firms with a proven track record in turnaround work.  An attorney, C.P.A., or key supplier may provide names as well.
               
With the names of perhaps three firms in hand, calls of introduction are made.  The phone calls often lead to a personal meeting at the business location or the offices of the consultant.  (In the case of Key Consulting, Inc. a trip to the Minocqua area is often a nice break for a business owner…)
               
The process is an interview of course.  What is often lost on business owners is the interview process works both ways.  After 23 years of working with small businesses, it is not hard to see whether a business owner is dealing in reality or fantasy.  If the personality side clicks, a letter of engagement is reviewed and signed.

Q.   How do fees work?

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Every firm has a method for calculating fees.  Most request an upfront retainer that provides security so the firm will be paid in the event of a failure or end of the engagement.  Hourly fees are often combined with what are called “success fees” related to specific goals being met. 

Success fees are not without controversy.  As a matter of policy, Key Consulting, Inc. will not accept success fees as compensation.  Success fees on something like a bank renewal can create an inherent conflict of interest.  The turnaround firm has incentive to push the renewal regardless of the terms and the business may suffer for that.  It may be trendy and profitable, but it can also put the interests of the client and consultant in conflict.

Key Consulting, Inc. requires a signed engagement letter, payment of a retainer or deposit upfront, and bills every two weeks based upon an hourly rate.
Q.   What is the role of the bank or banks in the process?

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By the time a company gets into a turnaround (or “workout” as banks call them), relations with the lenders may be strained.  Accusations often fly that the company did not provide an accurate ongoing picture of the situation to the lender.  Business owners often believe the bank is behaving in a heavy-handed manner and is not willing to work with them.
               
In most cases the bank is what is called the “senior” lender.  The have first claim on the real estate, equipment, inventory, accounts receivable and other assets.  Unfortunately for the business, this means the bank is in the driver’s seat.
               
Banks want action.  More than any other specific document or promise, banks want action.  The bank will want to meet, see a business owner that accepts the gravity of the situation, see some plan of action, and then decide what support it is willing to offer.
               
Business owners need a cool head to avoid emotional actions that will only serve to antagonize lenders.  Dare a bank to destroy your business by cutting off communication and cooperation and they may do just that.  It is in nobody’s best interest to start a war without first seeking a mutual solution.
Q.   Do we need an attorney?

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As a practical matter, every business needs an attorney.  A seasoned attorney that provides guidance and counsel can be a key partner in the turnaround process.  An attorney looking for conflict and billable hours can hamper and in some cases endanger a workout.

Legal fees are expensive and in many cases a business owner is paying both sides.  Yes, you did read that correctly.  In many loan documents, you will find the cost of recovery is not borne by the lender but by the customer.  When your attorney is talking to the bank attorney, you are paying both sides.  That can easily be in the $600 to $700 per hour range and often times over $1,000 per hour.

Pick your counsel carefully.  Specific examples can be cited of cases in which clients are promised lawsuit victories and judgements against a bank.  Unfortunately, the company died in the process.  With the death of the company, the ability to pay the attorney disappeared.  With the lack of funds for the attorney, the promised victory over the bank disappeared as well.

Fix the company.  In most cases that makes a drawn out legal fight with the lender irrelevant.
Q.   Our situation is so bad, we do not know where to start.  What should we do?

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Admit there is a problem.  Until the business owner admits the business is in crisis, any real possibility of turning the business around is a waste of time.  When a business has banks and creditors closing in, turning down the heat is not going to get it done.  It will only delay the inevitable.
               
Take out a legal pad.  Lay out the true condition of the business.  Review financial statements for traps such as accounts receivable that are not collectible and correct them.  Meet with your banker or the creditors applying the pressure and be willing to admit some action is required.

Admit there is a problem.  Develop a realistic strategy. Lay out the strategy to key parties.  Execute the strategy.
Q. Are there specific traps for a company in distress?

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In almost every turnaround project, the overriding risk may be employee benefits.  People can get behind with lenders, suppliers, and maybe even the IRS.  The one thing a business owner should never do is get behind on employee benefits. 
               
Employee benefits such as health insurance or 401K payments simply cannot be treated like other creditors.  There is personal liability for the ownership of a business that does not handle benefits properly.  In almost every case, the company is not only handling company money but employee payroll withholding as well.  At the point employee money is mishandled, you will have an epic mess on your hands.
Q. What if our employees find out we are in distress?

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They already know.  It is exceedingly rare that key stakeholders in a company do not grasp what is going on around them.  They may not know the scope of the problem, but they probably sense something is wrong.  Remember most employees in America live paycheck to paycheck.  The fear of losing a job can be overwhelming.  Your employees are watching, don’t kid yourself.
               
There is a fine line to walk here.  Employees are often relieved to find out ownership has made the decision to take concrete steps to stabilize the business.  This is a good thing.  Employees knowing all the details of a company in distress is not necessary a good thing and can cause significant problems.  Commonality of message and regular updates can be of great value in holding a team together.
Q. Does a turnaround mean unlimited rounds of slash and burn within a business?

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Every turnaround is different.  Some circumstances require dramatic cuts across the board which inevitably includes staff.  Other circumstances require a rebalancing of the structure of the business to better match capacity or to adapt the business to changing market conditions.
               
The process is pure agony.  Any turnaround consultant that promises a simple and painless process is simply not telling the truth.  Remember one thing above all else.  If the company does not take dramatic action, everyone is going to lose.  This means ownership, employees, creditors, customers, and vendors.  It is important that the ownership accepts that the actions are necessary to save the business or infighting may devour the whole operation.
Q. Can every business be turned around and regain financial health?

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Tough question.  The fact is in some cases bankruptcy or liquidation is the end result.  Having said that, almost any business that has a profitable core can work through financial issues.  It might require changes in operations, equity injection, or changes in the capital structure via debt restructuring but it can be done.

 

 
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