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Turnaround Specialists Saving Troubled Firms

Turnaround Specialists Saving Troubled Firms

source for article: by Maria Panaritis, September 2, 2008

They are the trauma team of the business world. Their job: Stop the bleeding before the patient dies – or the bank calls your loan. And if your boss doesn’t have the chops to rescue your troubled company, they may just recommend a new one.

They are turnaround specialists. Hired guns such as Brian F. Gleason. And they swoop into struggling companies to manage them out of crisis and keep them running.

These days, with fewer lenders willing to give businesses time to stabilize their hemorrhaging bottom lines all by themselves, executives are hiring people like Gleason to fix things fast. In other words, business is brisk.

Under increasing pressure from banks to whom they owe large debts, companies with revenue problems are hiring these consultants and giving them power over cash flow, payroll, and even whether the right people for the job are in the executive suite.

They invite the Brian Gleasons of the world into their world not because they particularly want to, but because the nervous lender holding their big loan has strongly urged them to, lording over them the tacit threat of stern penalties if they do not.

“Our job is to get in, stabilize and get out,” said Gleason, managing director and shareholder of Chadds Ford-based Phoenix Management Services Inc., one of the region’s preeminent turnaround firms and with offices on the East Coast.

“We are much busier than we were 12 months ago,” said Gleason, who last week said he fielded calls from a troubled business and the bank holding a big loan.

“The company wants an assessment,” Gleason said, “because the bank wants an assessment.”

He declined to name the company because, like many of his clients, it is privately held.

Gleason was called after the company in question had asked for additional financing but the bank refused, instead insisting on a turnaround consultant.

A year ago, banks were more willing to let businesses work out their problems by obtaining new financing and sticking to their own long-term business plans. Not anymore. The risk of default is simply too daunting in the wake of the subprime crisis. Banks want to make sure they are paid.

In the early months of the subprime meltdown a year ago, the companies most likely to summon a turnaround specialist were those with direct ties to the housing sector, said Randall W. Siegele of Chase Business Credit in Wayne and president of the Philadelphia chapter of the Turnaround Management Association.

But recent industry buzz suggests the hard times have spread to companies of all stripes. Siegele said calls for help now were coming from the industrial sector and beyond as companies and banks seek to avert bankruptcy during the economic downturn.

To banks, facing their own revenue problems in light of the credit crisis, a business in trouble could mean default may be around the corner.

“The lenders feel a lot more comfortable having a third party involved given that the existing management team is the one that rode the ship into the shoal,” Siegele said.

Gleason said his job was to assess a business from top to bottom: Identify its biggest problems; determine whether executives and managers have what it takes to turn things around; and – perhaps most critically – take control of cash flow and expenses. An assessment could take two to 10 weeks, he said.

If one problem is that suppliers are withholding shipments because they have not been paid, the consultant would examine the relationships with vendors and the staffing of the purchasing department.

If the deputy purchasing manager has better vendor negotiating skills than, say, her boss, the consultant may recommend that the deputy take over, he said.

Sometimes, the consultant concludes the chief executive officer should go and makes the case to shareholders. But it is more common to see a chief financial officer get the boot, Siegele said, because CEOs of private companies are also typically owners and resist such a move.

What do turnaround specialists bring to the table that industry executives lack in crisis? A dispassionate eye and battle scars. They often know how to maneuver out of crisis because they have been there before.

In fact, Gleason, 42, got into the turnaround business after helping the insurance company he worked for shut down one of its unprofitable divisions.

Executives who have enjoyed business success often lack the tools to manage when a crisis strikes. Cutting costs and managing cash, for example, are new moves. They may be reluctant to slaughter sacred cows such as club memberships to save money.

“They’re an executive who had a lot of success, but who is playing a game that he’s never played before,” Siegele said. “Take Michael Jordan. He’s a good basketball player. But put him on a baseball field and he’s pretty mediocre.”

To be truly effective, though, a turnaround specialist must be diplomatic. Employees, after all, know where the bodies are buried, understand the business at its grass-roots level.

“You can be Attila the Hun if you absolutely have to,” Siegele said. “But that’s probably not the best way to approach this. . . . You need those people.”