This section has not been written as a manual for turning around a financially troubled business. It is only here to warn you of few of the things that you might face if you do attempt a turn around. If at the end of the day you are sure that you want to attempt it I wish your nights full of very pleasant dreams.
There are many reasons that businesses get themselves into trouble. Some of the reasons can be easily corrected some of them cannot be corrected at all.
If you have never been involved at a very senior management level or owned a company that is in financial trouble I suggest that you think twice about getting involved and if after thinking twice you decide to do it then I suggest you think a third time and if necessary a forth.
Owning or investing in a business that is in trouble, especially if you are on the front line, managing it, can be one of the most psychologically trying things that you have ever done and I have been through three of them and each time I tell myself that I will never do it again.
The first thing that has to be done is to stabilize the company and that usually means getting expenses in line with cash flow (not profits). In other words you must stop the bleeding, in terms of cash, as soon as absolutely possible. In order to accomplish this you will most likely have to terminate employees and the terminations may have to be on a reasonably large scale relative to the quantity of employees that the company currently has. You may be terminating employees’ that have given the company a 110% effort and through absolutely no fault of their own they are now unemployed and you will have no choice but to listen to the anger and frustration that they will each vent on you. Believe me it is never pleasant to have to terminate good employees. Your only rational can be that if you don’t terminate half of the employees today all of the employees will be out of work tomorrow.
Besides employees you will most likely face the bitterness of suppliers and vendors who have accounts that are 90 to 120 days old. Bankers and financiers will want to know when you will be current with any loans and they will be threatening to close the business down because most likely they hold a security interest in the businesses’ assets. Outside forces will not give you a moments rest and unless you have a very thick skin and little concern for others you and your family (because it is almost impossible to leave all the problems at work and sit at the kitchen table having dinner with a big smile on your face and act as if everything is running as smooth as a baby’s bottom) will pay the price psychologically and with all my experience I have still lost many nights of sleep over it and kicked the dog out of frustration. (Metaphor only, I love dogs and would never actually kick one).
As a side note, it is very common that at the first signs that a company is in trouble many of the good employees will find new positions and resign. Good employees are always in reasonably high demand. So it is very possible that when you are talking to current management about either acquiring the business or investing in it that they will tell you that the staff is down X% over the last Y period of time. What they probably won’t tell you is that because the best people left that overall productivity has dropped at a substantially higher rate than the percentage of employees that have left or been terminated. You should also be aware that even without cut backs in staffing, when companies are in trouble overall employee productivity drops off dramatically, employee theft rises, more mistakes are made and customers will start looking for other suppliers.
It is of the utmost importance, if looking to acquire a business that is currently in trouble, that you fully understand why and how it got into trouble in the first place and what if anything you bring to the business that will correct the problem now and ensure, with reasonable confidence that the problem will not resurface in the future.
Being under capitalized is the most common form of failure especially in the first five years of a businesses’ life. Companies have a tendency to over extend their credit lines and borrow far too much money and the interest and principal payments can be devastating to cash flow. If in fact the business is in trouble due to a lack of capital and if you bring fresh capital to the company that will eliminate or reduce the debt burden substantially then you as the new owner or investor may very well be able to turn it around. Remember, that by the time you arrive as the white knight there will most likely have been some damage done to the company’s reputation, some good employees have probably already resigned and some customers may have already been lost. As the white knight the deal you negotiate for investing in a troubled business should have a substantial up side for you.
The second most common failure is high "growth". Many companies fail because they over extend themselves in a high growth period. The primary growth problem is cash, however secondarily it can be a manpower deficiency. I have seen circumstances where an entrepreneur is very successful however he has a personality or management deficiency or problem that prevents him from delegating any authority and/or responsibility. One individual can only do so much, when the workload becomes too much to handle mistakes are made and productivity goes down dramatically.