Assessing Future Viability: Turnarounds and Restarts

Concepts in Corporate Renewal

In the jargon of corporate renewal, two terms are used interchangeably: ‘turnaround’ and ‘restart.’ Often, these are thought of as synonyms. Both are similar in the sense that they require a reversal of fortune. The underlying concepts, however, are vastly different. Lenders need to recognize the implications of these distinctions. If they do not, any attempt at corporate renewal or recovery may fail.

This article compares turnarounds and restarts. Using case studies, it shows the increased difficulty of business restarts. It gives the stakeholders of any company a framework to consider when determining whether or not a restart is possible.

Turnarounds and Restarts

The Turnaround

The turnaround is metamorphosis delayed and may require a wrenching and intense period of change. It will occur in an organization that still has life. A revenue stream still exists, and the company’s doors are not closed. Clients still purchase its products or services. Suppliers continue to support the company in some manner, and it has banking arrangements of some sort. The company possesses an infrastructure that may include hard assets, personnel, an accounting function, management information systems, sales, distribution, and marketing. It also has some notion of future revenue potential and possible profits from revenue.

The Restart

Compared to a turnaround, a restart is a resurrection. A company that needs a restart has little or no signs of life. This is a result of catastrophic failure caused by grievous error or misfortune. The effects of many errors may have piled up over time, or a few disastrous errors may have precipitated a rapid decline.

In any case, a company that needs a restart has experienced deep and catastrophic failure. The doors of the organization may be shut, and infrastructure will certainly be impaired. Often, many legacy issues have accrued, representing a significant burden and challenge to revival. The issues can be myriad and varied. In both of these situations, the same characteristics are required for renewal: competent management, a viable core product or service, and sufficient capital to execute a reversal of fortune.

Success in Corporate Renewal

In a turnaround or a restart, you can assess the chances of success based on two factors: the difficulty of restoring health and the resources required to do so. Both of these increase dramatically from turnaround to restart, which is why the probability of success can differ significantly.

Before you can gauge the likelihood of success in a renewal effort, you must first be able to identify which type of renewal effort best fits the situation. While one might expect that it would be easy to identify a restart situation, not all cases are obvious, which is why even experienced turnaround professionals approach with caution. In some cases, the dysfunction is hidden, albeit just before catastrophe. This may happen for a number of reasons ranging from incompetence to deception.

Case Study: Industrial and Commercial Window Manufacturer

During my career as a commercial lender I was given a new file. The client produced industrial and commercial windows and sold to both end users and contractors. Existing information about the company’s P&L did not indicate any problem; in fact, it still showed profitability. However, a simple liquidity review showed that the operating line had been fully used for some time and that both the accounts payable (A/P) and accounts receivable (A/R) were past due by 60 days or more, with most A/R accounts aging identically. Although the A/R accounts were shown as several different entities, they were actually from one company that was in extreme distress. In fact, about 85% of A/R were from a single insolvent entity. Clearly, this borrower was a restart; it was very nearly moribund. It had carelessly bet its existence upon relationships that had failed.

Case Study: Yacht Manufacturer

Another example shows the devilish difficulty of the restart. The company, a storied name in yacht building, produced yachts from 36 to 50 feet in length, in addition to some custom work. At one time, the company was sizable, with manufacturing operations in both Canada and the United States. The company had experienced financial difficulties several times and reduced its capacity to one plant in Ontario. Shortly after, the company went into receivership and was purchased by a group from Hong Kong in an attempt at a restart.

The group had no experience in turnarounds, restarts, or yachts, nor had they provided sufficient capital. The company soon ran into serious trouble and was seeking a viability assessment.

The situation was as follows:

• The company had lost millions of dollars over the last few years.
• Production had nearly ceased.
• The production team was highly skilled but dysfunctional and poorly led.
• Quality had deteriorated, as evidenced by warranty repair work.
• Margins had fallen and, on some models, were actually negative.
• Cost estimates were based on historical value when the company was actually mass-producing some models. Current production did not share economies of scale. Tragically, this costing was used for pricing.
• There had been a fire in the plant, and insurance coverage was insufficient. This impaired delivery time as well as the company’s reputation overall. The company was facing very serious litigation from order failures due to the fire.
• The current CEO was inexperienced, even in a custodial environment.

The investors were considering an attempt at a restart — actually, a restart of a restart. Key factors in their consideration included:

• Replacing much of the production staff would be difficult. Operating in a highly specialized niche, finding new production staff would be difficult.
• Sales were nearly zero, and it would take time to improve quality. Concurrently, prices needed to be increased.
• Marketing efforts needed to be supported by re-establishing relationships with dealers who had been ignored while the company faced its challenges.
• The parent company had invested and lost millions of dollars. Although the board was willing to inject capital, a review suggested that capital requirements would likely go beyond the investor’s tolerance.

Many grievous errors had been made, and the burden of legacy issues was huge. Perhaps resurrection was within the realm of possibility, but the level of difficulty was hard to even determine. It would have required tremendous skill, time, effort, and capital to reverse its fortunes. It would have also required management, core product, and financial resources, all of which were deficient or lacking completely.

Accordingly, the decision was made to wind down the company and liquidate assets.

Conclusion

While both lie within the purview of corporate renewal, the terms ‘turnaround’ and ‘restart’ carry significant distinctions.  The turnaround is revitalization delayed, and the restart is resurrection. As such, the restart faces more uncertainty and barriers to success. It represents a tremendous challenge to all stakeholders, employees, board, lenders, and stakeholders. In the end, though, both models require the same parameters for success: a viable core product, financial resources, and management.

It is not always easy to differentiate between the turnaround and the restart. Before any attempt at renewal, stakeholders must define the business model and determine whether or not it is possible to meet the requirements for success. If this is not the case, then the renewal process should not begin.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Current Trends in Leveraged Finance
2. Understanding Risk Management Basics for Business Owners
3. Restructuring, Insolvency & Troubled Companies Series 

This article was originally published on October 28, 2024.]

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