1

A Framework for Business Planning

in a Turnaround Situation

SAF Conference 2008 Bratislava

dr. Jan Adriaanse

Financial crisis in a business and how to overcome it

2

Introduction

Associate professor in entrepreneurship, turnaround management and insolvency at Leiden University

Management Consultant at WissemaGroup

Guest lecturer at the Slovak University of Technology (2008)

3

Outline

Background and reason for framework

Methodology

Description turnaround process

Causes of financial crisis in practice

Success factors and failure factors

The need for turnaround planning

Turnaround framework

Concluding remarks

4

Background and reason

Research on success and failure factors 71% Dutch insolvency lawyers: no reorganisation plan while filing for

moratorium (suspension of payments) Little formal planning in turnaround practice

Research by Perry: Journal of small business management (2001) Relation between written business plan and (decreasing) chance of failure

Virtually no attention on “dark side of entrepreneurship” In research, education and practice

A gap needs to be closed Framework to be widely used in practice to avoid unnecessary bankruptcies of

both start-ups and matured businesses

5

Methodology

Ministries of Justice and Economic Affairs 2003-2005 Project: Modernisation Dutch Bankruptcy Act

Problem definition Which measures are taken in Dutch practice to prevent

bankruptcy proceedings? What bottlenecks can be found? Which success and failure factors can be derived?

Research methodology Literature review Surveys (incl. financial (credit) managers, insolvency lawyers,

accountants, business advisors) > 450 respondents > 20 Interviews specialized bankers and advisors 35 in-depth case studies (20 successful, 15 failed routes)

• Workout departments banks• Consultancies• Majority between € 10 mln and € 100 mln sales

Research on “causes of decline” (2005-2008) Why do companies fail? (e.g. “The restructuring of Spyker

Cars”)

6

Turnaround process

Description

“A turnaround can be defined as reorganization route which takes

place outside the statutory framework with the objective of restoring

the health of a company in financial difficulties within the same legal

entity.”

Restructuring without aiming to use judicial bankruptcy proceedings

[informal reorganisation]

The process should consist of 4 phases (DiNapoli 1999 ff)

(1) Stabilising

(2) Analysing

(3) Repositioning

(4) Reinforcing

7

Causes of financial crisis in practice

Why do companies fail? (5 categories)

Marketing and Strategy Behaviour towards market/environment (incl.

competitors) Management team Functioning/quality

Information MIS & lack of steering on financial parameters

Operational efficiency Fixed and variable costs out of control

Economy Downfall

Two typical examples from examined dossiers…

8

ICT company (€ 70 mln) • market conditions have worsened - as a result turnover

decreased and continues to do so;

• the operating costs, particularly those in respect of personnel costs, have not yet been sufficiently reduced;

• high costs have been incurred during mergers /takeovers;

• the company has grown too quickly without having a clear strategy/focal point as a basis;

• substantial investments were made in the recent past;

• until recently the management information system functioned insufficiently, during which the company could not be properly managed on the basis of financial information. As a result, the liquidity (incoming and outgoing cash flows) was also insufficiently managed;

• a lot of changes in management have taken place;

• in general the reorganisation was initiated too late

9

Furniture retail stores (€ 50 mln)

On 30 May 2001 it appears that the turnover and results for 2001 remain behind and this trend is anticipated to continue throughout 2001 and 2002. Partly as a result of this, possible takeover candidates are sought for parts of the company. In addition, an attempt is made to raise new risk-bearing capital. In December 2000 profits of € 69/m are expected for 2001, approximately 10% of the initially budgeted result a couple of months earlier. In March 2001 this is revised to € -/- 730/m. However, in April 2001 another positive adjustment is made to a result of around zero, whilst a forecast of € 826/m is announced for 2002. In the middle of October 2001, it appears that the consolidated loss until September 2001 amounts to € 1.39 million and this is expected to be € 1.27 million for the whole year. The current equity is close to zero and a liquidity shortage of € 3.1 million for 2001 is forecast in addition to that (during which an attempt is made to compensate this via supplier credit). The company therefore decides to try and sell (parts of) the company. On 28 November 2001, the intended transfer of assets from liquidation (bankruptcy) to the initial interested party is completed, and it purchases nearly all assets

10

Most important causes

(1) Lack of “strategic entrepreneurship”

(2) Insufficient steering on MIS

(3) Operational cost structure too high

(4) Time…

11

On average 16 months too late…

Cause EffectCause Effect

SC

OP

E F

OR

AC

TIO

N

NE

ED

FO

R A

CT

ION

Small

Large Small

Large

INSOLVENCYUrgency

Time

Urgent restructuring cases

54%

Consequences

• The later the crisis, need for action and start of the restructuring process are identified, the higher the pressure is for the company.

• At the same time, room for action is increasingly being limited.

STRATEGICCRISIS

STRATEGICCRISIS

EARNINGSCRISIS

EARNINGSCRISIS

LIQUIDITYCRISIS

LIQUIDITYCRISIS

29%

17%

Source: Blatz et al, Corporate Restructuring, 2006

E.g. Focus on shrinking markets

Underestimating competitors

End of product life cyle

Ignorance of customers needs

Ignorance of efficiency

71% of companies in a crisis

start reorganising

too late…

12

Success factors

Active attitude by management and shareholders Seeking help from professional advisors Adequate operational turnaround measures (based on

new strategy) Transparency with regard to financial situation Injection risk-bearing capital Involvement of financiers (major financial and trade

creditors)

Confirmed by (among others): R3 research (UK), Slatter & Lovett (London

Business School) and Franks/Sussman (UK)

13

Failure factors Passive attitude management and shareholders

Started too late Need for turnaround not seen

No speedy and adequate operational restructuring Lack of structured turnaround planning based on vision,

strategy, operational and financial planning Too much focus on costs instead of sales

Important stakeholders not involved Banks badly informed Important suppliers ignored

Insufficient transparency regarding financial situation and proposed reorganization MIS is disaster Lack of attention with regard to steering on financial indicators

Not enough efforts towards bringing in risk-bearing capital (equity) Too much focus on additional debt and/or workout agreements

with (unsecured) creditors Need for additional equity not seen by management

14

The need for turnaround planning

In failed routes no signs of structured patterns with regard to turnaround planning to be found

Important bottlenecks stem from lack of planning and systematic approaches towards the problems risen

“Top 3” regarding causes of distress often not enough addressed

So, an urgent need exists for more systematic turnaround action based on success and ‘reversed’ failure factors

A framework for turnaround planning seems necessary and helpful for business practice

15

Turnaround Framework

An integrated written business plan for an organisation in financial difficulties that serves as a foundation for a rescue operation aiming to restore the long–term viability.

Four reasons for writing a turnaround plan:

(1) Focus – gives clear and integrative picture of what should be done

(2) Compass – avoids losing track of needed actions to be taken

(3) Performance measurement – gives quantitative and qualitative goals

(4) Conviction and giving account – helps in negotiations with financiers

In general: steering mechanism for company management to avoid failure factors in a situation of distress

16

Questions “fuelling” the turnaround plan (1)

■ Which developments are taking place in the business sector? ■ What are current and yet unknown customer preferences?■ Which competitive forces exist in the industry (now/future)? ■ Which new entrants and substitute-products threaten the

company? ■ Who are the most important customers and suppliers, and why? ■ How should the company be renowned in the market (“The

Dream”)?■ What are the strengths and weaknesses of the company? ■ Where are “hands on” possibilities for performance

improvement?■ What should the new (entrepreneurial) culture in the company?

17

Questions “fuelling” the turnaround plan (2)

■ What’s the “vision” all company’s activities will be based on?■ What are the most important future products and services? ■ What’s the real unique selling point (USP) the company will

develop? ■ Which markets will (should) be entered? ■ Which (new) customers and segments will be targeted?■ Which cost-cutting and efficiency improvements will be made?■ What’s the best way to manage perceptions and expectations of

trade creditors and bankers?■ Based on the preceding questions: “does a serious basis exist for

financial recovery (in other words: do we have a right to exist)?”

And last but not least…

18

The Magic Question

Why should the customer

buy from us?

19

Turnaround Framework

10 elements

1. Company profile – business model + causes 2. Analysis of external environment – market analysis3. Operational analysis – formulated strengths/weaknesses

outlined4. Strategic intent – description of desired end-state5. Turnaround strategy – sales growth + retrenchments6. Operational action plan – detailed operational plan of attack7. Financial prognostications – profit & loss-, and cash forecasts8. Time scheme – timetable + milestones9. Risk analysis – best & worst case scenario, and risk reward ratio10.Summary – `to the point` outline (e.g. for bankers steering

committee)

By using the framework possible failure factors can (more easily) be evaded

20

Concluding remarks

Our research confirms that more bankruptcies are to be prevented by using structured and methodical approaches towards financial crisis

The turnaround framework is a management tool to be promoted in business, accounting and legal community, as well as within governments (bankruptcy legislators)

The US credit crisis will hit all economies worldwide and all business sectors...

The clock is ticking… Good luck!

21

Contact information

WissemaGroup. Business and Policy Consultants

Scheveningseweg 11

P.O. Box 85690, 2508 CJ, The Hague, The Netherlands

Tel. 070 355 9700

jan.adriaanse@wissemagroup.nl

www.wissemagroup.nl

Leiden University www.leidenuniv.nl