By Jeff Haden
First Published on www.inc.com
Starting a company from scratch has its appeal, but fixing a broken company can be more profitable... and satisfying.
Nearly every aspiring entrepreneur dreams about starting a company from scratch. Few dream of turning around a struggling business.
Like a friend of mine. He's wanted to own a business for years. I don't blame him. He's a brilliant operations guy. But there's a problem. "I don't know what kind of business to start," he invariably says.
That's why he's decided to buy a once thriving, now struggling business. Compared to a start-up the advantages are obvious: An established infrastructure, a certain level of market awareness, and at least some cash flow.
Plus the one thing every start-up envies: Existing customers.
Still, turning around a struggling business is far from easy. I asked Niels Juul, a partner at the brand recovery firm Nofatego, how he typically approaches a turnaround.
Juul and his firm just finished a three-year turnaround and restructuring of Cecchi Gori Pictures, the film production company behind Oscar-winning movies like Life is Beautiful and Il Postino. (Named as temporary CEO, Juul was brought in to recover lost assets and restructure operations after years of mismanagement and fraud.)
Here's what Juul says about how to turn around a struggling business:
Think like a firefighter.
We feel often like firefighters; when we kick in the door we don't know what's going on inside.
Usually the flames are bigger than we were told, and we walk in and don't know if the house will collapse before we put out the fire.
That's because we're often called when it's almost too late.
You may get the opportunity to buy a struggling company when it's almost too late, too.
Why? Raising the white flag is tough. Most people don't want to admit they need help—much less that they're failing.
Everyone holds out hope, even to the end, so always assume the business is in worse shape than you were led to believe.
Ignore the business plan.
A business plan is often little better than a fantasy. On the other hand, a struggling company involves realities you can touch and feel.
Maybe they had a plan and didn't follow it. Or maybe the plan is totally unrealistic. I worked with a company that had burned through $8 million and had 600k in sales to show for it. They were operating under a business plan and a flawed model that would never ever fly.
Often people go into businesses they don't understand. Only spend time reviewing the business plan if that will help you identify why the business is struggling.
Instead put all your attention on reality: Revenues, expenses, operations, cash flow...
Focus on people.
If a once-successful business is struggling, it's almost always a people-related issue. Not financing, not capital: Employees, management, or owners.
Somewhere along the way something broke and now there's a disconnect between the owner's concept and what people did with that concept. The problem may be entitlement, complacency, laziness, or ego.
Eventually, between the reality of the marketplace and the company's ability to act within that reality, something fractured until it was too late.
Always start with people, because it's always about people.
Then assess the brand.
That disconnect always manifests itself in one or two places: on the front end with the brand and sales, or on the back end in sourcing and operations.
Maybe the brand has lost its core attraction or equity. Or maybe distribution can't support the brand.
Either way, when did that disconnect occur, and what was the reason? If it's a brand problem, when did the company stop looking at new avenues for sales? Have they ignored international expansion?
Lots of American companies underestimate the enormous potential overseas. We've done great things with American brands in Japan, China, Europe, etc, and in every case the owners underestimated or even ignored the opportunity.
If a brand—or a business—once had value in the eyes of customers, it can recover that value, and that value can be extended, whether regionally, nationally, or internationally.
Then assess operations.
The main problem may lie with the brand, but ultimately the issue will be a question of operations, because if the wheels are not working the business is still a lost cause.
Brand starts, but back end delivers.
For example, in the apparel business it's all about the back end and sourcing, since that's where the cash is usually burned.
No brand is better than its delivery. Owners get excited when they land big accounts, but if your back end can't feed those accounts, it can kill you.
Rapid expansion is attractive, but operationally expansion can be a nightmare—especially because of the cash required to finance a major expansion.
I call it the QVC trap: A business lands a spot on QVC and gets excited, but they need production and sourcing and financing to complete that journey.
In the apparel business you're often nine months from contract to getting paid—and then you need to be ready at the end of the season to deal with charge backs, markdowns, marketing contributions... That's where the cash flow issue becomes a nightmare, and is typically when we're brought in to help turn things around.
Often a business bit off way more than it could chew. Oddly enough that's a good sign, because it means there's already an opportunity.
Your job is to develop operations that can meet that opportunity.
Then go back to people...
Even in our business, where owners have brought us in to help them, many will not talk about what the real problem is—because sometimes it's the owner and the owner's ego. (Our company is called Nofatego, or No Fat Ego, for a reason.)
The difficulty is sorting through all the agendas, defensiveness, and embarrassment at all levels of the organization.
So don't create and fill binders with reports. No binder has ever made a profit.
Roll up your sleeves and participate in the company. Be open. Talk to people. Show them you care.
And don't immediately clean house. Sometimes we are forced to fire some employees, but we try not to. It's extremely important to maintain the talent that originally created the concept or brand; they are the company.
People deserve a fair chance. Give them the opportunity to not only save their jobs but to regain their pride in their company and their work.
Look for quick hits...
First find ways to expand or finding new sources of revenue. Then streamline the back end and ensure the "machine" is capable.
If you need to rely on big suppliers, have them hold your hand. Go into the expansion together and set up shared risk. Good suppliers will support you through financing and credit so you can feed an expansion. Open your book, and ask them to open theirs. Make sure they have the capacity to support you.
And go back to people.
Here's the best part of a turnaround: It's exciting and can be incredibly fulfilling. It's great when it works. It's rewarding to see a business that was left for dead keep going, because it's the employees who benefit. Saving jobs is the ultimate pleasure.
When you get to see people realize their jobs are secure, and see them get excited again about the company they're a part of, it's an incredible feeling.
That's why, in any business, it's always about people.