The Art of the Turnaround: A Comprehensive 10-Step Guide

Main text copyright © Mike Dunlop, 2024

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978-1-998841-15-8 (hardcover)

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For everyone who helped me along

this wonderful journey

CONTENTS

Introduction

The Three Pillars Behind Every Successful Turnaround

More Companies Need Turnarounds Than We Tend to Think

The Ten Steps to Turning a Company Around

Step 1: Establishing Leadership

Step 2: Financial and Cash Assessment

Step 3: Company Meetings

Step 4: Personnel Assessment

Step 5: Implementation of Employee Recommendations

Step 6: Business Assessment

Step 7: Stakeholder Meetings

Step 8: Quality and Process Improvement

Step 9: Inventory and Equipment Valuation and Assessment

Step 10: Company Presentation of the Go-Forward Plan

Conclusion: Burn the Ships à la Cortés

Appendix: Financial Primer

Glossary

Acknowledegments

Index

About the Author

INTRODUCTION

Without much warning, here I was in Belgium, decamped from the United States to start my first overseas turnaround. My first thought was a paraphrase of the famous Laurel and Hardy quote, Well, here’s a fine mess I have got myself into. The company, Technical Airborne Components Industries (TAC), was owned by Fabrique Nationale, a major arms manufacturer in Belgium. TAC had not made a profit in its nine-year existence, so the parent company was enthusiastic about getting rid of it. I had negotiated an attractive price to buy the company but now I was faced with the realization that I was on my own, with a very modest command of the French language to support me. Three languages were spoken in the company: French, Spanish, and Flemish. I decided my only lifeboat language was French so I enrolled in a course called Immersion totale (total immersion). After four weeks I was not totally reliant on my translator, who I found out later was not exactly translating what I was saying or correctly translating the replies. My challenges included having two unions, one representing French- and Spanish-speaking (Catholic) employees and the other representing Dutch-speaking (Protestant) employees. Jet-lagged and completely isolated, I was now in the turnaround Olympics of my life with only one medal available, a win. As you will find out when reading this book, even the most challenging company can be turned around. It may be trite to say it, but the darkest hour is always before dawn in the turnaround process.

MY FIRST COMPANY turnaround came about by accident. I had just been unceremoniously fired from my first job in the United States after emigrating to Seattle from England earlier that year. My job, with a division of a major US conglomerate called Litton Industries, was to sell and install job-cost software for the construction industry. It was obvious early on in my sales career that the software had major deficiencies that made it unsaleable and unusable. In 1973 we did not have email, so the only way of communicating effectively with the head office in Newark, New Jersey, was by mail. My numerous letters outlining the deficiencies and asking for help were completely ignored. Without these major changes I felt like I had been left on a raft without a paddle. The US was facing the worst recession since World War II, so even though the idea of finding a new job crossed my mind, it would have been exceedingly difficult. I decided that rewriting sections of the software to make it saleable was the lowest-risk option. What I had not anticipated was how successful my software changes would be, and I rapidly vaulted into the top ranks of Litton Industries’s salespeople in the US. That unfortunately got me notoriety and attention that I was not looking for. I was summoned to Newark to explain my successful sales campaign. There was no alternative but to fess up. This led to an impromptu meeting with the CEO and their general counsel. As luck would have it, a simple question saved me. The general counsel wanted to know whether I wrote the software on my time or the company time. Without realizing the importance of the question, I answered honestly. I emphatically told him, On my own time of course. This answer led to further discussions and a decision to pay me for my enhancements because they intended to incorporate them into their own software. I don’t know whether or not they were generous, but the payment was more money than I had ever seen in my life.

Before my departure I was asked to meet with the CEO for a second and final time. He told me that in the future there was no way I would be able to work in a corporate environment. He told me I needed to work for myself and then I could choose whatever I wanted to do and make any changes I thought appropriate. What he described made me realize that I was free to set my own path. This advice and encouragement changed my life and provided me with the foundation for an exciting and fulfilling fifty-plus years of working in various entrepreneurial endeavors.

The first company I founded was called Computer Information Center. It was a full turnkey service for businesses that were planning to purchase their first computers. This was the early 1970s, a time when many small- to medium-sized companies did not have computers and had no idea how to choose the right one for their business or choose appropriate software. The unique service I offered was to select the best computer for their needs, select the software that would work in their industry, and complete a full system implementation including training. No other company was offering a service like this at the time. Charging a fair fixed fee meant the customer would know exactly how much they were going to spend. Seattle had a small business community so the referral base grew rapidly, and I soon had a thriving business. What I did not realize was that this business would morph into a new opportunity that, with the help of a wonderful mentor, would keep me focused for many years. The new business was helping companies in financial difficulties. The opportunity to ply my skills in complex puzzle solving suddenly became a reality.

My first turnaround presented itself while I was implementing a computer system for a major Seattle retail jewelry chain. It was clear that the family-owned company was facing significant business and financial challenges, like many companies were at the time. I did not need to do any sophisticated forensic accounting to know this. Simply overhearing the employees talk about the suppliers who were threatening to stop shipments because they were not being paid gave me a clue that there was trouble in Dodge City. This became even more obvious when I was installing their financial reporting system. Even to my inexperienced eye, I could see that their liabilities exceeded the true value of their assets. The technical term for this is insolvency, which is normally the precursor to bankruptcy.

My initial reaction was alarm — that I was not going to get paid for my computer services. But once I calmed my nerves, it was obvious to me that there were many improvements the company could make to remedy their difficulties. I started making notes on everything that I felt could help them. I also decided to present my findings to the family patriarch and see how he was going to address the impending financial doom. It turned out that the company’s demise was going to happen sooner than I expected: late on a Friday night he told me that there was a high probability they would have to cease operations. Partly out of self-preservation and partly because I wanted to help, I told him there were numerous opportunities to improve his company’s profitability and I would be happy to go over them with him. He told me he had a meeting with a senior bank officer at ten o’clock on Monday morning and immediately asked if I wouldn’t mind putting together my suggestions into a business plan over the weekend and delivering it to him before his bank meeting.

Over that weekend I set out to create a recovery plan. Some of the items were obvious but many were a little bit more nuanced. One item that could bring immediate financial relief was selling the accounts receivable to get immediate cash for all sales rather than have to bill customers and wait for payment. This was before the mass use of credit cards and was a common practice with many retailers (it is also known as factoring). This would immediately turn the business into a cash business and a third party would be responsible for collecting the money. The practice of allowing customers to have their own account was a throwback to earlier times when wealthy people rarely dealt in cash. There was also a practical reason why this archaic system was used. Some of the more well-known customers had two accounts, one where the bill was sent to their home address and the other where it went to their office to avoid scrutiny of prying domestic eyes. The office bills were always significantly larger than the domestic ones.

After working all weekend and delivering the plan to the owner as promised, I did not expect to hear from him for a while. The plan included closing some of the very unprofitable stores, reducing inventory in the stores, and reviewing pricing to make sure of sufficient margin. The headquarters of the company also seemed to be summer camp for relatives, so additional changes were made to reduce the cost of the headquarters.

I was surprised to receive a call from the owner so soon after his meeting with the bank. He asked me if I could join him right then at the bank. I was convinced that he had bad news for me. It was the opposite. The wonderful banker he was dealing with had requested an immediate meeting with the person who had put the business plan together—me! His name was Dave Friedenberg, and he quickly introduced himself as the head of commercial lending for the largest bank in the area, Seattle First National Bank. Dave was blunt and direct: if the owner would retain me to implement the recovery plan, he would not only renew the existing credit line but extend the company additional credit if needed. The owner of the business agreed at once, and suddenly, at the age of twenty-seven, I had morphed seamlessly into a business consultant. The turnaround was rapid, with many changes being implemented almost immediately, including many that I’ve outlined in this book. I learned to ignore the frequent entreaties from the owner that I was making too many changes and making them too quickly. I had the advantage of knowing that I held the ultimate trump card: the owner’s fear of facing his banker Dave Friedenberg again.

The financial results improved rapidly and it became obvious to the bank that the company’s need for credit had reduced dramatically.

A METHOD PROVEN OVER DECADES

That serendipitous meeting with David Friedenberg turned into a seventeen-year partnership, during which I helped turn around thirty-four companies that were in various stages of financial demise. After seeing my turnaround work with the jewelry company, David introduced me to all the loan officers at his bank to work with companies that were having financial difficulties. This gave me not only steady work but also immense enjoyment in the renovation of companies that were headed for oblivion. These companies ranged in size from $5 million in revenue up to $300 million. They represented the typical mid-market companies in manufacturing, distribution, and retail. I even worked with a law firm that had gotten into financial difficulties by advancing monthly partnership draws ahead of collecting their fees. Their draws were based on what they hoped to receive not what they actually received. This difference was financed by the bank until it grew to a point that the bank was unwilling to continue participating.

As it happened, none of the thirty-four companies that I worked with ended up in bankruptcy and only one ended up being sold to a competitor. One hundred percent of the loans that the banks had written off as being doubtful were recovered. Over $50 million in total loans were repaid. One company I worked with in 1975, when it was on the brink of bankruptcy, was sold for $400 million in 2021. I systematically applied the turnaround steps that I share in this book, and it was exciting to see the rapid transformation from a company where the coffin had been chosen to one that grew and prospered for many years until it was eventually sold.

Initially I was thrown in the deep end and had to quickly develop an effective turnaround process for each organization. But as I kept working with companies of different sizes, in a broad array of industries, I started to recognize a pattern in key elements that every company exhibited. Identifying, organizing, and simplifying each stage of the process allowed me to put together quick and effective turnaround plans that applied to a range of companies and industries. Speed was a necessity and became the mother of invention.

Following the same or similar process during all the turnarounds gave me the confidence to apply it in many different types of businesses. These included retail chains, large wholesale distributors, and complex aerospace component manufacturers. Even that large law firm was turned around using the same set of principles. No matter the company size or industry, I observed very similar and frequently predictable problems. I also recognized that the same solutions would work.

Helping to turn around dozens of companies has been the greatest joy of my career. One of my hobbies is the restoration of old British cars that had been neglected over the years. The vision of what something could be, and eventually seeing it in pristine condition, is a catalyst and a great personal motivator to complete the renovation. It is also what helped me to persist when working to restore companies that appeared to be in total despair. When everyone is aligned around a shared vision, company turnarounds become genuinely enjoyable, and life-changing, for all those who participate in the renovation.

I’m writing this book today, after a nearly twenty-five-year hiatus from my turnaround work, because something extraordinary happened recently. I was asked by a group of shareholders to help turn around their company in eastern Washington. The company was a sheet metal fabricator with identical equipment to that in the company in Scotland that I’d bought. I was happy to dust off my process and incorporate methods that had worked so well in previous turnarounds in order to see what might work for this faltering company. In doing so, I found that the same challenges I had encountered decades earlier applied today. This made me realize that I’d effectively created founding principles for company turnarounds. I believed that if I could document them, they could help other people who are striving to save a company in trouble. And as you’ll see in the pages that follow, these principles apply to more than company owners hoping to revive their business. They also apply to anyone who has recently bought a company and, upon opening the books, discovers that the financials are not what the seller made them out to be.