The Fall and Rise of Business

Is your company experiencing a downward trend? It doesn’t necessarily mean the end is near. Act now, thrive later.

By Carolyn Tang

as a virtual consulting firm that focused on providing expert knowledge to the legal community. Ten years later, Round Table Group made Inc. magazine’s 500 list of fastest-growing private domestic companies for the second year in a row. Boasting a strong 424-percent growth rate, these high flyers run a strong upward trend. And yet, the company didn’t get this far without its fair share of bumps and bruises.

During the heady dotcom years, Round Table Group branched out from the legal community and added internet startups to its client list. It also began hosting eCommerce boot camps and seminars. “We really got caught up in it to some extent, as a lot of companies did. We started doing different, unique things, which was a great experience,” remembers CEO Russ Rosenzweig.

Then in 2000 and 2001, everything came crashing down. “Partners went bankrupt or didn’t have any money, or their vendors weren’t paying them, so they couldn’t pay us,” Rosenzweig recalls. “Part of me probably saw it coming, but you get so caught up in things, that you just keep going.” It was a stressful time, and Rosenzweig realized that the company had stopped focusing on its core business. So as the dotcom environment started to crumble, the Round Table Group decided there was no time to waste—they had to turn things around, right then and there.

“It was an emotionally difficult time, because everyone starts to blame the CEO for everything that goes wrong; and you know, that’s okay. The buck’s got to stop somewhere and I took that responsibility,” Rosenzweig explains. “You feel like you let a lot of people down and you feel like so much time was wasted. But it really wasn’t. We are so much better now, having gone through that experience.”

One reason Round Table Group survived, and then thrived, was because the company acknowledged an issue and took action to remedy it. Many times, an organization will notice a decline and brush it off as a one-time event. Such a reaction can be treacherous. “Some companies are in denial, and they assume the decline in performance is a small blip. In some cases, this is true. On the other hand, I’ve seen companies describe multi-year declines in performance as a small blip,” says Randall S. Eisenberg, a past chairman of the Turnaround Management Association and senior managing director of FTI Consulting. “Continued declining performance will adversely impact shareholder value and can ultimately put a company on life support.”

Eisenberg looks at where companies fit along a “corporate demise curve.” Companies at the top of the curve perform at or above expectations. Companies that are underperforming move into various stages of decline, and ultimately reach severe stages as they travel along the curve. “As companies find themselves lower on the curve, two things happen. First, the company is in a more precarious situation, as enterprise value declines. Second, as a company travels farther down the curve, it has probably lost all or a significant amount of shareholder value. So the farther down the curve the company travels, the worse the company performs and the faster shareholder value erodes,” Eisenberg explains.

Indeed, upper management denial is one of the most significant problems Eisenberg sees in troubled companies. Subsequently, there is an unwillingness to respond to signs that suggest the company needs to take deliberate action to turnaround its performance. By not responding, the company increases its risk of losing shareholder value and threatens its ability to remain competitive—at a time when it should, in fact, be seeking help from turnaround professionals. “It’s very common to see turnaround professionals involved in the late stage (of a company’s decline); it’s less common in the early stage. If companies were to bring in professionals earlier in the process, the CEO would benefit from having a sounding board and a third party take a fresh and objective look at the situation,” says Eisenberg.

Bettina Whyte, a managing director at AlixPartners, agrees. “If you can keep making payroll and can string along your creditors for awhile, the turnaround specialists don’t usually get called in early enough, if at all.”

In order to identify a decline before the point of no return, companies need to keep a close eye on key trends such as overall sales, margin and revenue. It’s also important to monitor the spread between accounts payable and receivables. Whyte has witnessed situations where companies neglected to collect receivables due because of documentation issues. For example, say receivables are running 120 days on average, yet vendors are paid on a 60-day cycle. A mismatch such as this can slowly drag a company’s financials down into the trenches. The gradual decline, in conjunction with the organizational separation of A/P and A/R teams, could result in a ticking time bomb.

“By the time turnaround specialists get called in, it’s likely that the payables have been extended so far out that vendors are angry. And often, they’ve been promised that they’ll be paid next week when nobody was ever going to pay them, because there’s never going to be enough money to do so,” says Whyte.

In today’s environment, access to capital abounds. Low interest rates and over-eager investors have resulted in a very liquid market. However, how companies apply that newly granted liquidity does play a key role in crisis prevention.

“The emphasis should be on taking the necessary steps to fix the business. This is key. If you don’t effectively execute the turnaround, the company is going to be in a much more precarious position once available liquidity is used up,” says Eisenberg. “There’s a great opportunity here for companies to take advantage of strong capital markets, but some companies that don’t use this capital opportunity wisely to strengthen their business and get out of whatever precarious position they’re in may find themselves in a dire position down the road—when capital will not be as easily available to them, expensive and limited.”

Indeed, obtaining capital to finance liquidity needs is not a means for growth. And now, when the markets are flowing, companies need to make a conscious effort to use newly raised capital wisely. Eisenberg explains that one of the more common mistakes is overemphasizing the top line, rather than boosting the bottom line. “Companies do not necessarily grow strategically; they sometimes grow for the sake of the top line without thinking of the impact on the bottom line. Growth has to be managed very carefully,” he says.

According to Eisenberg, companies should instead work on actually changing the business. “The focus should be on fixing the business and executing on the turnaround plan. If you don’t effectively execute your turnaround, you could find yourself in a much more unstable position once your liquidity is used up,” he warns.

“In today’s environment, access to capital abounds. Low interest rates and over-eager investors have resulted in a very liquid market. However, how companies apply that newly granted liquidity does play a key role in crisis prevention.”

However, it’s not always management’s fault. External industry crises also can throw companies into turmoil. “In situations where the whole industry is in the toilet, there is almost nothing a company can do that would help, even if it started a long time ago and had a lot of foresight,” says Whyte. She illustrates her point with the 1980s oil and gas industry. “You knew there were only going to be a handful of survivors, because it went from a boom to a bust literally overnight,” she explains. “A lot of those companies had too much debt, but even so, it would have been difficult for them to see the bust. At that point, the industry needed to consolidate.”

Additionally, each industry—and each company, for that matter—has unique contributing factors. Eisenberg uses the airline industry as an example: “First, airlines have to renegotiate labor contracts. Second, many have large underfunded pension obligations. They also can have above-market lease arrangements with their aircraft, all of which are significant issues relative to the survival of the airline. If you take a look at what’s going on in the industry right now, airlines are in the midst of renegotiating these cost drivers where they can.” Add intense competition to the mix, and you have a recipe for a very difficult industry landscape.

The survivors are those companies that are able to anticipate a downturn, take precautionary action and reserve borrowing power. “In cases where the industry itself is not in trouble, but the company is, you’ve got to try to quickly figure out an exit strategy that’s going to bring it back to a position that’s as good if not better than its mid-level peers. Hopefully, it will have both the capital structure and operating structure to make it a true competitor amongst the best of the best in the industry,” says Whyte.

A good way to avoid that breaking point is to manage by cash flow. Good, old, dependable cash-in, cash-out. Diligently project forward and keep track of where every dime comes from and goes to. It’s natural for companies to experience crunch times, where cash-in may only just meet cash-out. But if a company readies itself for such situations, it could minimize the impact of an outright crisis. “Living by cash-flow positions that are true cash flow and not account cash flow, no matter what your size, is one of the most important things you can do,” advises Whyte. “That way you’ll know when you’re going to be in trouble. You’ll know if cash is starting to drop, and what the issue might be. You’ll know what questions to ask, or, at least, where to look.”

Rosenzweig agrees. When he was pulling Round Table Group back into the black, he concentrated on two things: “Cutting costs and increasing sales. Nothing else would even be allowed to enter my radar screen,” he says.

While not always popular, for obvious reasons, Whyte recommends an honest evaluation of management structure, in order to see whether there are any superfluous or ineffectual middle manager positions. Sometimes, she says, it’s better to create a temporary hole in the organizational chart. “When you find people who are not going to be a good part of the team, or even if they want to be, but aren’t able, one option is to create a hole. And very often, you’ll find that there’s someone in the organization who will step up and do a fabulous job. If you hadn’t have created that hole, you wouldn’t have known,” she explains.

The idea is to anticipate and focus. “Management needs to figure out how to operate within the current dynamics of its particular industry. Companies need to understand what the risks are to your company as a result of nuances or trends in their particular industry,” says Eisenberg.

Indeed, management needs to be proactive rather than reactive. Eisenberg urges management to identify potential weaknesses and to put specific plans in place to address these issues. “Look at all the key metrics. Look for early warning signals that suggest you may have issues to deal with,” he says. The survivors in good times and bad are those companies that react directly and quickly to internal and external factors that can inhibit performance. In this way, they avoid these factors becoming major problems for the company down the road.