ANNEX IV : CO-OPTING SUPPORT
A realistic plan for co-opting the support of lenders, important
suppliers, important employees, the unions, the customers, existing or
prospective shareholders and other investors, and possibly some branches
of government, constitutes an essential element of any viable Turnaround
Concept.
This co-opting of support is closely related with the issue of
turnaround communications. Communications with employees are discussed
in the previous Annex. The present Annex focuses on communications with
external stakeholders mentioned above.
By the time a company realizes that it is in serious trouble, chances
are that many expectations, which management previously expressed to lenders, existing or prospective
shareholders and potential investors have not been realized. Chances are that
these parties are skeptical about the company's ability to predict and
achieve results. Further support of these providers of capital is usually
dependent on the company's ability to re-establish its credibility by
demonstrating tangible improvements, in terms of profit,
productivity, cost and / or sales, and sometimes through intelligent
controls.
In such situations, I found it very useful to report, as much as is
possible, to banker and other providers of capital, operating
improvements in areas such as shop-floor productivity, in both
physical terms and in terms of their impact on profitability
and cash-flow.
Usually, it is easier to obtain the support of third parties in stages
– as concerns the support of individual parties, and of the support of the
entire group. Intelligent priorities have to be set concerning the plan
and the sequence for co-opting
support.
Support of third parties may be obtained through ‘incremental
win-win arrangements'.
Case #1 – A 10% Win-Win Arrangement. Consider this situation, which I
encountered in more than one troubled company. The company can obtain
profitable jobs from certain customers, but is stuck because its Bank
credit is at the limit, and to run these jobs the company needs
deliveries from suppliers, who demand full payment of large arrears
before they would deliver again on open account. Meeting these demands
is almost impossible. Moreover, it would put the company
in an even worse cash crunch. If this were your company should you
forego these profitable orders, or should you run to the Bank to pledge
your house in support of what would probably be a small increase in your
loan? Are these the only solutions? Is it a Catch-22 situation?
Not
really. My experience in those cases was that when the situation of the
troubled company was properly explained to the suppliers, practically
all of them agreed to ship small orders on the basis of COD plus 10% of
value of these orders towards the balance in arrears. As the 3M company
used to say :
"We paid a little, manufactured a little, sold a
little, reordered a little, and repeated this cycle as often as
possible."
We made money on these orders, and they grew. The
suppliers cooperated, because the above proposal (which I made) was good for
them – they were making money on our new orders without extending
further credit, and furthermore, the arrangement also enabled them to recover the amounts in arrears. Before long their confidence in
the company rose.
My experience is that when management is creative and flexible, and
works to obtain cooperation of third parties on a basis that is
attractive to both sides of the transaction, many intelligent new
arrangements are possible : with lenders, with minor suppliers,
different ones with key suppliers, with shareholders, with unions and
even with governments. All these arrangements contribute to the turnaround.
Sometimes though, the cooperation of creditors and other parties
(such as new lenders and unions) to
cooperate is not manifest until the company is placed under the
protection of bankruptcy laws. There may also be other reasons that
make a corporate reorganization feasible only when combined with such a filing. See the next Annex for more information on reorganization under
protection of bankruptcy laws.
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