Those of you who remember Old Friend remember that he was a turnaround specialist. That is, he invests and/or buys distressed companies. However, it seems that attractive turnaround deals are few and far between now due to being overly picked over by investors and equity firms alike. So Old Friend is now shopping for smaller but more profitable deals which I would like to address in the next post. But every time I see a turnaround I get excited because I usually see a lot of assets worth a lot of money – and lots of potential. I love the balance sheets. I want to dive in and renegotiate the debt and create net worth where there isn’t any. I have bought turnarounds and sometimes live to regret it. So here are five reasons to buy a Turnaround:
1. You can usually get the deal below book value. A lot below book value. I have seen $5.0 Million book values go for half that in cash up front with the rest papered.
2. There is huge potential in improving efficiencies. Reduce expenses, update software, tighten the budget, etc.
3. There is huge potential in downsizing the workforce. A-la Mitt Romney, this is the best way to save an ailing company.
4. There is huge upside in improving the marketing functions. Rebuild sales, that’s what its all about.
5. Any combination of the above tweaks can put the company back on its feet and increase the valuation dramatically. But achieving those tweaks can be a real challenge.
If those reasons sound pretty lame then I agree. So here are five better reasons not to do a turnaround.
1. The industry is usually broken. Furniture, textiles, housing, mining, construction to name but a few. Whether its a temporary or permanent problem, you are going to have an uphill battle to overcome an industry slump.
2. It costs money. It may cost personal guarantees too. Even if you get a great discount to book you probably need to inject working capital or other monies into the company to save it. And you will not know how much until you bought it. The risk to the buyer is increased dramatically with a turnaround.
3. Sales need to be at a critical mass. This means that a $2.0 Million sales company is too small but a $10 Million one is probably ok. There has to be room for improvement: enough fat to trim and enough sales to survive. A downward spiral will not do.
4. You need to stop the bleeding. Negative cash flow must be stopped asap and that takes a plan and immediate action. Your decision making has to be spot on.
5. You will need to be hands on, as opposed to hands off. You can bring in a turnaround manager but that costs money. You can run it yourself but that takes some experience and skill that you likely have not developed.
Moreover, you need to find these deals. There aren’t very many. They tend to disappear for obvious reasons. There are many more viable companies at reasonable prices without the risks of a turnaround.
Every once in a while I get offered a turnaround deal. Like the other day it was a (guess what?) furniture company. Maybe if it had been in another industry I might have nibbled at it.