Whatever the circumstance, the first step in moving forward is to understand where you are now.
What is the current situation?
Our initial assessment of the situation, whether it be for the board of a company needing turnaround assistance, a financing or a transaction, a private equity firm looking to analyze an acquisition candidate or improve portfolio company operations, or lenders looking to understand the situation of the company to which they have extended credit, is the foundation for all other activity. The necessary critical and impartial evaluation of a business from the standpoint of its current performance, assets, obstacles, and prospects for the success of future strategies from which every other step grows. Assessing a company’s viability is a complex task, typically fraught with emotion where cool-headed, objective analysis is required. Cash availability, business plans, competitive threats must be evaluated, and longer-term strategies reviewed.
It can be hard to distinguish between symptoms and root causes, especially when in the heat of battle. In our experience, however, investing time and effort in developing a detailed understanding of what is driving the situation always yields huge benefits. We believe this process is so crucial that we require it be done in very troubled situation in which Solon gets involved.
The following example helps explain why we feel so strongly:
In one circumstance, company lenders called us, fearing the need to liquidate a company, and asking us to evaluate the situation as a last ditch effort. Their consultants had been in, and told them that the management information systems could not be salvaged, the owners were past it, and the cash flow would continue to deteriorate. We went in, and found that the company had 52 P&L’s, and data was not input consistently, giving rise to misinformation. We found that the owners were stuck on two issues: the bad behavior of an officer required by the lenders to be there, and their own succession planning issues. Finally, the cash flow issues were related to improper allocation of risk between contractors and the company.
Once we understood what was causing what appeared to be a complete meltdown, we could hold effective discussions with company owners and lenders. The issues were easily addressed. A common language was specified for data entry and over the longer term the 52 P&L’s were redefined. As outsiders, we could clarify the behavior of the officer and get permission from the lenders to remove him, freeing the owners to work with us on succession planning. Once the impact of the skewed risk sharing was understood by both company and contractors, it took exactly one month to get all involved committed to a new agreement. Absent the initial assessment of what was really what, however, the company would be no more.
We begin by listening, in a process of structured interviews with company executives. We review data from inside and outside of the company, and of course we look at financial resources, starting with the general ledger, cash flow and cash controls. Importantly, we consider the value proposition to the customer, and the alternatives available to them. We use our ears, and we ask questions, lots of questions, and produce a synthesis of all we learn. This we review in draft with top management or the board, and present our recommended actions as well. Management, by definition, cannot hear what we can hear, and often we uncover vital connections heretofore overlooked. In some cases, we form cross functional teams comprised of various company personnel to consider our analysis, to challenge it, and to brainstorm through a structured process to arrive at action plans that can be implemented.
We use our Situation Analysis approach described above to identify problems lying in wait – problems that for one reason or another may not have yet surfaced as life-threatening issues. Historically clients have received well over ten times return on investment of fees, and substantial cash flow improvements in the first 100 days.
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“We do not know until the shell breaks what kind of egg we have been sitting on.”
T. S. Eliot, Poet and Playwright