Professionals guiding investors or looking to invest in underperforming companies need to be aware of what to look for and how to execute. The key to the profitability of investing in underperforming and struggling companies is to build a company with the sole purpose of selling it for maximum value, to focus on exit strategies early on.
First, look for companies on a cliff, not those that have already fallen off the cliff. Look for those critically short of capital and future potential, but avoid the trap of investing in an insolvent company. Acquire companies that can offer quality products at competitive prices but are severely undervalued due to ineffective management and/or lack of direction and market penetration.
Take advantage of low asset prices and invest for great returns. An infusion of capital placed in the hands of a leader with a solid strategy and a target return on capital in mind can be a powerful motivator.
Provide what prospective buyers are looking for:
* Consistency of businesses that create value
* High probability of future cash flows
* Marketing-oriented management team
* Track record demonstrating the ability to sell and compete, develop, produce and distribute products, prosper and grow
* Realistic return potential from your fair entry valuation
recovery cycle
Whether you invest in a new entity or a portfolio property gone bad, the payback cycle is much the same. This cycle begins with mismanagement. You then need to determine the feasibility, invest, convert, and ultimately sell the property.
Determine the feasibility of recovery by truly understanding what caused the company to collapse. Don’t be fooled by the symptoms and never listen to current upper management. If they knew what was wrong, they would have fixed the problems.
Make sure you have solutions to fix the real problems that no one else has used, perhaps because you can bring in new resources or non-cash applications to influence revitalization. Take advantage of underpriced material inputs, labor, assets, or capacity and intellectual property. Never “just add cash” and always implement new leadership.
Take the control
There must be a successful turnaround before the entity can be sold. Always keep active control of the entity. Passive investing if managed by a previous administration is like a placebo and you will lose your investment. Passive positions are only acceptable if they contribute to an investor group that has active principal ownership. Install a new CEO with transition experience in value creation situations. The executive must bring an objective approach and a fresh perspective to complete the cycle. This leader must demonstrate experience in:
* Management of crisis, transition and reconstruction processes.
* Shape the business strategy and financial structure
* Develop managerial talent, build caliber teams, use and enhance existing resources
* Increase sales and market share
* Maximize return on capital
* Link management performance to ultimate goals
* Development of incentive-based compensation programs
This leader must be directly involved in decision making to achieve the ultimate goal: selling at a higher value. The last step in completing the shift is to hire a “marquis” manager to lead the enduring team. This permanent team adds to the value equation.
establish strategies. Implement long-term strategies that will survive your exit. An essential strategy is to drive revenue by addressing the issues that plague the business and provide a roadmap for revitalization. You must set a new vision, distill this direction into concrete goals and objectives, and create a roadmap for everyone to follow.
Form a quality management team.. The value of the company is greatly increased with a strong, permanent and credible team that can demonstrate its ability to produce consistent results in sales, profit and cash flow. Establish continuity in the organization to allow everyone to look forward to orderly change and opportunity. Take advantage of the available underutilized human capital – the dedicated middle managers that remain. Set up an incentive structure that pays out only when you achieve the goals set out in your long-term strategy. Your incentive should be based on performance that will take the company beyond its sale. After all, employees are the assets your buyer is looking for.
Acquire new business/sales. There are only two ways to increase sales, sell new products to existing customers or sell existing products to new customers. Most underachievers have forgotten, or never had, the basics of marketing and promotion. Become a market leader, adapt to changing conditions and improve your competitive position.
Establish a solid capital structure. Create reasons for investors to invest. A solid strategy with a viable market, efficient delivery and production vehicles, along with a cohesive management team will appeal to the investment community. Securing new capital becomes much easier when investors see a high probability of return and a viable exit strategy.
implement processes. Use processes to drive the business and control the day-to-day environment. Focus on the important things: control cash and costs, increase sales and improve value creation.
Exit
Know when to “cash out.” The greatest return on investment occurs when the turnaround is complete and the company is ready for the next tranche to finance growth.
Remember that there is a clear advantage to using professionals who bring together C-level operational, transactional, and response experience to determine what is wrong, how to fix it, and how much to pay for it.
