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The turnaround business of trying to revive distressed companies can be exciting and challenging, but in reality, most dying companies—especially those in the middle market— cannot be saved.
“The vast majority of companies that you’re going to see, the risk/reward simply is not there,” said Andrew Boemi, managing director, Turnaround Capital Advisors, on a panel hosted by the student-led Turmaround Management Group November 4 at the Hyde Park Center.
As a first step, a turnaround company quickly decides if a business is worth saving.
“The one thing that you have to keep in mind is a lot of these businesses don’t belong in business, and need to be shut down,” said Ray Anderson, ’00, founder of Burnham Venture Management. “You can come up with some great strategies, but you really have to analyze whether this thing is better off alive or dead.”
Problems may range from fraudulent inventories and cooked books to bad business decisions like disastrous acquisitions or excess plant capacity. Even worthwhile businesses with fixable problems may not be able to withstand the forces working against them.
As an example, Boemi cited Frank’s Nursery and Crafts, where his firm found such problems as rapid overexpansion. Although his firm found an angle for trying to keep “the gem of a business” alive, capitalizing on its dedicated following in the northeast, Boemi’s firm didn’t get a shot.
“We were not given the opportunity by the thousand pound gorillas that were essentially dominating this deal,” he said, referring to real estate investors seeking liquidation to profit on the real estate values. Still, Boemi said, “we would have seen our returns being reduced” because “big box” stores were closing in rapidly, essentially eliminating Frank’s business.
There are long-term successes. Phil Calian, partner, Waveland Investments, said his firm was able to save the second-largest lock producer in the United States. The turnaround occurred by replacing key managers, getting cost structure and customers back in line, and sourcing product in Asia.
“This was a situation where you have the thrill of making a turnaround happen, hands-on, but then you also have the platform that allows you to have big thoughts on how you can grow and really make the business exciting,” Calian said.
—Mary Sue Penn