A  fact that can never be iterated enough – Turnarounds are a unique situation, thus demand a unique skillset. A good turnaround entrepreneur possesses not only wide experience and domain knowledge but also the ability to adapt and react swiftly when faced with unique situations. Hence, turnaround entrepreneurs are a rare commodity.

This introduces a new challenge

How to find the right turnaround entrepreneur? Without the right partner, the company is highly likely to fail despite the turnaround efforts. It is crucial to find not just a buyer, but a partner who relieves the group of the burden – the subsidiary – by truly giving it a new life. As it turns out, finding the right partner isn’t as difficult once one has the correct mindset and the correct approach.

The partnership mindset:

Once decided that the company needs a turnaround entrepreneur, it is essentially acknowledged that the company is liability that could potentially be converted into an asset. However, there is significant uncertainty around the possible transition, hence a risk of entrepreneurial nature.

Thus, before starting the search for the right partner, the group must focus on the potential economic profits they shall reap as a consequence of a successful turnaround. This profit comes in the form of better reputation that would’ve been tarnished had the subsidiary been shut down and reduced burden permitting the group to focus on its core business. A successful turnaround of the subsidiary also permits the group to continue receiving the subsidiary’s services. and will only effectively shield the group from any clawback. Last, just as the Army never leaves a soldier behind, leaving your former subsidiary in competent hands will boost the moral of the employees remaining in the group.

This forms the basis of finding a partner, not a buyer, to take over the firm, since the buyer will not have the group’s interest in consideration when deciding the fate of the company.

The correct approach:

The go to approach for most groups in terms of process is to call an investment bank. This has a lot of perks. It eliminates the hassle of preparing information memorandums and contacting potential buyers. The bank helps paint a rosy future picture for a business that is a liability to the group to extract the best short run value from the deal.

However, for a turnaround company this process is actually counter intuitive. The mindset here, as discussed above, is to maximise not the short run accounting profit but the long term economic profit. 

Avoid the bank’s curse

The go to approach for most groups in terms of process is to call an investment bank. This has a lot of perks. It eliminates the hassle of preparing information memorandums and contacting potential buyers. The bank helps paint a rosy future picture for a business that is a liability to the group to extract the best price from the deal.

However, for a turnaround company this process is actually counter intuitive. The mindset here, as discussed above, is to maximise not the short run accounting profit but the long term economic profit. To achieve this goal, you will have to control three « best practices » turned curse in the usual bank’s toolbox.

First, the investment bank’s picture of the target business is the exact opposite of what your turnaround entrepreneur wants to see. The entrepreneur needs to understand the problems prevalent in the business, which can only be achieved through a direct interaction with the management, not an information memorandum.

Second, a bank usually means an auction. This is great if the company is financially stable but disastrous in turnarounds. The company is in need of critical care, is there time to conduct a 3-month long auction? Certainly not, since the business loses value by the day.

Last, a bank will tend to identify the investor paying an inch more, even if that leads to the eventual shutting down of the business. This eradicates the concept of a partnership and the focus on economic profit that is the ultimate goal here.

Thus, if you hire a bank, limit its role to run the execution process of the transaction, but do not let the bank take the lead in interacting and selecting the buyer unless you are sure they are fully aligned with your long term goals and have the right culture.