Who should be the architect of a turnaround?
Small-to-medium sized business owners can’t effectively outsource the responsibility for driving a turnaround process when their business is in financial trouble. They can hire sensible staff and competent professional advisors but they are the only people with the incentive (skin in the game) and experience (because they started the business) to drive forward a turnaround process.
Businesses often have a range of advisors. It is important that business owners always have the best and brightest (that they can afford) around to make the business thrive, but when advisors don’t stick to their respective area of expertise, problems can arise. The problems arise because those professional advisors treat clients transactionally and have no relevant business experience or the economic incentive to drive a turnaround process.
An SME’s three closest professional advisors are usually their accountant, lawyer and finance broker. We discuss the role that each may play in a turnaround process below and the question arises about whether they should play any role at all.
A public accountant’s role is concerned with collecting and interpreting financial records, not with predicting the business’ financial needs. They excel in providing information about what happened last year but they are usually not the person to tell a business owner how to move the business forward during a financial crisis. Furthermore, accountants are usually answerable to a large number of different clients. This means they will most likely be unable or unwilling to devote the necessary time to carefully calibrate financial advice for your business. Finally, accountants are rarely specifically trained in business turnaround or your industry in particular and often don’t have experience beyond accounting.
The key issue is that most accountants aren’t advising their clients about forward-looking financial strategy. Most of their client’s key assets are not recorded on their balance sheets (such as relationships and the efficiency of their business process) and a business with a healthy profit and loss result can still be starved of cash. Preparation of annual financial statements can lull a business owner into a false sense of security if a failing strategy diminishes cash flow. The business owner in a turnaround scenario needs a deeper dive into their business that can’t adequately be examined in an annual review process with their accountant.
It is surprising how few accountants help their clients to implement process improvements to get better real time financial information. One methodology of ‘Objectives and Key Results’ (OKR) helps to distil the key metrics that should be regularly reviewed by the business owners so they know how they are tracking towards their strategy. Most accountants don’t want to engage in strategy discussions with clients because they are more comfortable with numbers and spreadsheets. If they really cared about saving people they probably would have become marriage counsellors or fireman anyway.
A lot of lawyers, particularly those who have an independent and vibrant practice are great listeners and have a terrific level of insight. But history has shown that most lawyers are terrible business people and if they were, they wouldn’t be trying to do all the work themselves!
Lawyers should be providing legal advice. Commercial lawyers are intelligent, ethical and well resourced, but they do not have the specialised skills required to navigate many business situations such as a turnaround. Many legal professionals also overestimate their skills and this is dangerous if they confidently apply their skills to an issue outside of their expertise. They may feel that they are competent businesspeople because they’ve drafted so many commercial legal documents – but they’re not.
Business owners should understand that knowledge about their customers, market and staff is not readily portable. The commercial lawyer didn’t start the business so they won’t have the best skills to work on the turnaround of the business. If lawyers were meant to be successful business people, they would have already followed that path. They don’t have the experience of managing your business day in and day out.
In a turnaround scenario the business owner may consult finance brokers to get funds for working capital. On the other hand, many SMEs also ‘borrow’ from the tax office through non-remission of PAYG and GST monies rather than consult a finance broker.
Borrow money from your finance broker, not advice. As Dominic Aversa writes in his 2019 book Corporate Undertaker (in the context of bankers):
‘You borrow from them, they make a profit from you, and the relationship should end there.’
Business owners share a lot of financial information about their business with their finance broker. But this should be for the sole purpose of making them feel comfortable with your business so they can lend money, not advising a business owner on their next move. Once again, without the relevant experience and testimonials, competence should be questioned. One example of this in a turnaround scenario is when high priced finance, such as receivables finance, is offered and then secured over business collateral and supported by personal guarantees. This finance structure would limit the scope of future restructuring and increase the amount that a business owner is personally liable for. Overall, business owners should also recognise that finance brokers aren’t a fiduciary for their business and they don’t have any obligation to act in the best interests of the client.
How to get your advisors to stick to their own lane
So, how can a business owner manage their longstanding professional advisors during a turnaround process?
The first thing a business owner should do is set clear goals and expectations for each advisor. Retainer contracts should state what services will be delivered by each professional advisor. If the business owner wants their professional advisor to go beyond this then they should have a conversation about what they want that professional advisor to achieve for the business. The business owner needs to be clear about what they want from the beginning, rather than setting rules as they go along.
Keeping each advisor in their own lane is important not only for ensuring that the business owner gets the best advice moving forward but it focuses that advisor’s attention on the business problems in which they can add real value. Each advisor’s time is best spent in the area in which they have developed a wealth of experience and knowledge over a number of years. Time spent working in this area will provide good outcomes rather than time speculating over other aspects of the business with only an elementary understanding of the root cause issues.
Business coaches offer an alternative to relying on accountants, lawyers and finance brokers to assist with a turnaround process. They usually have experience in business and are also consulting with a variety of SME clients. If the business owner is the person who needs to drive a turnaround process a business coach may have the right skills and experience to support them in that process and boost their confidence for making difficult decisions. One difficult decision may be to terminate non-performing staff and/or customers that are not suitable for some reason.
Business coaches may have the right experience to help the business owner conduct root cause analysis about their financial crisis. The value of a business coach may be that they recognise that the scope of their role is to coach the business owner and they don’t go beyond that scope. One of the signs of a true professional is that they choose to operate within their field of expertise and the scope of the retainer agreed with their client.