Funding Transformation

Recognizing the need for change, developing a plan for change, and gaining support for change are all necessary steps in a successful business transformation.  Necessary, but not sufficient.  An actionable business transformation plan, especially in the middle market, must also grapple, in the harsh glare of objectivity, with the cost of transformation and how best to fund it.

The question of how to fund a business transformation can test leadership teams that already feel themselves at the razor’s edge of endurable pressure, and for too many companies the question of funding is where a promising business transformation runs aground, as that same leadership team finds itself unable or unwilling to think through or engage outside support to advise on how best to chart a path to the desired outcome in light of available resources.

Timidity in the face of resource constraints, and the scarcity mindset it implies, serves only to narrow the horizons of those most desperately in need of a business transformation.  Luckily, engaging proactively with the sources and uses of funding does not need to serve in any way as an inhibitor of aims.  Rather, the discipline of addressing resource constraints and funding sources upfront can serve as a valuable spark to the creative process, yielding a more capital efficient, and oftentimes more ambitious in the long-run, business transformation.

An Umbrella When the Sun is Shining

The result of an extended period of below trend (or any) profitability for a company is that ambitious business transformation initiatives become increasingly difficult to fund just as they become increasingly more necessary.  For many leadership teams, the answer to this quandary is simple: borrow.

Efforts to borrow in order to fund a business transformation often run into a frustrating challenge.  Companies find that the ease with which outside funding can be procured for a business transformation project is inversely correlated to the importance of the project’s success for an organization’s future.  Capital for low-risk, high return projects is abundant, but for those business transformation initiatives that truly represent a do-or-die crossroads, capital is more scarce and much more costly. 

Mark Twain famously quipped that: “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.”

The availability and sophistication of risk capital has certainly increased since the late 19th century, but the central point that Twain was seeking to make remains as true today as in his own time: for the majority of lenders, and certainly the sources of the cheapest outside capital, the most attractive candidates for a loan are those that do not need the money.  Luckily, there are lenders active across the risk spectrum, and prospective borrowers have no need to limit themselves to banks.

Internal Sources

Middle Market leadership teams often have less exposure to the capital markets, and hence are more susceptible to shock when they realize the challenges that come with certain types of funding sources.  Absent expert support, this shock can impose costly delays on, and even derail, promising and even existential business transformation projects.  In order to prevent this, it is important to consider the internal sources of funding available to any company, and the pros and cons associated with that source.

  • Operating Expenses.  Too often leadership will view an existing cost structure as a fact of life, rather than a set of circumstances that can be easily changed.  The inadvertent misallocation of resources is unfortunately the norm throughout the middle market, and as a result the gains to be achieved through a rigorous assessment and reprioritization of spending are considerable.
  • Working Capital.  The capital tied up in an organization’s operations represents an immense opportunity and is one of the lowest cost sources of funding for a business transformation initiative.  Too often management teams severely under-estimate the magnitude of the opportunity that working capital management represents, and so fail to consider working capital as a viable source of funding.  

There are pros and cons to funding a business transformation via internal sources of funding.  Among the pros are the high level of control that companies have on both their internal cost structure and in their approach to working capital management.  Cons include declining employee morale, dissatisfaction among customers and suppliers, and increased strain on management.  Regardless of whether or not internal sources of funding ultimately utilized for a given business transformation initiative, they should always be considered.


The ultimate source of value creation in a company is improved performance.  Industry, positioning, and timing all matter, but robust profitability and cash flow enables an organization to maintain control over its own destiny.  The funding of a transformation project should be looked at as a question of carefully assessing the project, how and why it is expected to improve performance and moving forward aggressively with any transformation project that makes sense.  Faced with a compelling business transformation initiative, leadership teams have several viable avenues to explore for funding, and so should not allow their horizons to be narrowed.  In business two things are certain: change is constant, and the returns to controlling your own destiny are enormous.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround and value creation.  He can be contacted at:

Reporting: A Catalyst for Improvement


Becoming a company that learns, rather than one that simply reports



Business owners today are stretched for time, and so are all the members of their team.  The pace of business can seem unrelenting, and in that environment abstract goals can seem frivolous.  The ever-present temptation, given this state of affairs, is to regard the past as a curiosity, and a topic as banal as reporting to be a matter of creating something that is good enough, in order to move on to the next thing.  This view is almost invariably wrong and has often proven to be a fatal mistake for companies large and small.  Rather, an investment in robust reporting should be considered a necessary step for every company seeking to utilize its own data to maximize value.

Reporting, whether on financial, operational, or business intelligence data, presents every company with an opportunity to develop insight into its own business as well as its broader market.  Too often that opportunity is not seized.  Opportunities to begin building an insight advantage are deferred, and eventually lost.  Reporting that presents sufficient data to answer the question of what happened must be considered to be merely the starting point and must be enhanced first with comparative information and qualitative context in order to transmute the simple reporting of data into the creation of insight.

Successful companies understand that data-driven insights are the one universal value creation opportunity.  Every company sits on immense data about both itself and its market, but few make use of that data in a thoughtful way.  By investing constantly in data reporting and analysis, high-performing companies develop crucial insight into themselves and their markets and then seek to constantly push out the frontier of that insight.  These companies are invested in knowing not only the “what” but the “why” behind it.


Giving Context to “What”

For entrepreneurs and business owners who do not possess an analytical background, many reports can seem daunting at first glance.  The data is evident, but it often takes additional time and thought to see all that is missing. Consider a simple quarterly income statement (see Exhibit A):


Exhibit A: Quarterly Income Statement

Amounts in ($000s)

The above income statement provides sufficient data to answer the question of what financial performance was for the first quarter and takes the next step by providing useful profitability measures.  But how should this performance be assessed?  Absolute measures of performance at most companies are meaningless.  Context is necessary to better understand whether performance was superior to, in line with, or below expectations.

Consider the same income statement, with added context (see Exhibit B):


Exhibit B: Quarterly Income Statement (with context)

The additional data included above (the Q1 budget) was limited, and likely already known to whoever would be viewing this report, but the value of the report has been substantially enhanced.  With the benefit of additional data, a deeper understanding of performance is now possible. 

It is now clear that the company under-performed on revenue expectations but outperformed on profitability (in both nominal and percentage terms).


The Power of “Why”

The strength of comparative analysis is that it provides useful insight for report audiences.  But comparative analysis alone is not sufficient.  High performing companies look to provide additional context that will further aide in understanding the drivers of performance. 

Consider the additional utility of a further revision to the quarterly income statement (see Exhibit C):


Exhibit C: Quarterly Income Statement (with additional context)

The above format now provides a level of context that allows for the development of a few key insights:

  1. Revenue. Adjusted for timing, revenue seems to be tracking to budget.
  2. Gross Margin. Improvement due to better pricing with a new supplier is higher than forecast. Why was this opportunity missed or under-represented in the budget? Has the market changed?
  3. Operating Expenses. Out-performance was temporary and directly tied to the delayed customer order.

The more robust report format has yielded superior insight of both the company’s own performance as well as offering tantalizing hints about the broader market.  Additional follow-up in these areas would likely yield further insight.



In an era of rapid innovation, industry shaking disruption, and voracious competition, no company can afford to disregard opportunities to create and enhance competitive advantage.  Unfortunately, mastery of data, through robust and thoughtful report design, is too often considered to be merely a use of time, rather than an investment in developing superior insight.  Those companies that invest in the necessary mindset shift and seek to understand the “why” behind every key “what” are on the path to becoming the industry leaders of tomorrow.


About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career, David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, performance improvement, restructuring, turnaround and value creation.  He can be contacted at:

Stakeholder Support

A business transformation presents an abundance of challenges for any leadership team, regardless of tolerance for conflict.  In the business press, financial issues often take center stage in reporting on a business transformation, and with good reason.  The task of systematically resetting the capital structure and profit potential of an enterprise is an enormous endeavor, and when that task is combined with intense time pressure, it is easy to see how financial concerns naturally take the forefront, particularly in the discussions of outside observers.  The challenge in focusing too narrowly on financial issues in a business transformation is that such a focus obscures a key driver of success: fostering stakeholder support by rebuilding relationships and crafting a narrative of future success that effectively sets the stage for productive collaboration moving forward. 

It is difficult for many leaders to intuit the crucial importance of stakeholder support, and as a result that importance is felt most keenly when it is absent.  By their nature, relations with stakeholders are often marked by long stretches of monotony interspersed with intense periods of rancor.  The time commitment necessary for productive relationship building with multiple stakeholders has none of the glamour of the 11th hour restructuring that saves a company, or the heroic return to profitability following years of losses that the most dramatic business transformations are known for.  And yet, as the work of professor Michael Jensen at Harvard Business School suggests, value maximization is inextricably tied to cultivation of stakeholder support.  Simply put, the headline grabbing value maximization results of a successful business transformation are impossible without stakeholder support. 

The stakeholders in every situation are varied, but the overriding theme in the early stages of a business transformation is their sense of anger and betrayal.  Capital providers feel misled by performance that has fallen short of forecasts and are impatient for a credible pathway to an acceptable level of profitability or a palatable option to cut their losses and exit the investment.  Employees are demoralized by poor performance and frustrated by management’s inability to solve the problems that are overwhelming the company.  Suppliers are furious at a lack of communication as they nervously assess their exposure while hoping for a return to better days.  Each stakeholder group has a good deal to gain from a successful business transformation, but the reality is that, for any transformation effort to truly be successful, each stakeholder group is going to need to grapple with a set of hard truths first.  

Earning stakeholder support in the context of a business transformation is very much a process of guiding stakeholders through the acknowledgement of hard truths and on to a workable framework for a forward-looking relationship with the company.  Over time I have come to see this process as one of the defining crucibles of transformational leadership.


We can safely generalize stakeholder constituencies into the following groups: Capital Providers, Employees, and Suppliers.  Each of these broad constituencies has a unique set of concerns, risk tolerances, and levers at their disposal to help or harm a nascent business transformation.  It is the role of leadership in a business transformation to manage each constituency for the maximum benefit of the enterprise.

With each of these constituencies a few key principles apply:

Rebuilding Trust

Capital Providers: This group, which comprises lenders ranging from banks to private credit funds and shareholders ranging from family owners to private equity firms, is broad but has a common interest in earning an attractive risk-adjusted return on investment.  The challenge with this group is in respecting a party’s risk/return preferences and structuring a formal proposal that will result in a palatable long-run equilibrium.  Banks, almost always at the low end of the risk/return spectrum, will seek a path to reduce their exposure in a business transformation, while private equity firms, at the opposite end of the spectrum, will be more amenable to deploying additional capital at an attractive return.

The hard truth for this stakeholder constituency is the definitive end to prior forecasts and a resetting of the baseline, both short and long-term.  In the short-term, this resetting of the baseline will often involve a violation of lending covenants, a worrisome level of liquidity (cash plus untapped borrowing capacity), and a need on the part of capital providers for intensive monitoring (often weekly, but usually no less than monthly).  In the mid-term, a restructuring is often necessary, which raises the specter of considerable losses to all capital providers, but most often to equity investors and subordinated debt providers.  Given these dynamics, trust is low, all analysis is heavily scrutinized, and it is of the utmost importance that leadership at the company under-promise and over-deliver.

Capital Providers

Employees: As a group, employees are the stakeholder group most open to a plan that will return the company to success, but most resistant to the idea that they (individually) had a role in the company’s troubles.  Executive team members are often defensive and unrealistic in assessing their performance prior to the launch of a formal business transformation initiative and are noteworthy in their frequent attempts to envision a successful business transformation that somehow leaves their personal status quo unchanged.  The hurdle with this constituency is to address layoffs, reassignments and key promotions quickly, and instill a sense that, following a brief but intensive transition period, their efforts will again be the prime determinant of their future success at the company.   

The hard truth for this stakeholder constituency is that the status quo is at an end, permanently.  People will lose their jobs, and for those who remain there will be considerable changes: departments will be reshuffled, executive departures and new promotions will scramble old power dynamics, former sacred cow divisions or projects will be objectively reassessed.  The promise here is that the change is premised on making the company better, the challenge is in recognizing that such an outcome will be secondary to those facing an individual loss in power, status, or control. 

Suppliers: This broad stakeholder group encompasses landlords, key supply chain partners, and miscellaneous service providers large and small.  The key dynamic for this group is the overwhelming desire to maintain and grow their commercial relationship with the company, mediated in part by concern over their current level of financial exposure and a desire for clarity on the path forward. 

The hard truth for this stakeholder constituency is that every business transformation takes time, and so the fix is unlikely to be immediate.  Past due balances are more likely to be worked down over time rather than paid off immediately.  In some cases, this disappointing news must be delivered simultaneously with a request for additional concessions.  The key here is to focus on the plan that is being executed, and appeal to greed (growing with the company post-transformation), over the fear of current levels of financial exposure.

Employees and Suppliers

Time and Attention

The investment in leadership time and attention necessary to rebuild stakeholder support is considerable.  In the short-term, even formerly low-value stakeholder communications should be handled by executive leadership.  Routine interactions such as vendor calls, quarterly financial reviews with capital providers, and employee townhalls should be recast as opportunities to reinforce the message that a business transformation is in progress, get real-time feedback on how the process appears to those outside the c-suite, and provide a forum to address questions and concerns promptly. 

Leaders executing a business transformation must recognize that they swim in a sea of skepticism, and that the way to change that condition is to address the skepticism patiently, clearly, and often.  Results ultimately carry the day in any business transformation initiative, but in the early stages the process can also be envisioned as a series of interlocking public relations campaigns to different stakeholders.

Capital provider communications can most effectively be recast through upgraded report quality and an accelerated reporting cadence.  If updates had been quarterly under normal circumstances, consider a weekly or semi-monthly update call along with appropriate financial reporting.  Look to provide additional metrics, featuring an appropriate mix of leading and lagging indicators, and tell a consistent story.  Once the transformation has gained traction, invite capital providers to an on-site presentation of the long-term strategy.  The goal here is to provide visibility into near-term performance, provide advance warning of any issues, showcase improved performance, and build excitement for the future. 

Employee communications offer the prospect of the rich bounty of energy and goodwill that comes from an energized, enthusiastic workforce.  Unfortunately, the risk of declining morale and skepticism is ever-present.  Communication to this group must represent a mix of styles: townhalls, small group gatherings, email, etc.  Few people are equally disposed to all methods of communication, and leaders in a business transformation should keep that in mind when crafting an approach aimed at winning, and keeping, the hearts and minds of this group.

Vendor communications are a risk area for all but the most iron-willed leaders in a business transformation.  Accusations and threats are to be expected in the early days, as months or years of pent-up frustration are released, ironically on the very leaders with the discipline to hear out angry vendors.  The key with this group is consistency and access; setting a rhythm of weekly updates with critical vendors and providing them with an executive level point of contact goes a long way toward reestablishing a positive working relationship.   

The investment in time and attention necessary to rebuild stakeholder support is considerable.  In the short-term, even formerly routine stakeholder communications should be handled by executive leadership.  While this approach might initially seem to represent a questionable allocation of precious time, when considering the crucial importance of stakeholder support, the cost is low. 


Business transformations strain the political skills of even the most persuasive leaders.  The dynamic challenge of setting expectations, addressing past missteps and rebuilding trust, all while driving cultural, financial, operational, and strategic change, is daunting.  But with stakeholder support even the most challenging business transformation becomes less so, and without it even seemingly minor situations can falter.

About the Author:

David Johnson is founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. 

David can be contacted at:

The Evanescence of Strategy

Every strategy has a sell-by date, and the costs of ignoring that reality are steep.  Recently General Electric took the radical step of terminating CEO and Chairman John Flannery after 13 months on the job (prior to this action GE had had a total of 11 CEOs and 10 Chairmen in its 126-year history) and replacing him with the company’s first outside CEO, Lawrence Culp.  The break with history was certainly necessary, as General Electric had seen its market capitalization decline by $100 billion in the past year, and $500 billion in the past 18 years.

GE Stock Performance
Value Destruction at GE

GE rose to prominence by constructing a set of self-reinforcing advantages that were largely industry agnostic. Under the leadership of Jack Welch the potential cacophony of multiple lines of business became a sublime orchestra, with GE Capital as the engine that powered the whole.  But the global financial crisis changed the outlook for massive financial businesses, and Welch’s successor, Jeff Immelt, spent much of his tenure untangling the byzantine, and formerly massively profitable, conglomerate.

What happened?

Strategy, a high-level plan to achieve one or more goals under conditions of uncertainty, is the answer to a question.  That question: what set of actions, utilizing what resources, will produce the best outcome.  A company’s strategy is its theory of self, its reason for being.  Unfortunately, few organizations, or the people leading them, can adjust to the cognitive dissonance of an ever-changing answer and all that that implies.

Since at least the Jack Welch era General Electric’s strategy was to compete only in sectors in which it could be a dominant player and rely on what was seen as an advantage in leadership training and internal capital allocation to drive efficiencies that would beat the market.  The strategy worked both long and well (the company first had to attain a market capitalization above $500 billion in order to lose that value), but over time challenges that were long apparent took on increasing importance.

  • Pace of Change.  As the pace of change across industries has ramped up, being a major player in disparate industries became a tax on leadership attention, making it impossible to focus or marshal the resources necessary to make sound strategic adjustments.
  • Leadership Training.  It may have been the case once upon a time that GE had an inherent advantage in leadership training, but with the workforce investing heavily in education and training, this one-time advantage has been negated.
  • Capital Allocation.  Jack Welch took the helm at General Electric after a period of flat equity returns, when many U.S. companies were bloated and inefficient.  In 1981, perhaps a case could have been made that GE could more efficiently allocate capital within the company than the capital markets were able to.  Increased competition, new classes of investor (private equity, activist, etc.), and heightened shareholder expectations have changed that state of affairs.

There is a strong case to be made that complexity killed GE, but the wonder is the extreme longevity that an outmoded strategy enjoyed.  Much like the wooly mammoths (or, for a separate example, the dodo) that lived as recently as four thousand years ago on a small island off the cost of Siberia, General Electric had been a living anachronism for years.  With new leadership, GE is making a break from its past and speeding the dissolution of its current, anachronistic form.

About the Author:

David Johnson is founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. 

David can be contacted at:

Distressed Retailers Groping for Viability

The challenges that retailers have faced in the past few years have been nearly biblical in size and scope.

• The unstoppable rise of ecommerce, driven by voracious competitor Amazon, has siphoned revenue growth from competitors great and small, and forced every retailer to reassess their vulnerabilities and contingency plans.
• Shifts in consumer tastes have left retailers struggling to reposition store footprints that are increasingly at odds with where and how their customers prefer to shop.
• Business model innovations, particularly among apparel retailers have forced legacy retailers to rethink historic approaches to sourcing that maximized volume procurement over speed and flexibility.
• And for private equity backed retailers, debt burdened capital structures have increasingly come to seem less like savvy aspects of financial engineering than millstones around the necks of companies robbed of the ability to pivot.

Perhaps most challenging: during this industry’s (most recent) hundred-year flood, the ominous specter of an emerging consensus has hung like a pall over executives, investors, vendors, and advisors: bankruptcy had become a death sentence for retail, a roach motel with straightforward entrance but no viable way out (at least as a going concern).

Recently, the clouds have lifted somewhat. Retailers Toys “R” Us, Payless, and Gymboree are each on a path to successfully emerge from a chapter 11 bankruptcy filing with a substantial percentage of their pre-bankruptcy store count intact.

Enlightened self-interest has driven retail stakeholders to reassess their approaches to the challenges inherent in supporting a distressed retailer and better align their tactics with the twin goals of minimizing losses and repositioning struggling retailers for long-term success. As a result, following years of disappointing retail restructurings, stakeholders are more actively supporting a purposeful restructuring process as the best option for a distressed retailer, holding the prospect of considerably higher recoveries than a fire-sale liquidation.

The structural challenges facing retail are likely to persist, but with renewed signs of aligned interests among stakeholders, it now appears likely that struggling retailers can navigate a restructuring without the process devolving into a value-destroying liquidation.

About the Author

David Johnson, founder and managing partner of Abraxas Group, has a 20-year track record of driving organizational change. David has served as interim executive or financial advisor to dozens of middle market companies in turnaround and restructuring situations.

Burger King Revival


For years, Burger King was the sick man of the quick service restaurant industry.  A perennial laggard to McDonald’s in scale, the company was also widely seen as hamstrung by poor execution, a revolving door of leadership (Joe Nocera noted in 2012 that the company had had 13 chief executives in the prior 25 years) and an unclear strategic vision.

The company’s purchase for $1.5 billion by a private equity consortium of Bain Capital, Goldman Sachs and TPG in 2002 marked a brief resurgence, but when private equity firm 3G, acquired the company in 2010 (for $3.3 billion), Burger King was still seen as a troubled operator.

What a difference focused ownership can make.  Burger is now setting a grueling pace that its fellow quick service restaurant competitors are being pressured by Wall Street to match. 

3G’s playbook has been heavy on the fundamentals, and laser focused on solid execution. 

  • By refranchising restaurants, Burger King is challenging industry orthodoxy that a franchisor should operate a large number of its own restaurants.  Also, divesting those company owned restaurants has allowed Burger King to offload the capex requirements for those locations onto franchisees, boosting free cash flow.
  • Increased focus has been placed on international expansion, an area where Burger King had long been seen to be badly trailing McDonald’s and others. 
  • General and Administrative costs have been rationalized, creating further operating leverage to the business model. 
  • Increased focus has been placed on advertising and marketing. 

This approach is simple, but not easy.  The focus and clarity of vision that 3G seems to have infused into Burger King is generating excitement on Wall Street, while driving competitors (in particular McDonald’s, Wendy’s and Yum! Brands) to adopt similar approaches.

The example of Burger King highlights the value potential of an outside perspective paired with a simple yet audacious strategic plan.  In a market awash in capital, private equity firms will increasingly seek to execute value creation strategies premised not on simple financial engineering but on re-envisioning their portfolio companies, as 3G has done with Burger King.

About the Author

David Johnson is the founder of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to companies in transition.  David has served as advisor or interim manager on over $5 Billion of distressed transactions, and is a recognized expert on the topics of value creation, change management, performance improvement, turnaround, and restructuring.  He can be contacted at or 312-505-7238.

Interim Managers: Value Creation Catalysts

There is a tendency among the leadership ranks of most organizations to espouse the virtues of disruption, but only when that disruption is focused on somebody else.  When incumbent leadership is unable or unwilling to drive necessary change, creditors and other stakeholders are showing an increasing willingness to press for interim managers to supplement the senior management team and drive the change necessary to save what is often a faltering organization.

Recent news regarding two troubled organizations highlights the value interim managers can bring, especially in periods of distress:

Holly Etlin - AlixPartners

Holly Etlin, Interim CFO of RadioShack

  • RadioShack.  The struggling electronics retailer announced recently that CFO John Feray would resign, after only seven months on the job.  Mr. Ferary will be replaced by Holly Etlin of Alixpartners, would will assume the CFO role on an interim basis.  According to Michael Pachter of Wedbush Securities, Ms. Etlin’s appointment is a negative to shareholders, as she will “represent the creditors”.  Mr. Pachter’s comment is actually a strong endorsement: given the fiduciary duty of officers of a company operating in the zone of insolvency, Holly Etlin should be working for the benefit of creditors, not the shareholders who are almost certainly out of the money.

Kevyn Orr - Detroit Emergency Manager

Kevyn Orr, Emergency Manager of Detroit

  • Detroit.  In his nearly 18 months as emergency manager of Detroit, Kevyn Orr has presided over the largest municipal bankruptcy in U.S. history ($18 billion) and pushed that contentious process toward what looks to be a remarkably successful resolution.  The Michigan law which allows for emergency managers dictates a term of 18 months, but in light of his successes many in Detroit are arguing for Orr’s continued involvement, if only to provide continuity throughout the bankruptcy and immediate post-bankruptcy period.

Experienced interim managers, such as Ms. Etlin and Mr. Orr, are professional change agents, responsible for both catalyzing and driving the change necessary for organizations to raise their level of performance.  In periods of turmoil, these change agents can be the difference between success or failure for struggling organizations.

About the Author

David Johnson (@TurnaroundDavid) is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.  He can be reached at 312-505-7238 or at


Business Model Expiration Dates

Buddha - Lose what you cling to

For most companies, worries about the transience of advantage can seem hopelessly theoretical.  The goal for the majority of companies and their leadership teams is to achieve market dominance, not worry about the staying power of that dominance.  And for those lucky companies currently enjoying their time in the sun, time spent pondering the end of their hard-won market position can seem morbidly pessimistic.

Recent developments suggest that leadership teams from the scrappiest startup to the Fortune 100 would be better served by stepping back and considering the roots of advantage, how it has been attained in their industry/niche, and how market trends will impact the staying power of that advantage.

  • Media company Gannett (GCI) recently attracted the interest of investor Carl Icahn due to the company’s plan to spin-off its low-growth print operations.
  • Ecommerce startup Fab, which rode to a $1 billion valuation on the strength of its flash sales model, has recently stumbled, with multiple rounds of layoffs, as the company struggles to navigate a path to profitability.
  • Consumer Products giant Procter & Gamble (PG), driven by a tectonic shift in consumer shopping behavior, has announced a plan to divest as many as 100 brands.  There is some evidence from the company’s prior efforts at divesting brands that this approach is flawed, and may in fact only delay a more substantive shift in the company’s business model.
  • Energy company Kinder Morgan, which popularized the use of a tax-advantaged structure known as a Master Limited Partnership, recently announced a $70 billion plan to simplify the company, citing investor concerns around complexity and a high cost of capital.
  • Tech company Microsoft (MSFT), announced that it will cut up to 18,000 jobs in 2014 as it seeks to integrate its recent acquisition of Nokia and implement new CEO Satya Nadella’s revamp of both the company’s culture and market positioning.

Each of these companies are coming to terms with the need to fundamentally reimagine their business models as shifting market dynamics render prior competitive advantages moot.

The lesson, if there is one, is that there is no end in the struggle for market dominance, but only a continuous journey.  It is a lesson that all leadership teams should reflect on from time to time.

About the Author

David Johnson (@TurnaroundDavid) is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.  He can be reached at 312-505-7238 or at

Failure to Recognize the Obvious

This article originally appeared in Business Insider

Article Date: 7/3/11

I had a chance to see “Page One” this weekend, the documentary on the troubles facing the New York Times.  Many have opined on the issues facing the New York Times, notably Henry Blodget here at Business Insider, but this documentary illustrated for me how well and truly screwed NYT may be.

A turnaround situation requires, more than anything else, honesty about the nature of the problem and at least a sense of what success looks like.  With revenues down over 24 percent from FY 2008 – LTM, the situation at NYT is clearly a turnaround situation.  And yet, over the course of a very well executed if muddled documentary, I was left with the strong impression that too few of NYT’s own people have a sense of how this ends, other than hoping that each round of layoffs will be the last, or patting themselves on the back for the admittedly impressive breadth and depth of their news coverage.

Death is Not the End

It was interesting in watching “Page One” to hear the vitriolic comments of NYT employees regarding a January 2009 Atlantic article written by Michael Hirschorn.  In the article, Hirschorn outlines the serious financial troubles facing NYT and suggests that the world might soon find the company consigned to the dustbin of history.  Hirschorn’s boldest prediction, that NYT could fail in 2009, has clearly been proven false, but on rereading the piece I am struck by just how much of his analysis remains relevant.

Hirschorn makes a number of fantastic points, notably:

“journalistic outlets will discover that the Web allows (okay, forces) them to concentrate on developing expertise in a narrower set of issues and interests, while helping journalists from other places and publications find new audiences.”

“over the long run, a world in which journalism is no longer weighed down by the need to fold an omnibus news product into a larger lifestyle-tastic package might turn out to be one in which actual reportage could make the case for why it matters, and why it might even be worth paying for. The best journalists will survive, and eventually thrive.”

Facing Up to the Challenge

As a public company valued at not quite 5.4x LTM EBITDA, the markets are telling NYT that something needs to change.  A quick look at the numbers suggests that the low-hanging fruit has already been consumed (see exhibits on key financial ratios, there is just not much left there) and it is time for serious discussion of the types of unpalatable options that make executives nauseous but have a tendency to save struggling companies.

·       Say Goodbye to the Past: Man, the 70s were great for the major papers.  NYT had the Pentagon Papers, Washington Post had Watergate, and journalism was on the march.  A lot has changed and it is time to get over it.

·       You Are Not a Public Trust; You are a Corporate Governance Basket Case: I am not a shareholder in NYT, but to hear Bill Keller, the Executive Editor at the time of Page One’s filming, explain that all options had been considered; including running the company as a nonprofit, made my blood run cold.  This is a publicly traded company, and regardless of the dual-class structure every investor who is not a Sulzberger has a reasonable expectation that management is focusing on turning this ship around, not turning it into a megalithic non-profit dedicated to the idea of its own greatness.

·       Adopt a Bold Strategy and Hunker Down: This is not a call to buy something.  Rather, divest everything that is non-core, put together a clear-eyed view of where this company will be in five years, and then execute.  The people at NYT are an erudite lot: think Fabian strategy, think the Siege of Constantinople in 626, think Stamford Bridge.

Revolution is Not a Tea Party, and Neither is Business

Same Zell got kicked around briefly in “Page One”, and I think somewhat unfairly, when a clip was shown of him at a meeting with Tribube employees exhorting them to change the company.  Yes, Tribune became a fabulous mess, but Zell was right: in the end a company must be able to afford its cost structure, or else reduce it.  This basic law of business does not include a special dispensation for newspapers with foreign offices and numerous Pulitzer Prize winners.

The Change Agents We Need

The leader of men in warfare can show himself to his followers only through a mask, a mask that he must make for himself, but a mask made in such form as will mark him to men of his time and place as the leader they want and need.

― John Keegan

The middle market has seen considerable change in recent years, and these changes have led to an evolving shift in how capital providers view distressed situations among their portfolio companies. Increasingly, capital providers (including banks, commercial finance companies, subordinated debt lenders, private equity firms and fundless sponsors) are seeking out versatile professionals able to serve as Chief Restructuring Officers in order to manage a distress situation from the inside, and steer a troubled company to an optimal outcome.  In many middle market companies a CRO will often find him/herself to be the lone advisor on-site, and as such these professionals must embrace the role of change agent.

The emerging generation of CROs will need to possess the following traits:

1) Focus on Substance over Form.  Too often distressed situations devolve as a result of an overly restrictive view of form success will take.  An experienced CRO will recognize that a sale of the company, refinancing, or balance sheet restructuring are all likely to generate superior value to a liquidation, and as a result will pursue a flexible strategy to position stakeholders for the highest value outcomes while not excluding the possibility of lower-value (but still viable) solutions.

2) Strong Communication Skills.  A distressed situation is always a tenuous balancing act, with multiple constituencies angling for position.  Skilled CROs understand the need for clear and consistent communication to all stakeholders, both within the company and without.  Inevitably certain constituencies will receive more or less information, but the messaging should be clear and the focus should be on executing toward an identified goal.

3) Comfort with both Strategy and Tactics.  In the middle market the day of the armchair CRO is coming to an end.  Small and midsize companies experiencing distress can no longer afford to have turnaround advisors dictate broad strategy while the company internally struggles with execution issues.  Today’s distressed situations call for advisors able and willing to first develop a viable strategy and then take a central tactical role (i.e. leading the charge) in executing that strategy.

The role of Chief Restructuring Officer is becoming increasingly central in driving distressed situations to a successful conclusion.  However, changes in the capital provider universe as well as an increase in the general tempo of distressed situations has given rise to a need for a more versatile, independent type of CRO than those who previously served the market.  Increasingly stakeholders must look not only for a CRO, but for a CRO with the right mix of skills, in order to steer a distressed company to a successful outcome.