How to deal with stakeholders in a financial crisis
Monday, September 23, 2013/
People often focus on their financiers when faced with a financial crisis. While this is important, talking to all key stakeholders is crucial.
A manufacturer whose business was recently in financial difficulty learnt the importance of managing multiple stakeholders through good communication. Negotiating with several key suppliers, as well as existing and new financiers, it was able to secure ongoing supplies and, importantly, retain crucial irreplaceable plant and equipment.
Proper management of stakeholders may be the difference between success and failure. This applies to all facets of business, whether a large corporation or an SME.
Quite commonly in a failing business, communication between management and key stakeholders has broken down and in certain circumstances is close to the point of no return.
Key stakeholders need to be convinced that rescue, rather than termination, will in fact be the better outcome. The problem is, particularly when dealing with financial stakeholders, a CEO or managing director may have little or no experience in dealing with stakeholders in a crisis, whereas the financier is very likely to be experienced and highly knowledgeable in this area.
A role of a turnaround adviser is to rebuild confidence between the parties by providing a bridge between any knowledge gaps, and to reinstate fluency between the parties through appropriate communication. To achieve this, a turnaround adviser will need to analyse and understand what is at stake for all parties and will need to be in a position to do so before starting any negotiations.
Stakeholder management during a turnaround process will change in direction from a customer focus, which is typically employed in a normal trading scenario, to that concerned with supplies, capital and other elements that impact cashflow improvement in the short term.
The customer, of course, continues to be important and supported, but will be less of a priority in this ‘cash and time’ critical phase.
Stakeholder management is about gaining and communicating information. Understanding a stakeholder’s impact on a corporate turnaround through proper analysis is essential and includes working out the following key information:
1. Where do they fit within the business?
Due to the critical nature of turning around a failing business, there is rarely time to attend to all stakeholders as quickly as one may like. Consequently, stakeholders must be prioritised and graded according to the potential impact on the future of the business. Are they a key supplier, debt or equity provider? What are the implications on the business and its cashflow if they turn off the financial tap?
2. Are there any alternatives?
A ‘plan B’ provides certain comfort when negotiating in any situation, for example, finding another major supplier. But if a ‘plan B’ is not available, negotiate cautiously. Understand what is on both sides of the table, emphasise the benefits and be informative on any downside.
3. What are the expectations and limitations?
A turnaround adviser will need to assess the needs of the business against the expectations of the stakeholder and find some middle ground between them. This can be a long drawn-out process, but an important one. Knowing the limitations of all parties will help gain an understanding of where the compromise may fall.
4. Is there history?
Armed with a diagnostics review, a turnaround adviser will need to demonstrate that a business is capable of change and that the right team is in place to give effect to that change. It may be that due to recent cashflow issues, it is probable that renegotiation of trading terms or financial covenants have previously been necessary. But if granted, were the varied terms met by the business? If promises have previously been broken, or a stakeholder misinformed, the relationship will be fragile and in need of repair.
5. The fine print
A full review of the relevant documentation is necessary to understand what legal steps a stakeholder may take in relation to a defaulted position. If a supplier of goods, is there a registration on the Personal Property Securities Register? Does the supplier have a valid Purchase Money Security Interest? If a lender, does the institution have a security interest and where does is rank? What rights does the stakeholder have that could seriously disrupt your turnaround strategy and plans for the future of the business?
6. Avoid infighting
The turnaround adviser will need to understand a stakeholder’s common interests or conflicts with other stakeholders. Support provided by a certain stakeholder may well encourage other stakeholders to follow suit. However, the outcome for stakeholders within the same group may be vastly different and, therefore, each will have its own agenda – particularly when dealing with debt holders. Consequently, the managing of competing interests is often a complex and delicate task, which requires timely communication of relevant information throughout the turnaround period.
When it is finally time to open discussions remember this is not just a quick fix. The actions taken in these early negotiations will lay the foundations of hopefully a long-term relationship. It is essential, therefore, that communication is open and honest; clear, concise and continuous; and based on high-quality objective information.
Daniel Cooksley is a principal in restructuring recovery turnarounds and insolvency at Pitcher Partners, Sydney.