Trevor McClintock: Investing in failing companies can offer lucrative returns

Investing in a failing company isn't for the faint of heart. It'll take buckets of blood, sweat and tears to turn around and there's no guarantees. But for those willing to go hands-on and take the bull by the horns, the potential returns can be phenomenal.

Not all failing companies are created equal and it's obviously crucial to do your due diligence before putting any investments down. It's important to discern the reasons behind a business' downturn and whether it's something that can be addressed.

 

Every company is different and there's no one-size-fits-all solution to determining the root cause of the failure. In fact, it's likely you'll never be 100% sure – so it's more a case of establishing trends, than diagnosing problems with complete certainty.

 

That said, it's vital to be as empirical as possible, since the weight of facts will lend credence to your hypotheses or help you discount them as possible explanations.

 

Some critical research to do at this stage includes:

Once you've made your choice, your first step should be a brutally honest assessment of where the company stands. After all, you can't decide where things are going until you know where they are currently.

 

All organisations develop an entrenched culture over time, which can be an under-used asset or an obstruction that needs to be ruthlessly cut out. People don't like change and your inevitable alterations to processes are bound to meet with some resistance.

 

Don't mistake this for dissent and instead communicate as honestly as you can why these changes are needed and what you're trying to achieve. Employees feel more motivated and perform better when their work has meaning and value, so refrain from taking the 'just do it' tack and try and keep your staff in the loop.

 

Similarly, staff can also be an invaluable source of information on the root cause of problems, so ensure you collate their views on the obstructions they face in their day-to-day roles.

Over time, inefficiencies tend to crop up in processes and the weight of tradition means staff on the ground can lose sight of why things are done a certain way.

 

As a turnaround manager – it's your job to seek out and identify these, be they trading terms with suppliers, bottlenecks in client communication or issues with internal administration.

Sadly, not having the right people with the right skills in the right places can often necessitate restructuring and how you handle this can have a severe impact upon morale.

 

Don't leave workers in limbo over their job security by letting staff go in waves. Determine who you want to keep, who you want to let go and cull those who need to leave in one fell swoop if possible.

The people and organisations you're working with are just as important as the ones you've got working for you. When taking over a business on the down-turn, it's vital to audit client relationships and review the time and effort it takes to service them versus the return.

 

All too often, customers are kept on the books because they're a 'name' in the industry or due to prior relationships. This is a false positive. I'd rather take a dozen 'dull' clients with steady demands and that pay on time over twice as many 'exciting' ones, where turning a profit is a constant tug of war.

You're likely to be facing pressure in terms of debt and loss from the moment you take the helm, but shooting from the hip with all guns blazing isn't the way to correct this. Yes indecision can be worse than wrong decision, but that doesn't mean you should act recklessly without all the facts you need to make an informed decision

 

However, when the time comes to act – you can't afford to dawdle. Every good surgeon knows that sometimes you have to cut off a limb to save the body.

 

They do say fortune favours the brave and in my experience businesses can be brought back from the brink to offer lucrative returns for those bold enough to accept the challenge. If you have clarity of purpose and a venturous spirit then don’t shy away from the challenge.