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Why do businesses fail? Excess leverage, management shortcomings, technology changes, loss of market share, an ineffective board of directors and overall economic conditions are some of the leading causes of business failure today.

A lost contract coupled with product distribution problems may initiate a downturn. For business owners, it may seem easy to overlook difficulties at first. However, if an organization does not immediately address looming problems, it will hemorrhage key employees, cash and customers. Revenue sources will dry up, and the once rosy future becomes dim. An overall sense of fear, panic and despondency sets in.

Smart business owners seek ways to maximize the profitable good times as well as strategic guidance and expertise to curtail and remedy potentially lean periods. Surprisingly, though, many owners do not ever expect their organizations to perform below average or worse. They do not plan for fallow periods or even periods of distress. Like an ostrich, management may bury its head in the sand, not wanting to know the extent of the difficulties. The wake-up call usually comes when a company hits a cash crisis and owners are required to call on its bank or investors, and panic is set into motion.

Management’s initial reaction to crisis often gives an indication of the longevity of their organization. Those leaders who seek council early tend to prosper in the future. Further, these owners realize the importance of keeping clear and open channels of communication with all stakeholders by providing key information on a timely basis.

Alternatively, some companies see, but ignore, the warning signs. These firms often decline, and then fail without implementing decisive recovery measures.

What many organizations do not realize is how quickly the business lifecycle can shift. Company owners may be too close to the situation to see what’s really going on in their business, or so exasperated that they’re ready to give up. That’s when they hire a turnaround specialist.

The classic five-step process to engineering a business turnaround is as follows:

Situation Analysis

Management Change

Emergency Action

Business Restructuring

Return to NormalStep 1: Situation Analysis

Exploring the past to reveal insights into why the company languished is critical. From this investigation, a turnaround practitioner can learn from historical challenges to build a new business strategy. Immediate questions include:

Is there a core business and is it viable?

Is cash or bridge financing available to complete the turnaround process?

Are sufficient managerial and organizational resources on board?Step 2: Management Change

The goal is to ensure that all capable management remains in place and those who may impede the turnaround process are removed. A turnaround professional can serve as the interim CEO in companies where the CEO was terminated. In other instances, the professional will support established management teams with turnaround strategies and counsel, including mentoring management.

Whether the CEO and key executives remain or are replaced, what is critical during this phase is to introduce strong leadership, now and through the run of the turnaround assignment. This individual should:

Be able to reposition the company quickly and decisively for short- and long-term achievement.

Possess entrepreneurial instincts along with general managerial experience.

Possess strong negotiation and interviewing skills in order to understand and communicate with employees and stakeholders.

Be action oriented: setting clear, forward-thinking objectives from which employees can follow.

Step 3: Emergency Action

For the short-term survival plan, sometimes, this means initiating layoffs or eliminating entire departments. Underfunded organizations may seek bridge loans to fund the turnaround process until their restructuring is complete.

When implementing a work force reduction, the aim is to make cuts quickly and deeply. In the short run, doing so may be emotionally painful for remaining employees. However, employee morale becomes weakened dramatically if layoffs are strung out. Concerns over job stability demoralize staff and paralyze rebound efforts. During this stage, restoring cash flow is paramount, but so is employees’ faith in the future.

Step 4: Business Restructuring

If the goal of Step #3 is to restore cash flow, Step #4 is to restore the company’s capital structure and profitability as a way to ensure its long-term success. Negotiations with creditors, lessors and vendors to exchange debt for equity and/or cash-on-cash discounts are critical actions that must be deployed.

To restructure a balance sheet, turnaround professionals must be confident in a company’s basic business. Without a solid core business, the chances of a successful turnaround are in jeopardy.

Step 5: Return to Normal

The hardest part of a successful turnaround is to change the company culture which, more often than not, is a direct legacy of the actions or shortcomings that caused the company to fail. Unless the turnaround process includes enough time to ensure that a new culture has taken hold, the restructured company may find itself back in trouble again.

Provided sound business management principles are employed, results measured and positive trends reported, control of the business should be re-established.

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Russell K. Burbank, certified turnaround specialist and partner in the consulting practice group of Burr Pilger Mayer in Santa Rosa and San Francisco, specializes in corporate renewal, process improvement and repositioning companies in difficult circumstances by arranging balance sheet recapitalizations, mergers, asset sales, wind-downs and liquidations. You can reach him at 415-677-4530 or rburbank@bpmllp.com.