The Modern Turnaround Manager: The Trends, Tech and Skills Required to Navigate Today’s Market

Keith Chulumovich: Depending on which article you read, by most standards the economy appears to be fairly stable, but as you dig into the details, many businesses are struggling with rising supply chain and labor costs. Manufacturers are still trying to stabilize material and component costs while at the same time having to figure out if they can approach their customer base and present a strong case for price increases. For the turnaround manager, some of the biggest challenges include access to reliable data necessary for developing an effective plan. Time is always an issue so quickly finding the root of the underlying issue and developing an effective strategy has always been a challenge. During the assessment and implementation phases of any plan, labor retention, supply chain reliability, customer pricing issues, contract renegotiations, borrowing capacity and bank lending constriction are always tactical challenges for any company.

Adam Duso: The current business environment is a tale of two stories. On one side, there is cautious optimism: interest rates appeared to have stabilized and may be trending downward in the coming quarters, some market sectors are doing quite well and many assets held their value better than anticipated post-COVID. On the other hand, there are companies that barely survived COVID and became dependent on stimulus funds for survival and now find the COVID-related debt that saved them is a barrier for new capital to enter the business. The biggest challenge facing turnaround managers today is getting access to capital to help fund the turnaround of the company. Companies have fewer options at higher costs and typically find themselves over-leveraged prior to entering the workout.

Robert Katz: Bumpy, challenging but opportunistic. Regardless of your political preference, most people are looking to see what the coming presidential elections hold. So, when things are a bit uncertain, that always brings opportunities. There is plenty of money in the private credit system to fund the right opportunities, so it’s more about diligence, story and creativity.

Creativity is one of the most fascinating and interesting traits. Too many so-called leaders drink their own Kool-Aid. They want to tell you how great they are. True leaders rarely do so because everybody knows how astute they are. They lead through actions, not their words. The challenges likely are sifting through the rhetoric to get to the action plan and quickly and effectively determine if that can generate significant positive cash flow and success. To paraphrase Steve Jobs: “Do we as turnaround leaders know what our clients need / want before they do? Can the message be effectively communicated, and the plan executed?”

Bobby Lau: Economic indicators are mixed and there are clearly winners and losers across the business spectrum. The interest rate environment is unclear, although it seems like we should expect some small downward adjustments by the end of the year. Higher costs throughout the supply chain are impacting margins for many borrowers. In addition, there are still material supply chain issues for some products/inputs. We have seen a recent uptick in container rates as well as the possibility of an East Coast labor strike at the ports. On the demand side, inflation is impacting consumer behavior and higher borrowing costs are affecting demand for some consumer products and capital equipment. In addition, we have seen multiple examples of poorly managed businesses or flawed business models that were disguised by an extended period of near zero interest rates.

The biggest challenges in the turnaround space remain unchanged. High levels of leverage and weak credit documents are a problem. We continue to see situations where lenders have little leverage prior to a default and/or a liquidity crisis. In many cases, there is little runway to execute a turnaround, and unless some stakeholder contributes incremental capital, a liquidation or sale in bankruptcy is likely. For ABL lenders, this is hopefully an acceptable outcome. For enterprise value lenders, it is a more complicated set of decisions.

Stefan Piotrowski: Despite recent optimism in equity markets, the economic environment remains uncertain for most clients and counterparties. Expectations of lower interest rates and strong consumption provide some upside, but inconsistent results across industries fuel doubt and concern for the long-term outlook. Compounding these uncertainties, many at-risk companies have already tapped alternative capital sources, leaving turnaround managers with fewer conventional refinancing options to navigate turbulent markets.

Are specific industries facing more significant challenges than others? What trends are driving these challenges?

Chulumovich: All businesses face challenges, but any labor-intensive business — whether B2B or B2C — has more issues to address, from rising labor costs, training and retention, to work from home issues. For those businesses looking to hedge the impact of labor with automation, finding the integrators that will allow the business to remain nimble is becoming an issue. Often by the time a solution is designed and implemented, the rate of technology change requires constant on-the-fly upgrades. Any business that provides products considered to be a discretionary spend for either consumers or other businesses is always vulnerable to the economy. These types of businesses need to develop strategies to insulate themselves from dramatic swings in the economy.

Duso: Some industries facing trouble are retail, e-commerce, hospitality and manufacturing. The increased labor, goods and borrowing costs have led to these trends. Hospitality was drastically affected by COVID. While much of the industry has rebounded, many hotels, destinations and conference centers are still not seeing pre-COVID levels of travel and spending, especially in the business travel sector. Retail and e-commerce have seen the price of finished goods increase, delays in supply chains, rising costs for workers and increased costs for fulfillment and sales on digital marketplaces. Lastly, manufacturing has been affected by tariffs, shifting supply chains, higher borrowing costs and increased costs of labor while often being locked into fixed end-pricing contracts

Katz: Healthcare, hospitals, behavioral health, nursing homes, smaller colleges and retail are certainly at the top of most lists. At its core, though, it’s not so much about the industry but the stakeholders therein. For example: In what other industries than healthcare do your largest customers do everything they can to delay or not pay their bills. The biggest entities yielding arguably the most resources make it painful for those providing critical care and service; it seems so counter intuitive.

Consider education, the fortunes of some smaller colleges, private schools and universities that waited until long after they should have before they began taking action.

Ponder some larger retailers that have gone and are going through out of court and in court restructurings. There are usually substantial retention bonuses for executives. The company’s trends usually continue to appear negative. So, what is it those executives did to deserve any bonuses, usually totaling in the millions? On the other hand, and despite the stress that retailers are under, there are still retail entities positioned well. One just has to walk through the Court and Plaza in King of Prussia, PA to see what successful retail road maps could look like.

The core differentiators are still the people running the companies. And even when the economy is strong, there are still approximately 20% or more of businesses that struggle.

Lau: Consumer and healthcare have represented roughly half of the businesses we have worked with since COVID. On the consumer side, demand has evolved. This has been driven by inflation and interest rates, but also by lack of demand for products that experienced demand spikes during COVID. It seems that a lot of folks redecorated their houses or purchased patio furniture, grills, exercise equipment and recreational products during the lockdown. Most of these items do not have short term replacement cycles, and it will be some time before demand returns to a “normalized” level. The fact that consumers are now facing higher prices for everything from gas to groceries has extended this demand hangover. 

Piotrowski: Heightened interest rates and inflation continue to be challenges across industries. While widely publicized cultural changes have also contributed to struggles in commercial real estate, the heightened cost of capital has also contributed to building pressure in heavy manufacturing, food processing and other equipment intensive businesses. Additionally, while many industries have adopted strategies to pass inflationary costs to the consumer, labor-intensive service businesses and technology companies relying on human capital often reel from both heightened wage requirements and top-line uncertainty.

How are financial pressures, such as rising interest rates or inflation, impacting companies and the need for turnaround services?

Chulumovich: The impact of rising interest rates is dependent, of course, on the amount of debt a company has. If debt is structured with variable interest rates, the impact can be quite severe. Inflationary cost increases are always an issue. I always say it is far easier to run a business when the economy is good and very few business owners know how to run a business when times get tough. As turnaround advisors, we first look to reduce any discretionary expenses while simultaneously looking to restructure the operations of the company, so the business is more insulated from rising costs. Therein lies the double-edged sword for our profession in that many companies don’t want to spend money on turnaround services. What troubled companies don’t realize is that the payback of an effective turnaround strategy is tenfold in most instances.

Duso: Companies that cannot afford debt obligations that they locked in from 2018 to 2022 and also need access to capital in order to turn around their business struggle to meet the requirements of underwriting and repayment under today’s interest rates. Inflation and raising labor rates only compound this process.

Katz: The financial pressures to success always exist, it is just human nature. The differentiating factors are really execution of the business plan and the vision of the stakeholders. If business leaders thought that extremely low interest rates and very little inflation would last forever, would that not just be a fallacy? Consider further, if a couple of points change in the interest rate and/or inflation are the difference between meeting and missing covenants and payments, was the business being run at peak performance?

The best and most well-run businesses took advantage of the last decade of the low interest rates and low-inflation environment to better position themselves for the future.

Lau: Rising interest rates have a double impact on restructuring activity.  The cost of financing negatively impacts demand for certain consumer and capital equipment providers, and second, the increase in borrowing costs is meaningfully impacting borrowers carrying significant debt loads.

Inflation has contributed to compressed profit margins for some borrowers as well as a change in consumer behavior. Additionally, interest rates have been piling on challenged businesses.

Piotrowski: Rising interest rates have amplified the need for turnaround services, particularly under the “good business, bad balance sheet” argument. Less noticed, however, is the working capital pressure from higher carrying costs for trade receivables and inventory, leading to tighter terms and a growing reliance on alternative financing to sustain liquidity.

How is technology influencing turnaround strategies? Are there any digital tools or innovations that are particularly effective?

Chulumovich: Data has always been a key driver in decision making and that is no different in a turnaround situation. As a turnaround professional I rely heavily on data to quickly identify cost drivers of the business. Understanding the relationship between company activity and costs is crucial to developing an effective turnaround strategy.

Technology, if used properly, can assist in developing strategies to maximize profits and eliminate unnecessary costs. Technology in the form of automation can also be a big part of the turnaround plan, usually in the area of reducing labor costs and increasing the overall quality of the product provided. Data on product or market profitability will assist in deciding the best course of action to take.

Duso: There are a variety of platforms and software tools that help with modeling and valuations and some platforms that specialize in selling distressed notes or raising funds for distressed situations such as Soteria. These tools offer streamlined workflows for turnaround professionals and allow them to reach a larger market when raising capital.

Katz: The evolution of technology and AI tools are amazing to watch and be a part of. Most professional service firms are creating new digital departments and platforms. EisnerAmper has an exceptional technology group that has the ability to create proprietary software and digital products, conduct time-saving research, follow and examine trends, and report results in a fraction of the time it used to take.

Two considerations immediately come to mind.

1. Know what you know, accept what you do not know, be humble enough to acknowledge the difference, do not be afraid to ask questions and commit to continuing education.
2. When utilizing technology and AI, be cautious and do extra work to ensure that the responses are real. There are standing cases in our courts where attorneys reference case law only to find out it did not exist, and they had their law licenses suspended and their reputation tarnished. It is important to perform extra due diligence and be accountable. The old cliché that if it is too good or easy to be true, it probably is holds so true in this arena.

Piotrowski: Technology is always difficult to implement in environments of change and/or crisis; however, turnaround professionals can differentiate themselves and deliver more effective outcomes if they are able to identify cost-effective, mission-specific (either top-line or cost side) technology solutions for clients and drive their implementation.

How do you see the role of turnaround managers evolving in the next few years? What new skills or areas of expertise will be required?

Chulumovich: I see the turnaround manager acting more as a long-term partner that becomes a key part of management. Identifying turnaround strategies is our lifeblood, but as the rate of change in business increases there will be a need for turnaround professionals to stay engaged and assist management in adapting to changes in the economy and customer demands. We bring the most value to our clients by providing insights and experiences from our entire client base so we can offer best-in-class solutions to the problems that arise. As technology continues to evolve, we as professionals owe it to our clients to stay up to date on new technologies and how different industries are using them. If I had to give advice to any turnaround professional, it would be to remain curious and innovative.

Duso: Out-of-court restructurings will be prominent, as will knowing how to navigate them. Courts are traditionally slow and in the current environment, there is an increasing appetite for resolutions outside of court proceedings. Also, the efficiency of bankruptcy has decreased for many businesses over the past decades while seeing the costs of those filings skyrocket. These costs are often shouldered by the debtor and senior lenders throughout this process, yielding a lower net outcome for all parties.

While bankruptcy is highly efficient in certain circumstances, the time of using it as a one-size-fits-all solution for business insolvency has come and gone. Lenders and debtors are looking for alternatives that streamline the process, reduce costs and maximize returns to creditors

Katz: I am not sure the focus will be new skills or arenas but more reassessing skills that make companies successful. In today’s world of social media and instant gratification, being more thoughtful is critical.

• Do not rush to make decisions. Take a breath to be thorough and thoughtful. Ensure all/best alternatives have been considered.
• Be empathetic, which is more important than ever. “Nobody will care how much you know until you show them how much you care.” Maya Angelou said something that never ever will be outdated: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
• The old cliché that there is no “I” in team. Today’s world is faster paced and more stressful than ever. Take a few minutes to thank people and team members for exceptional efforts. Most people are quick to criticize, but few take a couple of minutes to say thank you and praise excellence. Make the effort, it will be well worth it!

Lau: I think flexibility will be important in the coming years. As bankruptcy has become more and more expensive, and the level of unlevered assets has limited the ability for incumbent lenders to inject the new capital required to execute a turnaround, flexibility is key.

Piotrowski: I expect a sustained need for seasoned professionals in the turnaround space to manage more than traditional financial challenges, including an elevated emphasis on professionals who can provide both financial and operational expertise. While a conventional “playbook” is widely seen in restructuring circles on the financial side, turnaround professionals who can differentiate themselves as operators who can adapt to the uncertain times will be more in demand in the coming years.