Working With a Turnaround Consultant

by Gary Brooks

Oct 1, 1996

(TMA Global)

More than 250,000 middle-market businesses are in trouble. Usually, by the time the warning is sounded, performance has deteriorated to the point of jeopardizing lending relationships, customer contracts, credit ratings, and employee confidence. Some symptoms include cash shortages, eroding market share, falling margins, escalating employee turnover, and aging accounts payable.

The problems responsible for these symptoms may be bloated inventories and mismanaged credit and collection policies, ill-founded marketing and sales strategies, high waste and poor defined lines of responsibility and authority, or poor management of productive assets. Solutions become realities only through fundamental changes in the way the business is run. This is where the restructuring consultant enters the picture.

As the business’ lawyer, whether in-house or not, the quality of your relationship with the consultant can spell the difference between your client’s survival or demise. This article will discuss what turnaround consultants do, how they do it, and how you can help them to do it well enough to get your client back on track.

The Role of the Turnaround Consultant

The turnaround consultant (also called a crisis manager or restructuring consultant) traces the symptoms, defines the problems, and proposes the solutions that are possible within the context of available human and financial resources. The process is best accomplished through a compatible professional team involving lawyers representing the company and its management, and when appropriate, additional representatives of the various interests at risk which may include the board of directors and the equity holders. The consultant’s role is advisory only. The expectation is that implementation will remain within the management team.

Interim Management

In extreme cases, the turnaround consultant may have to serve as an interim manager. An interim manager assumes the duties of a chief executive or chief operating officer for a defined period of time to accomplish specific turnaround objectives. The senior executive agreed to step aside through the crisis period. In addition, a consultant may serve as interim chief financial officer, sales manager, or in some other role that helps to stabilize operations.

The Goal and the Obstacles

An effective turnaround plan balances the interest of all the various participants. It does not exist to favor the interests of only one party, but to put the entire business back on track. The very nature of the environment within the troubled company makes this task a daunting one. Few managers, although they may be well trained, mature, experience, and fully knowledgeable about their products and markets, have applied these attributes in crisis conditions. Few schools educate business students in the elements of troubled enterprises.

Atmosphere of Limited Trust

Crisis intervention does little to bridge the gap that broken trust creates. Intervention only helps to lower the emotional level sufficiently to help the parties understand what will happen if they don’t stop infighting. This is by no means easy. It may take years, not months, to accomplish. The period of intervention, then, cannot be so short that an effective beginning is interrupted by a return to the culture that created the crisis.

Before the Engagement

The troubled debtor (or aggressive creditor) will often approach the company’s counsel after some problem has developed in the business. This begins the formation of the professional team.

Defining the Client

This is a critical juncture. You have to identify the client at this point. Is it management? Shareholders? Directors? The corporate entity? Fiduciary obligations differ for each of these possible clients and may change as the financial condition of the company deteriorates. For example, as the corporation approaches technical insolvency, directors become increasingly responsible for creditor interests in their corporate governance role.


Identifying Qualified Consultants

Qualified candidates can be found through:

  • recommendations from other professionals with similar specialties;
  • industry participants who may have gone through similar experience;
  • lenders;
  • selected trade creditors; and
  • investor groups.


Preliminary Agenda

The client, once defined, will determine the preliminary professional agenda. An outline of the scope of involvement of each member of the professional team will help the selection process by ensuring that expectations are agreed upon by all constituencies: the client, other professionals in the case, lenders and creditors. Also define the work product for each anticipated phase of any engagement. Will it be a report? A new financing? Establishment of interim management objectives? It is also a very good idea to establish rules of disengagement, milestones, and review schedules.

Specialized Directories

Directories of relevant trade and consulting associations may be helpful. The directory of the Turnaround Management Association (an association of turnaround and crisis management professionals) is the most comprehensive source of currently active restructuring professionals. Search the trade and financial literature. Capable professionals often are quoted in or write articles about significant issues related to the case a hand.

Define Evaluation Criteria

Experience with financially troubled companies, particularly with companies that suffered a similar crisis, is more critical than industry or product experience. Industry-specific knowledge can be provided by the company’s staff or trade associations.

Professional Credentials

Professional credentials including education, certifications (certified turnaround professional, certified insolvency accountant, certified management consultant), related management experience, and references are important elements in selecting the professional. Certification is peer confirmation of certain expertise and basic knowledge. Insist on references from prior clients, other professionals, and sources of referral to verify representations made by the candidates.

Standards of Conduct

Ask the consulting candidate for information about the codes of ethics and standards of professional conduct under which he or she practices. These codes are an important indicator of the consultant’s practice principles. Verify that a senior member of the firm will be an active part of the project team.

Fee Structure

Ask the consultant for a specific fee proposal. There are several acceptable arrangements, time-based and fixed project fees being the most common. Be wary of contingent fee proposals—they are appropriate only in limited circumstances such as sale of selected assets, recoveries above expectations, or tasks with clearly defined objectives and directly measurable benefits. Be warier still of equity-in-lieu-of-fee proposals—they present a potential conflict of interest. Independence and objectivity designed to serve the client’s interests can quickly become lost in favor of the interests of the service provider.

Conduct Interviews

Interview each potential candidate. Describe the current circumstance in detail. You want the consultant to know what he or she is up against and you want to be able to judge whether he or she is equal to the job. Verify technical expertise, analytical skills, and negotiating performance. And pay special attention to human relations considerations including temper and disposition—these factors will be important indicators of how the consultant will conduct the engagement. Ask yourself some of these questions:

  • Does the candidate seem to be someone who can deflect the pressures of competing forces in the business and maintain his or her objectivity and integrity?
  • In previous turnarounds, did this candidate actively seek out the input of a wide cross-section of the business’s constituencies (its managers, professionals, directors, and the like)?
  • Were the candidate’s proposed solutions complete, timely, practical, and suitable given the client’s circumstances? If so, were the recommendations implemented?
  • Were hoped for benefits actually realized?
  • Would the last client or two that the consultant worked for retain him or her again?
Meet with the Consultant and the In-House Crisis Team

After you have narrowed the field, set up meetings to introduce the best candidates to the in-house crisis team. Make it clear that no obligations are involved or implied at this stage. One purpose is to discuss the proposed scope of the engagement and to expose the candidate to selected information about the client. Another purpose is to give members of the in-house team, often with selected advisors and directors, an opportunity to evaluate how well the candidate will fit into the company’s culture as well as the consulting firm’s ability to meet objectives on a timely basis.

Formalizing the Engagement

The information shared during discussions with the in-house crisis team will form the basis of a proposal for the consultant’s services. Think of the proposal as a discussion document. It may take on a new form. Never let the engagement proceed without a written, properly executed proposal—you need it to memorialize the exact boundaries of the engagement and its goals.

Contents of the Proposal

The proposal should describe the expertise that the consultant will bring to bear on the problem and describe the role that the consultant will play in support of the in-house crisis team. It helps to designate which professional will serve as team leader, coordinating the tasks and monitoring the schedule.

The written proposal should describe at least the following elements:

  • The background factors leading to the engagement, with a description of the circumstances of the crisis;
  • The objectives of the engagement;
  • The scope of the engagement, including areas for evaluation, work product, and support documentation;
  • The consultant’s methodology, any special tools or procedures, milestones, reviews, and reports;
  • The staffing, including a description of the project team, key staff, and the extent of support that the client will furnish;
  • The schedule, including the starting date, dates for reviews and interim recommendations, and a target date for the final result;
  • The consultant’s fee arrangement;
  • The terms of the engagement. This covers the consultant’s role (advisor, team member, interim manager), as well as negotiated clauses (hole harmless, best efforts, confidentiality, non-competition, and so on); and
  • The consultant’s acceptance and acknowledgement of the terms.

An acknowledged proposal serves as a satisfactory document of understanding between the parties when the consultant’s role is purely advisory or informational. The key element is that acceptance and implementation of any recommendation remains the decision of client’s management or directors.

Interim Management Proposals

An interim management engagement requires a more complex contract. Role definition is critical. As an interim manager, the consultant assumes authority and accepts responsibility as the senior operating executive.

Scope of Authority

It may be possible to assign certain fiduciary responsibilities and risks to the interim manager. Statutory limits curtail the authority which can be granted to any manager, particularly in matters of corporate governance. The proposal should also set forth the contractual limits on capital spending and the authority to make long-term strategic decision without board approval.

Spell Out the Obligations

Define the obligations that will exist between the interim manager and your client during the engagement period. Staffing, fees, terms of engagement, disengagement provisions, and limits of responsibility are but a few of those elements. Urge the client to consider shorter contract terms (quarterly, for example) with more frequent renewals as a means of forcing periodic performances reviews and reevaluations of objectives. This process enhances the value of the relationship.


Confidentiality becomes critical when the consultant serves as an interim manager. For some purposes, existing management may need access to confidential information that should not be shared with the interim manager. And in other cases, it may be absolutely essential to share confidential information (prior and potential competitors, trade secrets, and the like) that the interim manager may have to learn about and prepare appropriate nondisclosure agreements.

Interim Manager’s Personal Liability

The proposal must spell out the consultant’s degree of performance indemnification, as well as all representations and warranties of potential personal liability. Tax and environmental exposures are of particular concern with many troubled companies. (You may want to obtain status acknowledgements from the pertinent agencies before an interim manager assumes responsibility in these cases.) The interim manager may be unwilling to be personally responsible for liability in these cases; neither errors and omissions nor malpractice coverage is available when the consultant acts as a decision maker.

Evaluating and Addressing the Crisis

An important tool for getting the problem under control is the operations evaluation checklist. It is used to identify the strategic alternatives and to quantify risks associated with the courses of action open to the client. Specifically, the checklist is designed to:

  • Determine the viability of the enterprise,
  • Identify the problems that have been causing deteriorating performance, and
  • Lead to alternative solutions and recommend a preferred option.

The proposal must spell out the consultant’s degree of performance indemnification as well as all representations and warranties of potential personal liability.

  • Establish a basis for forecasting how the proposed solutions will affect the company’s financial condition, income, and cash situation;
  • Establish a basis for an implementation plan; and
  • Identify the resources required for successful implementation.
The Need for Objectivity

Objectivity is critical when working through the operations evaluation. The information generated has to be interpreted conservatively to reduce the risk of misrepresentation. Each evaluation task has a corresponding purpose ultimately aimed at improving performance and enhancing cash flow. The task-and-purpose relationship is shown:



The time available to perform this evaluation and to establish at least a preliminary plan for future action depends on the severity of the client’s crisis. Under the most critical circumstances, only a few days may be available to identify the strengths to build upon, to find the sources of ongoing working capital, and to propose an immediate plan to stop the bleeding and preserve available cash. These are operating issues. The legal options may depend upon how quickly the operating tourniquet can be applied and credibility of the proposed plan to those at risk.

Minding the Workouts

The elements of any workout require legal guidance, confirmation, and participation. Review the consultant’s communications and actions with any of the constituencies to ensure transactions and language are without pitfalls and do not represent additional exposure under federal or state insolvency statutes or under the Uniform Commercial Code.

The Bankruptcy Factor

A bankruptcy petition alters the roles of the professionals and the urgency of the situation. Usually, you will assume the lead role in guiding the client through the bankruptcy process. The consultant can focus his or her attention on operations and developing a plan for confirmation. The diagnostic process remains the means of determining the causes of prior failure and in developing a course for improving performance. Implementation issues may be less frenetic, helped by the automatic stay, and by the well-defined structure of any cash collateral order or debtor-in-possession financing agreement. The consultant offers a reality check—measuring the risks involved in any future plan. The forecasts are important tools to be used in negotiating creditor plans. Aggressive expectations often lead to plans that end in default or a loss to the client and all related parties.

It Takes Some Patience

The case does not end at the time of plan confirmation or upon agreement among the parties in an out-of-court restructuring. The professional team has much to gain if it continues to support the client through the full course of the operating restructuring to ensure that stability has been achieved and that recovery is being built upon a sound foundation. The process is often slow and laden with fits and starts. There is no quick answer. Recovery is not built upon one new customer or one new product. It is the summation of change in the culture of the enterprise, its tolerance of risk, the skills of its leadership and the soundness of its strategy.


The members of the professional team should not wander too far. The engagement can be considered successful if cash flow has been stabilized, customers are being serviced, creditors are receiving payments on a timely basis, and the emotional crisis has passed.

Copyright 1996 by The American Law Institute. Reprinted with the permission of The Practical Lawyer.

Gary Brooks CTP, CMC
Chairman and CEO
Allomet Partners, Ltd.

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