Revenue and EBITDA are down, the cash runway is short, and time is of the essence. So in a turnaround, set your sights on becoming a start-up.

As turnaround professionals, we often see a pattern that most will see only once. Like the five stages of grief (denial, anger, bargaining, depression and acceptance), turnarounds unfold, sometimes obvious to observers but not entirely clear to those in the middle of the vortex. During a turnaround, most senior leaders go through five stages, too (denial, bargaining, anger, decomposition and acceleration). Like the stages of grief, the process begins with senior leaders being in denial.

Denial: “I Know It Looks Bad, but It Won’t Last”

Denial shows up in unrealistic sales forecasts (hockey stick or simply not grounded in past performance), lack of willingness to make cost reductions even in the face of declining revenues (“It won’t last.”), and an unwillingness to address poor employee performance (“It’s not their fault.”). We recently worked with a client who had such optimism in his business that he described it as being stronger than at any time in the previous eight years. Cash-flow analysis, however, showed the company running out of cash in a few short months with no access in place for additional funding.

Budget deficits abound and past promises have been broken, irrevocably. If governments honestly valued their assets and liabilities, most would be insolvent. In the not-too-distant future, delivery of essential services will require a new mix of “skill and will” from our elected leaders and public-sector employees. Changes in compensation structure, job tenure, internships and fellowships, and secondments may provide solutions.

As citizens, you and I face a conundrum. Do we work to solve the problems left by past generations, or do we focus on avoiding problems that we would otherwise leave to future generations? 

According to the M&A Advisor, “often failures occur because of … the inability to retain key talent. So you need to make sure … the vision is aligned before you do the deal.” Mackinac Partners counsels its clients to spend significant up-front effort developing and negotiating an appropriate integration plan, including a transition services agreement as a key component. This article highlights buyer and seller concerns — subsequent to the closing of a §363 sale — relating to human resource matters from the unique perspective of a single restructuring firm representing both sides of the same transaction.

THE SITUATION

Diamond Resorts acquired substantially all of the operating assets of Pacific Monarch Resorts (PMR) through a § 363 sale process (C.D. Cal., 11-24720). As a turnaround and restructuring firm with significant experience in the hospitality and leisure industry, Mackinac was involved at both companies — as CRO and financial advisor for PMR, and as CFO and M&A advisor for Diamond. In an unorthodox twist (details to be the subject of a future article!), professionals from Mackinac were retained to represent both buyer and seller in this court-approved $50 million transaction.