Turnaround Management: Steps to turn a company around

Turnaround Management:

Few decisions test a management team as much as admitting that the company has stopped working the way it should. The decline is rarely a sudden accident: it is the result of months —sometimes years— of ignored warning signs, tightening margins and cash that keeps getting squeezed. Restrictive interest rates, volatile supply chains, accumulated cost inflation and technological disruption have, on top of that, eroded the margin of safety in almost every sector. Turnaround management is precisely the discipline that turns that uncomfortable diagnosis into a plan of action.

In this article we discuss what a turnaround really is, how to tell it apart from neighbouring concepts, what phases an orderly process follows, which levers —financial and operational— management has at its disposal, and what legal and liability implications it carries. And we do so with an eye on the Spanish reality: an SME or family-owned business in the mid-market facing a crisis under a legal framework —Law 16/2022— that today allows earlier and better action than ever before.

What Turnaround Management Is (and What It Is Not)

Turnaround management is the structured process of taking a company in difficulty and transforming it to bring it back to a competitive and financially sustainable position. The key word is transformation: it is not enough to cut costs or renegotiate a maturity; the point is to realign strategy, operations, the commercial structure and the balance sheet in a coordinated way and under strong time pressure.

An essential nuance: a turnaround is aimed at viable but deteriorated companies. Businesses with a healthy core —a product in demand, a customer base, real know-how— whose track record of results, market share or cash generation has degraded to the point of threatening their survival. If the business is not viable under any reasonable scenario, we are no longer talking about a turnaround, but about an orderly liquidation.

A turnaround is not the same as corporate transformation

A turnaround should not be confused with transformation or corporate renewal programmes.

• Transformation applies to financially stable companies that, despite a slight drift or a slowdown in mature markets, enjoy solvency and liquidity headroom; its horizon is broad and its goal is to revive growth.
• A turnaround, by contrast, is triggered when there is substantial deterioration in the fundamentals or a liquidity crisis that threatens continuity as a going concern. Here time is the scarcest resource: the inertia of a company in difficulty is downward and value-destructive, so it demands surgical, immediate measures rather than the unhurried consensus of the good times.

And as opposed to other terms often used as synonyms:

• Turnaround: an integral transformation (strategic, operational, commercial and financial). It is the umbrella that encompasses all the other tools.
• Restructuring: the redesign of a specific dimension —financial (balance sheet, debt, capital) or operational (processes, headcount, portfolio)—. A lever within the turnaround, not the whole of it.
• Workout: the out-of-court, voluntary renegotiation of debt with creditors to avoid insolvency proceedings. Confidentiality and flexibility in exchange for less legal certainty against dissenting creditors.
• Liquidation: the cessation of activity and the orderly realisation of assets. It is the outcome when the company is not viable, and sometimes the optimal decision.

The difference is not merely semantic: a successful turnaround preserves jobs and value that a liquidation destroys. When the operating business is healthy but the problem lies in the balance sheet, the way out is not to sell or liquidate, but to refinance and reorganise. We cover this in our analysis of the options for restructuring in a corporate crisis.

The Decline Curve: From Strategic Crisis to the Zone of Insolvency

Corporate crises are rarely sudden. They follow a sequential and fairly predictable path —the decline curve— that boards which fail to understand it mistake for bad luck, reacting late and attacking symptoms rather than causes.

Strategic crisis

The business model loses competitiveness: demand shifts, a disruptive technology breaks in, differentiation runs out, or the company cannot pass its cost increases on to the customer. Revenues still hold up through inertia, but the gross margin begins to compress in silence.

Operating and profitability crisis

EBITDA turns negative or becomes insufficient to absorb the fixed-cost structure and debt service. Here the levers are cost reduction and the improvement of the unit contribution margin.

Liquidity crisis

Working capital runs dry and the company cannot meet suppliers, banks and public authorities on time. This is the most dangerous phase. The golden rule is blunt: in a crisis, the priority is liquidity, not profitability. A company can report accounting profit and still die because it cannot pay a payroll.

The zone of insolvency

When enforceable liabilities exceed the real capacity to generate cash and the liquidation value of the assets, the company enters the zone of insolvency. This threshold is not only economic: it automatically activates severe corporate and legal risks for the governing body, as we will see later. These states have their legal counterpart in the Insolvency Act: probability of insolvency, imminent insolvency and actual insolvency.

The Leaky-Bucket Fallacy: Why Injecting Money Is Not Enough

One of the most frequent diagnostic errors among shareholders and managers is believing that a business crisis is fixed with money: more bank debt or a capital increase. It is a belief that ignores how financial statements actually work.

A company with structural operating losses and working-capital inefficiencies works like a bucket full of holes in its base. The holes are the contracts with a negative contribution margin, production waste, an oversized indirect-cost structure, recurring bad debts and the excess of slow-moving inventory.

Pouring water —injecting liquidity— into a leaky bucket does not fix the holes: it only increases the volume of water that is lost and artificially stretches the time until it empties. If fresh capital is contributed without first repairing unit profitability and the inefficiencies, the new financing creates no value: it is consumed financing losses, destroys more equity and worsens the creditors' position. That is why operational re-engineering must precede —or at least be synchronised with— any refinancing of the liabilities.

Warning Signs and Diagnosis: the Independent Business Review

Detecting the crisis early is the factor that grants the most room to manoeuvre. And it is not intuition: among companies that carry out a rigorous diagnosis at the outset, a majority achieve a successful turnaround; among those that do not, the success rate falls sharply. A rigorous diagnosis —separating the structural from the cyclical— almost doubles the odds of pulling through. The early-warning signs give quantitative alerts well before the first default:

• Deterioration of the contribution margin: the gap between sales and direct variable costs narrows, a sign of pricing problems or inefficient purchasing.
• Abnormal expansion of DSO: outstanding receivables grow, whether through a relaxation of commercial risk policy or a deterioration in customer solvency.
• Build-up of non-rotating inventory (DIO): stock that stalls, sometimes from overproducing to dilute theoretical fixed costs.
• Financing the long term with the short term: covering investments or structural deficits with credit lines and advances, breaking the balance-sheet equilibrium.
• Recurring breach of covenants: breaching the ratios agreed with the banks, which can trigger acceleration of the debt.

A particularly useful thermometer is the cash conversion cycle (CCC = DIO + DSO − DPO), which measures how many days the company takes to recover in cash every euro invested in its operations. Reducing the CCC frees up working capital at no financial cost: cutting the cycle from 60 to 40 days can release a third of the working capital trapped on the same level of sales. It is often the first source of cash in a turnaround.

The Independent Business Review (IBR)

In a refinancing, banks and debt funds do not decide on the basis of the company's internal budgets: they require an Independent Business Review, a viability audit prepared by an independent adviser. A solid IBR covers four fronts:

1. Normalisation of historical EBITDA: cleaning the income statement of personal expenses, non-recurring income and extraordinary adjustments to see the real, sustainable result of the core business.
2. Profitability by product, customer and channel: segmenting revenue to distinguish what creates value from what destroys cash.
3. Review of liabilities and their collateral: taking inventory of the financial debt and its security (mortgages, pledges, guarantees) and modelling the order of priority.
4. Stress testing of the projected model: subjecting the projections to adverse scenarios to quantify the maximum cash deficit and the genuinely sustainable level of debt.

The Roadmap: the Five Phases of a Turnaround Plan

Execution demands method and time discipline. Each phase is a prerequisite for the next. An indicative timeline:

• Phase 1 (weeks 1–4): crisis control and cash.
• Phase 2 (weeks 4–8): diagnosis and viability plan.
• Phase 3 (months 2–6): operational and working-capital restructuring.
• Phase 4 (months 3–9): financial and balance-sheet restructuring.
• Phase 5 (months 9–24): institutionalisation and growth.

Phase 1. Crisis control and stabilisation of liquidity

The priority is not theoretical profitability, but immediate survival. The core instrument is the 13-week cash flow (a rolling weekly forecast of certain collections and indispensable payments, with a variance analysis every week). It is accompanied by three measures: a Cash Committee (CEO, CFO/CRO, purchasing and operations) that approves every payment; the centralisation of group cash so that no subsidiary hoards liquidity while another company defaults; and the signing of standstill agreements with the banking pool, freezing amortisations for 60–90 days to open up negotiating space. It is also the moment for quick wins: accelerated collections and cuts to discretionary spending that generate cash and credibility.

Phase 2. Diagnosis and viability plan

Once cash is stabilised, the question is whether there is a rescuable core business. The profitability of each product, division and customer is assessed, and lines with a negative margin or that absorb disproportionate working capital are adjusted or wound down in an orderly manner. On that cleaned-up perimeter the five-year viability plan is built —with projected income statement, balance sheet and cash-flow statement— quantifying normalised EBITDA, the indispensable maintenance CAPEX and the free cash flow available for debt service. This is the piece the banks require in order to refinance: we set out that point in what banks expect to refinance a company's debt.

Phase 3. Operational and working-capital restructuring

The focus moves to processes. First, working-capital optimisation: tightening collection terms and automating the chasing of overdue invoices; the accelerated liquidation of obsolete stock to inject cash and free up space, with purchasing based on real demand; and rescheduling supplier maturities in exchange for volume and operational certainty. Second, a programme to reduce structural costs (renegotiating rents, energy, insurance and licences; eliminating duplications). Third, the divestment of non-strategic assets —idle plants, land, obsolete machinery— to fund the plan or cancel onerous debt.

Phase 4. Balance-sheet restructuring and refinancing

It is of little use to fix operations if the capital structure remains unbalanced. In this phase the liabilities are reconfigured to fit the new cash flow, with several tools:

• Reprofiling: extending the maturities of the senior debt and agreeing principal grace periods in the first two or three years of the plan.
• Sustainable and non-sustainable tranches: splitting the debt into a Tranche A (senior, amortisable out of operating cash flow) and a non-sustainable Tranche B, structured as subordinated debt, a participating loan, or with capitalisable interest (PIK) so that it does not drain short-term cash.
• Haircuts and capitalisation (debt-to-equity swap): when the liabilities exceed the enterprise value, negotiating partial write-offs or converting debt into equity to restore the balance-sheet equilibrium.
• Rescue financing: when traditional banks pull back, the entry of special-situations funds or private debt that provide liquidity or flexible working-capital lines.

When the problem lies in the balance sheet and not in the business, refinancing can prevent worse outcomes: we address this in refinancing companies in distress and in the analysis of poorly structured debt.

Phase 5. Institutionalisation and return to growth

With operations and the balance sheet cleaned up, the company must be shielded against relapse. Management dashboards and management information systems are put in place to monitor profitability by line and budget compliance on a weekly basis. In the family business, this is the moment to professionalise corporate governance: bring in independent directors with sector experience and clearly separate ownership from executive management. With the house in order, selective investment in digitalisation, product and expansion is reactivated wherever there is a competitive advantage.

Key Metrics: a Turnaround Is Run by the Numbers

Every decision —closing a line, requesting a haircut— must rest on standardised metrics. These are the ones that set the pulse, with indicative thresholds for the mid-market (they do not replace case-by-case analysis):

• Cash runway: the weeks of operation left at the current rate of cash burn before funds run out.
• DSCR (debt service coverage ratio): if it is below 1.0x, free cash flow does not cover the financial obligations and refinancing is inevitable.
• Leverage (net financial debt / EBITDA): in a high-rate environment, ratios above roughly 4.5–5x tend to compromise the stability of a mid-sized company.

Stakeholder Management: Negotiating Under Pressure

A turnaround is not just a spreadsheet; it is an exercise in leadership, diplomacy and the management of conflicting interests. Coordinating the players is what keeps the plan from stalling.

The banks: from the relationship manager to the work-out department

On defaults or serious covenant breaches, the file moves from the commercial relationship managers to the recoveries and restructuring departments (work-out), whose mandate is to maximise the recovery rate and minimise provisions. To negotiate with them constructively it helps to: provide contrasted, verifiable information through the IBR (any concealment destroys trust and precipitates the contentious route); treat the whole pool even-handedly, with no hidden preferential payments that fracture the banking syndicate; and demonstrate the shareholders' commitment, because the banks only accept grace periods, haircuts or subordinations if the owners put something of their own on the table —fresh equity, waiver of dividends, or subordination of their shareholder loans.

Suppliers: segment so as not to halt production

A break in a key supply paralyses the plant and nullifies any recovery. Trade creditors must be segmented into critical or non-substitutable —integrated as a priority into the cash-control calendar, sometimes on cash-on-delivery terms— and ordinary or substitutable, with whom overdue balances can be deferred without stopping operations.

Talent: retain those who execute the plan

Uncertainty triggers the flight of key talent just when it is most needed. Transparent internal communication about the situation and the plan, and specific retention plans for technical profiles, middle managers and operations heads whose continuity is indispensable.

The family business: the emotional dimension

In the mid-market family business, personal history is intertwined with the company, and that makes drastic decisions harder —closing a founding subsidiary, letting go of long-serving staff, or opening up the capital. The adviser acts as an objective technical mediator: bringing rigour and clarity, facilitating family agreements, professionalising governance and helping protect the owners' personal assets against corporate contingencies.

The Spanish Legal Framework: Pre-Insolvency and Director Liability

Law 16/2022 reformed the Consolidated Insolvency Act (TRLC) to transpose the EU Directive on preventive restructuring frameworks, giving viable companies the tools to resolve the crisis before formal insolvency.

Restructuring plans

These are the central mechanism for steering the situation without formal insolvency proceedings. The route opens in three states: probability of insolvency (an objective forecast of being unable to meet obligations within two years), imminent insolvency (within three months) and actual insolvency. The notice of the opening of negotiations (art. 585 TRLC) activates an automatic three-month shield, extendable, which stays enforcement against strategic assets and prevents essential suppliers from terminating contracts on financial grounds. Creditors are grouped into classes by homogeneous economic interest, and the plan can be sanctioned and imposed on dissenting classes through the cross-class cram-down, always respecting the best-interest-of-creditors test: no one may end up worse off than in a liquidation.

Fiduciary duties and the board's liability

This is an angle many directors underestimate. On entering the zone of insolvency, the focus of fiduciary duties shifts: the priority loyalty is no longer solely to shareholders and moves to the preservation of the estate for the satisfaction of creditors.

Article 5 of the TRLC requires filing for insolvency within two months of becoming aware —or having had reason to be aware— of the actual insolvency, unless the notice of negotiations has been filed. Missing those deadlines, or taking negligent decisions —selling assets below market value, making unjustified preferential payments— can lead to the insolvency being classified as culpable and to directors being held personally liable for the insolvency shortfall. That is why the independent adviser does not merely design the plan: they document the economic rationale of each decision, shielding the board's liability.

Sale of the productive unit and the insolvency pre-pack

When the company carries an unsustainable legacy of liabilities but retains viable business lines, the productive unit can be sold as a going concern. The pre-pack, with an expert appointed by the court, allows the purchase offer to be prepared and audited before the insolvency is declared; once declared, the transfer is executed immediately, free of the prior corporate debt (except the labour and social-security obligations of the transferred contracts). In this way the healthy business survives under the going concern principle, preserving activity and jobs. It is the natural terrain of an M&A boutique, as we explain in selling companies in crisis and distressed M&A.

Success and Failure Factors

Turnarounds are hard, and a significant share fall short of their objectives. The difference usually comes down to a handful of factors.

What works

• Anticipation: the room to manoeuvre is inversely proportional to the time elapsed since the first symptoms. Overcoming the team's own denial bias is the first step.
• The primacy of cash over accounting profit: the result is a normative estimate; cash is an inescapable reality.
• Restructuring operations and the balance sheet inseparably: deferring debt without correcting margins only postpones the collapse.
• Decisive and, often, renewed leadership; and an obsessive focus on the quick wins of the first few weeks.

What derails a turnaround

• Reacting late, when there are no degrees of freedom left.
• Relying only on pouring money into the leaky bucket, without repairing operations.
• Cutting without a strategy: austerity without repositioning.
• Losing key talent during the process; a company that loses it rarely recovers.

An Illustrative Mid-Market Family Business Case

Consider a second-generation family industrial company, with stable sales but declining margins due to energy and labour costs. It begins to max out its credit lines and delay payments: a profitability crisis sliding towards liquidity. The diagnosis reveals a cash cycle inflated by excess inventory and a high DSO, and two product lines that destroy margin.

The roadmap: first, a 13-week cash flow, a payments committee and quick wins on collections; second, the orderly closure of the unprofitable lines and a focus on the core; third, refinancing with extended maturities and sustainable/non-sustainable tranches, supported by a credible viability plan and an IBR; and, if any creditor blocks it, the notice of the opening of negotiations and a court-sanctioned restructuring plan with an expert. The expected outcome: preserving the majority of jobs and the continuity of the family business, as opposed to the alternative of liquidation.

Practical Recommendations by Stage

Alert stage

• Install a financial dashboard. Monitor the contribution margin, EBITDA, net debt/EBITDA, DSCR, covenants and the cash cycle (DSO, DIO, DPO).
• At the first sign of cash strain, implement the 13-week cash flow straight away. It is the first measure, before any structural decision.

Declared-crisis stage

• Surround yourself with specialists. An independent financial adviser and, depending on severity, a CRO. Commission an IBR if you are going to negotiate with the banks.
• Repair the bucket before filling it. Fix margins and working capital before or at the same time as refinancing; do not finance losses.
• Prioritise cash over accounting profit and execute quick wins in the first 100 days.

Formal-restructuring stage

• Activate the pre-insolvency shield (art. 585 TRLC) to gain three months of protected negotiation.
• Document the rationale of every decision. It protects the estate and the board's liability against a culpable classification.
• Act sooner, not later. As soon as insolvency is foreseeable within two years, the preventive route is already available.

Conclusion

Turning a company around is not a matter of luck or of holding on until the cycle changes. It is a process that rewards anticipation, numerical rigour, operational execution and negotiating skill. Those who watch the warning signs, prioritise cash, repair operations before refinancing and use the tools of the reformed Insolvency Act in time have a far greater chance of keeping their company —and their jobs— than those who wait for the liquidity crisis to make the decisions for them.

At Maraz Corporate Finance we support mid-market companies and shareholders through restructuring and refinancing processes, from the diagnosis and the viability plan to the negotiation with the banks and, where necessary, the solution in the market. If your company is facing a complex situation, it is best to act as early as possible: you can explore the approach further in our restructuring and debt refinancing service.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

FAQs about Turnaround Management

What is the difference between a turnaround and restructuring?

A turnaround is the integral transformation of a company in crisis —strategic, operational, commercial and financial— to bring it back to profitability. Restructuring is one of its levers: the redesign of a specific dimension, usually the balance sheet or operations. Every turnaround includes restructuring, but not every restructuring is a turnaround.

Why is it not enough to inject money into a company in crisis?

Because a company with structural operating losses works like a leaky bucket: pouring in liquidity without first fixing the negative margins, the excess inventory or the oversized costs only increases the water that is lost. The fresh capital is consumed financing losses and destroys more equity. Operational re-engineering must precede or be synchronised with the refinancing.

What is the 13-week cash flow and why is it so important?

It is a rolling weekly forecast of collections and payments for the coming quarter, prepared on a direct basis, with a variance analysis every week. It is the standard in a crisis because it anticipates liquidity strains with time to react and shows banks and investors that management controls the cash. It is usually the first thing creditors ask for.

What is an Independent Business Review (IBR)?

An independent viability audit that banks and funds require before refinancing. It normalises historical EBITDA, analyses profitability by product and customer, reviews the liabilities and their collateral, and subjects the projections to stress scenarios to determine the genuinely sustainable level of debt.

What liability does the director of an insolvent company assume?

On entering the zone of insolvency, their duties turn towards preserving the estate for the creditors. Article 5 of the TRLC requires filing for insolvency within two months of becoming aware of the actual insolvency, unless the opening of pre-insolvency negotiations is notified. Missing deadlines or taking negligent decisions can lead to a culpable classification and to personal patrimonial liability.

What is the insolvency pre-pack?

A mechanism that allows the sale of the viable productive unit to be prepared and audited, with an expert appointed by the court, before the insolvency is declared. Once declared, the transfer is executed immediately, free of the prior corporate debt (except the transferred labour obligations), preserving the activity, jobs and going-concern value.

When should a company resort to pre-insolvency?

As soon as it is objectively foreseeable that it will be unable to meet its obligations over the next two years (probability of insolvency), it can activate the notice of the opening of negotiations under article 585 TRLC. It is not advisable to wait for actual insolvency, which additionally triggers the duty to file for insolvency within two months.