The role of the CFO in a turnaround can often be the ‘make or break’ hire for a business struggling to stay afloat.
While most finance leaders will experience this at some point in their careers, Aaron Ames has made a career of parachuting into distressed situations and leading comprehensive change.
We spoke to Aaron about what leadership lessons he has learned, what private equity cares about most, and why the CFO needs to be the ‘eye of the storm’.
RW: Aaron, how did your first turnaround CFO opportunity come around?
AA: I became the CFO of a rather large company that had been acquired by a private equity group. The challenge was that there was a significant amount of debt associated with the acquisition, so we had to work through a number of cost-cutting measures. In order to turn things around, we needed to re-evaluate the business and operating model in order to achieve synergies.
Then, I ended up working with a mining company in 2008 and 2009, building a mine in northern Chile. The copper price went from $4.25 to something like $1.25, which created a number of challenges, since the cost to get the copper out of the ground was about $1.75.
While I wasn’t brought in for turnaround, I learned a lot about it between these two situations.
RW: Which soft skills have you developed that you feel are critical to be successful as a CFO in a turnaround?
AA: In a distressed situation, you often spend a lot of your time with vendors, banks, company employees and management and so it is critical to be able to engender trust with all stakeholders early on. I often get on the phone to vendors and banks as soon as possible, and tell them if there is ever a problem to call me on my cell number. They rarely do, but it helps build trust if they feel they have access. Ignoring or avoiding them can often create more issues down the road.
It’s also critical to be calm, assured and take control. A CFO mentor once said “When there’s a storm going on, you need to be the eye of the storm”. Your employees need to see that you’re in charge, tranquil and patiently working through issues one-by-one in an organized fashion.
Lastly, you need to be a good listener. Talking fifty percent less and listening more is a great way to quickly get to the heart of any issue. I spend a lot of time asking what people think - whether it’s someone who’s working the line, whether it’s someone who’s in middle or senior management, because everyone has a different perspective on what’s going well and what’s not going so well.
RW: When you step into a distressed situation is there a sense of denial about where things are at? If so, how do you bring them back to reality?
AA: There’s denial in almost every situation. To a certain extent, it is human nature to try and hide the severity of problems and make things look a bit better than they are. But avoiding the problem just makes things worse than if you’d dealt with it head-on.
There are no easy fixes and it often requires spending a lot of time getting to the truth - as the ‘truth will set you free’. It’s messy to roll up your sleeves and go back to clean up the original source of data/financials, but in some cases, it’s the only way to move forward.
We once found millions of dollars by going through the contracts of receivables that people owed us – because we were willing to go back to the original source documents. As another example, I went to one company who was in the middle of implementing an ERP system which was costing a lot of money and was likely to fail because the underlying data was inaccurate. Sometimes you have to recognize where you are eroding value and have the courage to be able to end these ‘cash-burning’ projects.
RW: You said that you’ve never met a bad team, but you’ve seen poor leaders. Can you elaborate?
AA: Leaders have to empower their teams to be successful. You need to set healthy parameters for your people to work within, and when you don’t you’ve likely taken all the responsibility and decision-making power. You’re likely slowing things down because people are coming to you all the time. You want your team to come to you when there are difficult situations, but if you want to grow and develop employees, you have to allow them to make some decisions. Being a leader is letting your team work through things and bringing you issues which really require your attention, like when things are spectacularly bad or good.
What I find is once you start empowering people and recognizing their successes, they learn what they should do and begin to grow and then, all of a sudden, you have a wonderful team of people with the authority and power to make good decisions, and to approach the truth. And as your employees grow, you can work yourself out of a job because you have created that skilled team who can do the job going forward.
RW: You’ve worked with different types of private equity. Which approaches have been the most successful?
AA: I think that the most important thing with private equity firms is to build trust. They don’t want you calling them with every situation and every problem, because they don’t have time. They’re dealing with multiple portfolio companies, and a challenged portfolio company may not be a particularly important part of their portfolio anymore. All the same, they want it to end well. I try to put myself in their shoes and empathize with this viewpoint.
I tend to think about the business as an owner when I’ve been imparted with enough trust to make the key business decisions. I act the way I would do with my own assets or investments. When your stakeholders are assured that you have their best interests top-of-mind and know how you’re going to react, that’s the foundation for success. I also know my parameters and I know where to come back to them for guidance.
It’s also important to find out which metrics will determine if your business is improving. It could be this year’s sales versus last year’s sales, versus the past three years; it could be the margin rate or an improvement in deal flow. In any case, it’s the metrics that will reveal if your business is operating better this year versus last year.
Private equity IS very focused on capital allocation. I’m spending 10% or 20% of my time on capital allocation to make sure that where we’re spending the money that is key to our liquidity and to our success. I also spend time making sure that we cut back in the places where we don’t need to allocate capital, because when you’re in trouble and you have liquidity problems, that capital is worth a lot of money at a very high rate of interest, because you need it and when you need liquidity, it’s usually hard to find.
RW: What advice would you give to a CFO who is entering into a turnaround situation, when they’ve traditionally been in more stable environments?
AA: First, you have to figure out where the cash is going. Sometimes, the EBITDA or the numbers don’t necessarily translate into liquidity, for whatever contractual reasons there are. I learned this from a banker long ago.
Also, when you go into the situation, listen a lot. Listen twice as much as you talk because you have to understand the dynamics, especially if the industry is new to you. If you don’t have 10,000-hours in that industry, you should get yourself very close to someone who really knows the business and who will have a good understanding where you can push and what you can’t push on.
Lastly, its important to not jump to assumptions, to ask lots of questions, and find out why it’s being done that way. I don’t think people are stupid and there’s often a reason why things are being done a certain way.
Most MNCs cannot afford to ignore the Chinese market, but what exactly are the proven leadership...