Best Practices for Turnaround Management in the Mexico Market
In this, our fourth in a series of articles focused on the distinct considerations associated with conducting business in Mexico, we discuss best practices for businesses with turnaround needs in the Mexico market.
Business distress knows no borders. In fact, it’s as global as the markets in which businesses from around the world operate. Just as a chain is only as strong as its weakest link, a global company can find its overall health impacted by the performance of its overseas subsidiaries, including those located in Mexico. These subsidiaries often rely heavily on intercompany trading among other complex dynamics, making their success crucial to the parent company’s well-being.
Companies competing on the world stage are always on the move and are constantly evolving. In essence, they’re either on their way up or down an escalator that never stops. If management doesn’t act with speed and precision, the downward escalator can take a business from underperformance to full-blown liquidity crisis in short order. With the window for action often surprisingly narrow, the need for agility and foresight among today’s businesses and their leaders is absolutely paramount.
Turnaround management strategies are all about being proactive, rather than reactive to challenges, anticipating them ahead of time and having a plan in place. Doing so requires understanding a local market’s unique challenges and opportunities and weaving them into a global strategy that protects a business and keeps its momentum moving in the right direction.
In Mexico, as in other global markets, implementing effective turnaround strategies is about acting decisively to steer the company back to health and growth. It’s about making tough calls that can include streamlining operations, reassessing market strategies, or even restructuring finances — all aimed at stabilizing the business and setting it up for a strong future.
KEY COMPONENTS OF THE TURNAROUND PROCESS
Asset Analysis (ID and Appraisals)
Imagine walking into a room blindfolded, trying to figure out what’s in there. That’s what jumping into a turnaround strategy without having conducted a thorough asset analysis would feel like. It’s essential to know what assets you’re dealing with, their value, and their monetization potential. With this information, the lights go on and a business can see everything it’s dealing with clearly. There may be some clutter and some worthless antiques alongside numerous valuable possessions in that room but if you don’t do your asset analysis upfront, you may not like what you find when it’s too late to do anything about it. Why? Because this step isn’t just about knowing your assets’ worth; it’s about strategic insight. It informs decisions on what to keep, what to sell, and where to focus your revitalization efforts. It’s foundational, setting the stage for the moves you can and should make next.
Liquidity Enhancement
Cash flow is king, and in the thick of a turnaround, enhancing liquidity is akin to finding water in the desert. It’s not only about making every drop count, but also about finding more sources before you run out. This phase is essentially focused on squeezing liquidity from every possible asset — through sales, refinancing, or other creative solutions — while also keeping operations running smoothly. It’s about giving the business the lifeline it needs to push through to the next phase of the strategy.
Capital for Restructuring and Growth
This is where companies build a bridge to the future. It’s not just about survival. It’s about positioning for growth. Accessing capital for restructuring can mean a range of actions, from refinancing existing debt under more favorable terms to bringing in new financing for investment in growth areas. This capital isn’t just a buffer; it’s a catalyst for transformation, enabling a company to invest in new technologies, markets, or operations that align with its strategic vision for its future and drive its business ahead.
Strategic Advisory
Strategic Advisory is the compass in a turnaround journey. When businesses have a seasoned guide by their side, they receive insights, gain strategic perspective, and discover pathways they otherwise may not have seen. Strategic advisors with experience, deep roots and connections in a given market, can help navigate the complexities of restructuring and identify the most effective strategies for stabilization and growth in a given country or region. This can include everything from operational improvements and market repositioning to advice on mergers or acquisitions as part of the turnaround strategy. Tying these and other elements together serves to ensure that actions taken are not just reactive but are steps towards a business’ sustainable and thriving future.
A DEEPER DIVE
Diagnosing Trouble
When diagnosing trouble in the early stages of a turnaround, understanding what assets a company holds, their condition, and their true value is critical. This is where comprehensive asset analysis and management becomes a pivotal tool for deeply understanding assets within the context of the local market dynamics, regulatory environments, and operational challenges that are specific to Mexico.
Mexico presents a unique blend of opportunities and complexities. From regulatory compliance, which includes navigating the intricacies of Mexican tax laws and labor regulations, to understanding local market conditions, currency fluctuation and the implications it has on asset value over time. These elements make it essential for companies to have a robust system for managing their assets comprehensively.
When managing a liquidity crisis, the insights gained from comprehensive asset management become invaluable. Knowing exactly what assets are at your disposal and their liquidation value, can provide strategic options for enhancing liquidity — such as asset sales or restructuring asset portfolios to better serve the company’s turnaround strategy.
And when assessing business viability, the detailed analysis provided by comprehensive asset management can offer a clear picture of the business’s breakup value versus its value as a going concern. This insight is crucial for making informed decisions about the company’s future direction, whether it involves pursuing a turnaround or considering divestment.
Comprehensive asset management plays a crucial role throughout the turnaround process, aiding in the stabilization and restructuring phases by ensuring assets are optimized and aligned with the strategic goals of the business. It helps identify non-core or underperforming assets that can be divested to free up resources for investment in growth areas, thereby supporting the development of a business restructuring plan and its ultimate execution. And when “New Normal” operations get underway, effective asset management further ensures that the company continues to monitor and optimize its asset portfolio to safeguard against future crises and deliver sustainable operations.
Managing Liquidity
Ensuring the company has the cash flow necessary to keep operations running while the business works on instituting more strategic, long-term changes is critical. Think of it as giving a patient in critical condition a blood transfusion. You’re buying time, but you’re also stabilizing the patient for essential surgery. Much like a patient without the right treatment or medicine, a lack of liquidity can accelerate a company’s decline from underperformance into a full-blown crisis.
Enhancing liquidity can involve several strategies, such as renegotiating payment terms with suppliers, accelerating receivables collections, or even selling off non-core assets quickly to generate cash. It is important to point out here that as liquidity is enhanced in such ways, a business also gathers critical data and insights about the its own operations as a byproduct. Understandably, this added perspective about which assets are truly valuable and generating cash, and what actions or operations are leading to the greatest financial drains for the business, can be of great value during restructuring planning.
Lastly here, liquidity is about more than just about surviving an immediate crisis. As a company moves through its business restructuring efforts and looks toward implementing “new normal” operations, the liquidity that has been secured becomes, in essence, the war chest for implementing strategic change. It’s what funds the pivot in business models, supports investment in new technologies or markets, and enables the company to reposition itself competitively. And it’s the bridge that connects the emergency actions needed to stop a company’s “bleeding” via the strategic moves required for long-term health. It’s not just about finding money to pay the next set of bills; it’s about stabilizing the company so that it can undergo the necessary transformation and emerge stronger.
Securing Capital
When navigating through a turnaround, securing the right type and amount of capital is pivotal. Here, it’s not just about finding any source of funds; it’s about finding the right fit for the company’s specific needs and growth plans. In the context of Mexico, this means understanding both the local financial landscape and how it intersects with global financial markets.
In approaching capital for restructuring, it’s crucial to start with a clear, realistic assessment of the company’s financial health, future prospects and long-term viability — identifying the core areas that require investment to turn the business around. With a strategic plan in place, the approach to securing capital should be multi-faceted. This can range from traditional bank loans and lines of credit to financing solutions such as asset-based lending, where the company’s assets serve as collateral for loans. Given Mexico’s dynamic economic environment, exploring local financing options, including government grants or incentives for foreign investment, can also provide unique opportunities for capital.
For growth capital, the emphasis shifts towards funding not just survival, but needed expansion. This might mean investing in new technologies, entering new markets, or scaling operations. Here, equity financing becomes an attractive option, offering a way to inject fresh capital into the business without the immediate burden of debt repayment. Importantly, leveraging the company’s projected growth, without unrealistically forecasting, can attract investors looking for opportunities in Mexico’s burgeoning market sectors. Strategic partnerships or joint ventures with local entities can also serve as a source of capital and local expertise that aligns with planned new normal operations aimed at sustainable growth and operational stability.
Throughout these efforts, the strategic, judicious use of capital should be the overarching objective. It’s about ensuring that every peso invested moves the company closer to its turnaround and growth goals. This means maintaining a laser focus on ROI from the outset, continuously monitoring the impact of investments, and being willing to adjust strategies as the business evolves and market conditions change.
Ultimately, approaching capital for restructuring and growth in Mexico is a balancing act. It requires a keen understanding of the business’s needs, a deep dive into the available financial instruments and partners, and a strategic plan that aligns capital utilization with the company’s long-term vision. It’s a critical step in turning the tide and setting the stage for a successful future in one of Latin America’s most vibrant economies.
CONCLUDING THOUGHTS
To help ensure successful restructuring efforts, companies operating in Mexico would be well advised to seek out a partner or partners with both local expertise and global knowledge/reach. While the local connection provides invaluable insights into critical areas such as the regulatory landscape, market trends, and hidden challenges, global experience and associated best practices can enhance the type of strategic decision making and executional excellence we have discussed in this article.
At Hilco Global Mexico, we serve as such a strategic advisor to help businesses involved in turnaround and restructuring efforts, guiding them on a path toward the most optimal outcomes. We encourage you to reach out to our Mexico-based team with any questions pertaining to the topics addressed in this article or for assistance you with a current or evolving situation your business may now be facing. We are here to help. Estamos aquí para ayudar.
