Establishing turnaround potential before commencement of formal turnaround proceedings

Abstract

Background: Determining the turnaround potential of a firm has plagued academia and practice. Existing failure prediction tools yield limited insight into turnaround potential and are heavily dependent on financial metrics. This framework made a valuable contribution to research in this field as it added a new perspective for decision-making purposes.

Aim: Practitioners, judges or directors require a quick, efficient framework to aid in developing a reliable opinion on the likelihood of liquidation of a firm intending to commence with reorganisation proceedings. The aim is to speed up the liquidation of economically inefficient firms that attempt to seek shelter in reorganisation.

Setting: The study was conducted in South Africa and made use of experts in the field of turnaround management.

Methods: The indicators were derived from a strong and widely used managerial tool known as the Delphi method. The relative importance of each element was allocated using a powerful mathematical model known as the analytic hierarchy process (AHP).

Results: This study identified key indicators for the nine liabilities with accompanied weights of relative importance for a likelihood of liquidation framework. Anchor scale values are proposed for each indicator to assist in its application. The framework is timely in its application, considers the availability of accurate data, inexpensive to implement and easy to interpret.

Conclusion: The likelihood of liquidation framework was developed to include a broader spectrum of liabilities to assist in deciding the viability of recovery of a firm in reorganisation.