Restructuring a Financially Troubled Company


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Five Key Steps to Success

Not all restructuring efforts are created equal.  When a financially troubled company recognizes that dramatic change is required to ensure survival, a clear focus on these five elements will lead to a successful restructuring effort.

By the time a company finds itself in trouble, several avoidable missteps have occurred that effectively paralyze the company and jeopardize its survival.  Fortunately, many of these effects turn out to be reversible; provided, of course, that a solid restructuring plan is developed and employed in a decisive manner.

A case in point is the typical high growth company that rapidly expands based on success in its core competency.  Many of these businesses seek growth through acquisition, both horizontally and vertically, and in doing so begin to tread on unfamiliar ground—growing too large, too fast until a change in the economic cycle or industry reduces volume, sales wane, and margins decline resulting in operating losses and negative cash flow.  Soon, thereafter, cash resources dissipate, suppliers get stretched, bank covenants are violated and the company moves dangerously close to defaulting on its loans.

  1. It is critical at that point for the financial advisor to communicate with management and the Board that drastic, immediate action is required to ensure the company’s existence.   What the company needs most is a crisis management plan that addresses five key steps that, if properly implemented, will provide the best opportunity for a successful turnaround.
  • Immediately develop a realistic cash budget that is updated on a timely basis and that accurately forecasts the company’s cash position and needs at all times;
  • Communicate, Communicate, Communicate – Open a dialog with all of the company’s constituencies and stakeholders to instill confidence in the restructuring effort;
  • Identify operating expenses that can be eliminated and/or materially reduced;
  • Identify and focus on core competencies and operations and develop a plan to dispose of the non-core or unprofitable business units;
  • Develop an ideal restructuring blueprint that assesses the company’s debt capacity under worst case operating conditions, which establishes new, sustainable credit parameters that ensure future operating viability.

Once progress has been made on these five key steps, it’s time to focus on implementation.  Again, communication plays the key role when attempting to persuade stakeholders on the wisdom and viability of the restructuring plan.  Management and its financial advisor need to convey their vision to constituents and provide a plausible pathway for recovery and future growth.  Often, though, implementing the plan involves more than simply creating and communicating it.  The plan’s viability is usually dependent upon an infusion of fresh capital.  A bridge loan or debtor-in-possession (DIP) financing (in the case of a Chapter 11) is often required to successfully move from concept to reality.  In this case, it is critical to identify collateral early and be able demonstrate how other creditors will benefit from the new priority borrowing.

As the company stabilizes, exits non-core operations, re-establishes and grows its core business, exchanges debt for equity under a plan–ultimately returning to solvency and creating new value–it is important to draw on the skills of a talented financial restructuring advisor who possesses a combination of experience and restructuring knowledge, which will prove critical to the success of the process.  After the restructuring is complete, the Board may find it advantageous to hire new management to take the reins and guide the redesigned company forward according to its new business plan.

In the final analysis, the value of a restructuring advisor is measured from the perspective of the various stakeholders–customers, employees, creditors and shareholders—many of whom will directly benefit from a revitalized company that is economically sound and operationally viable, which will be most attainable by focusing on the five key steps to success identified above.

During challenging times, it becomes ever more important to seek the advice of an experienced team that can provide insightful and practical advice while building consensus among competing interests to ensure acceptance of the restructuring plan. That’s why businesses turn to VALCOR. We are uniquely qualified to assist clients with their financial restructuring needs by providing comprehensive solutions based on experience and a reputation for integrity and independence.

Ray Clark is the Senior Managing Director of VALCOR Consulting, LLC, an independent financial advisory that provides restructuring, transactional and valuation services to middle-market companies. VALCOR has offices in Orange County, CA, San Francisco, CA and Phoenix, AZ. He can be contacted at (949) 644-8022 or by email at Rclark@valcoronline.com.

Learn more about VALCOR Consulting at:
VALCOR Online

Article Source:http://www.articlesbase.com/accounting-articles/restructuring-a-financially-troubled-company-938481.html

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This entry was posted on Tuesday, June 16th, 2009 at 2:25 pm and is filed under accounting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Restructuring a Financially Troubled Company”

  1. gmarris Says:
    November 19th, 2009 at 2:32 am

    gmarris…

    …

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