Sep
05
2008
Turnaround alternatives
Posted by Dr. Earl R. Smith II in Questions, tags: advisor, advisory board, board of directors, CEO, chairman, coaching, consulting, director, Leadership, leadership assessment, leadership development, leadership styles, Life Coaching, management assessment, Personal Growth, spiritualityOne of my clients is in the process of orchestrating a turnaround. They are well on the path but want to avoid the necessity of a Chapter 11 filing. What strategies have you found that are good alternatives to a bankruptcy filing?
Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in leadership development and advising management on leadership styles which make them more effective leaders. He also works as an executive and/or life coach in the areas of personal growth and spirituality.
Entries (RSS)
Aaron Miesse wrote:
I have had good success with reaching out to the relationships the company has with providers and customers. The first thing is to find those stakeholders in the company that through telling the new story, feel a sense of commitment to the idea and its growth. They may be willing to ease up on payables for a short term or extend then 15,30,45 more days or customers may be willing to undertake some short term price fluctuations if they understand that it will benefit them tomorrow.
The same occurs with employees. I tend to see regularly that simply asking and reaching out to those that are crucial to success, that they are willing to help. The closed-door secretive turnarounds are harder for that reason.
Finally the banks or creditors are where taking this position reaps results. They don’t want bankruptcy and again preparing a solid plan with a solid short, medium, long term contingency and result proposal will go a long way in getting some badly needed easing by the creditors.
Create that sense of buy in and success is easy.
Best of success!
A
Jacob Kaldenbaugh wrote:
While there aren’t many details to your question, in general there are a couple of alternatives to filing bankruptcy, but they tend to have a low probability of success. First, as the previous poster mentioned, is working with creditors to agree to a delayed payment schedule. If you believe that the company’s cash-flows will catch up to the credit payment obligations in the reasonable future, then explaining the situation with a creditor and offering to pay a higher interest or a fee in return for their forebearance is one option.
The second option is find a capital injection. If the nature of the problem is truly a timing issue (cash payments required in the short term can eventually be met in the mid-term) and the business is attractive in the long-term, then someone may be interested in taking an ownership stake or providing high-risk financing at a very high rate. On the equity side, they will likely force a very low valuation which will result in a substantial change in the ownership structure (to your client’s disadvantage).
In general, I find that when this type of question is asked, it’s usually too late. People only ask about alternatives to bankruptcy only after it’s fait accompli
Robert Schwartz wrote:
Our service is geared specifically as an alternative to bankruptcy, and as such our clients are by definition seriously distressed companies.
The process we employ is similar to that referred to by the first party to answer your question, but we go much further. Rather than simply getting creditors to “buy in”, and give our clients a tad more time to pay, we document in great detail the distressed nature of our client’s finances. We then use this information to negotiate dramatic settlements - 20 to 30cents/dollar is not uncommon - with our client’s creditors.
Additionally, we may make some short term advances to our clients, injecting some quick liquidity, helping to make “downstrokes” on the settlements we’ve negotiated. We may also assist them with working capital lines and raising capital with under-leveraged assets as collateral.
The sort of negotiations we do on a daily basis are something a company can theoretically do on their own. However, having an unemotional third party, with a significant track record and relationships with creditors, has historically lead to a far better execution - effectively creating a situation where it’s the creditors themselves that are paying our contingency based fees.
Links: http://www.metrocapitalllc.biz
James Penman wrote:
1. Asking current investors/owners to infuse additional capital
2. Restructuring and extending debt or issue new secured debt
3. Draw upon credit lines, if available.
4. Asking customers to make additional or advanced purchases with giving the customers the knowledge that they may otherwise lose a key vendor.
5. Asking executives to defer compensation or take equity as compensation until turn around occurs
6. Liquidate assets
7. Sell and lease-back key operational assets, such as real estate, machinery, or vehicles
8. Return inventory to suppliers or borrow money against inventory
9. Employee layoffs, unfortunately
10. Take on additional investors and conduct an equity take-down for existing investors
11. Sell or merge the company
Bill James wrote:
Assuming the business produces something of value and would be a ‘going concern’ with some new capital or substantially reduced costs, I think debt for equity swapping is often a far better prospect than chapter 11 filing.
Without knowing the business or its customers, maybe there are some folks out there who would like some equity and can ’see’ the opportunity at hand to acquire some stock relatively inexpensively.
This is a ’shareholder friendly’ (existing) approach to sailing through the rough patch. Interestingly it is the approach being pursued by companies like Etrade as they avoid the wholesale recapitalization of their balance sheets and the ruin (total) of their existing shareholders (as distinct to some of their financial peers). It is particularly helpful if existing shareholders are instrumental in driving the existing business.
Naturally, dilution will occur but that’s better than losing it all.
Regards,
Bill
Jack Derby wrote:
Earl,
A very broad topic, but a couple of point specific recommendations based on our involvement in numerous turnarounds.
1. Bring in outside highly experienced expertise who are going to be actively involved, but involved on the basis of specific objectives, timelines and clear definitions of when the turnaround is done. Base a portion of thier compensation on quantitative success factors.
The issue here is that existing management unfortunately got themselves in this position, and all of our experience is that there are too many emotions, past experiences and prior inattention to the big picture that to try to do this very diffcult process with only the existing management will typically fail.
2. Get buy in from your current investors and lenders. If they are clearly considering Chapter 11, it means that they are most likely in the workout section of the bank. This highly fragile situation is not one in which they do not want to be be in constant communication with their lenders even given that there may be some level of tension in the current relationship.
3. Have the managment team, define a clear turnaround plan in writing, with specific objectives, timelines which cannot exceed six months, and actionable items with speciffic responsibilities. This becomes the bible for management during the process of the turnaround. It is reviewed and updated weekly. It is shared (in less detail) with the investors and lenders and it becomes everyone’s central plan.
4. Proactively work through the financial and legal implications of a Chapter 11 filing. Whether this is a bad or a good alternative can only be decided by actually going through the specifics of the existing loans, assets and legalities. On the financial side of this equation, if you do not have the inside expertise, it is very easy and relatively inexpensive to find this subcontractor expertise. On the legal side of the equation, do not quess and bring in a bankruptcy attorney for a couple of mutli-hour sessions to walk through both the general issues and the company’s specifics on the current liabilities.
Once they have gone through this process, they will find that it will be an easy decision as to whether to file or not. Filing for Chapter 11 is not the end of the world assuming that there are no or very limited personal liabilities to the owners.
I hope that this helps.
Jack Derby
Gavin Tonks wrote:
I am doing an intervention now for a bank on a very badly run company and to avoid all the mess and legal fees we made a list of affected parties made appointments went to see them and got them to support us in our work
We have avoided 2 companies going to court and have paid off 4 accounts with 7 left
Communication and honesty is the key and keeping people involved
We have started a pay on sell mandate and pay sold product each day into respective accounts and trade with our gp only
We have also increased revenue by R400 000.00 in 6 months quite considerable in the lite of a business that would have just closed
Sue McPhail wrote:
Earl,
I have two suggestions for you:
1) Duane Douglas, a friend of mine, is an accountant, who is extraordinary at finding financial resources companies didn’t know they had. If you would like to speak to him, please email me privately for a phone number.
2) What if all the answers you need already reside within the walls of your company? Naturally inventive employees have already devised solutions to the problems you have not yet identified. They think holistically. They understand the relationships between function and departments. They have been waiting for someone to tome along who listens and acts upon their ideas.
Naturally inventive employees - they are your richest source of innovation. Unfortunately they have stopped sharing their ideas with employers who don’t listen and act upon great ideas. Rebuild trust with them. They have evey answer.
Inventively yours,
Sue McPhail, APR
Ideaology
Mike Bloom wrote:
Dr Earl:
Consensual restructurings happen all the time. But do not limit your options.
First, you need to assess why you do not want to use Chapter 11. This is a valuable tool in your arsenal, and when negotiating with creditors, suppliers and others they need to know that this is an option that you are prepared to use. You may not WANT to use Chapter 11, but you need to be PREPARED to do so if necessary.
Second, as another poster mentioned - is there a true going concern value to this company, or is a restructured entity still likely to fail? I looked at a company that lost money on every product it sold: restructuring didn’t make sense because it would soon be in the same mess.
Third, is management capable of running the restructured venture profitably? If not, run do not walk from this business - or get someone in there that can make this company work.
Fourth, make sure the company is properly capitalized after the restructuring. A common mistake is converting vendors to secured creditors when the company cannot support the increased debt. You want to go the other way, by reducing indebtedness. This will usually require dilution of ownership, but investors/owners need to realize that a small percentage of a going concern is better than 100% of a bankrupt one.
Fifth, get new capital into the company. I would try to use this capital to purchase the creditor positions at a substantial discount. This is where the threat of Ch 11 comes in. Creditors do not have to play but the threat of Ch 11 usually brings them to the table, especially if they are unsecured. This is often a better strategy than trying to convince creditors to take equity in a failing business. Sometimes you can pay a little upfront and convert the rest to equity, but often you just have to pay a little and the creditor won’t require equity. “Cash is King.”
Sixth, make sure that you have alternative vendors!!!! Again, a common mistake is assuming that the vendor who just wrote off your payable is going to continue to ship. Do not assume that. If you need this vendor, use the capital you raised in point #5 to fund working capital so vendors will ship.
Seventh, share the pain and the upside. Make sure that those who got the business in this mess are looking at reduced comp if they stay with business. But make sure they are incentivized with profit sharing or equity to make the restructured business profitable.
Eighth, keep the legal bills low. A good lawyer is invaluable, but expensive. Do as much of the work yourself as possible. Rely on the lawyers for legal work - drafting and interpretation - but do the strategy and negotiating yourself.
Last, get an advisor experienced in this area, who can get to the bottom of issues quickly. Do not delay. I recently worked with a potential client, identified a host of issues, and gave them a strategy to move forward. They thought they could save money by doing it themselves rather than hiring my firm or another advisor. Six months later they are out of money and out of options.
Generally, management and ownership are tied in - emotionally, personally, or financially - to the causes of the problem and cannot take actions quickly or decisively enough even if the plan is laid out for them. They often have lost the faith of creditors, customers, or employees. Get someone in to be the bad guy and make the hard decisions.
I am happy to discuss further.
Good luck,
Mike
Marti Mang wrote:
Formulating a well thought out plan and presenting it to all creditors or at least to the major creditors. The plan should be an improvement over what they would receive in a Chapter 11 proceeding. That is not hard to do since most creditors would be spending money on legal fees in a Chapter 11 proceeding.
The plan has to be housed in reality– not a “pie in the sky” otherwise you would be wasting everyone’s times. The word is “realistic” — not pessimistic or optimistic. Whatever the circumstances, face them and formulate the best possible strategy.
Another tool to get creditor buy in is to show that the managers and/or stockholders are also willing to sacrifice something in this situation. It is not a one way street.
Mark Shmagin wrote:
Investigate the merits of an Assignment for the Benefit of Creditors.
This might wipe out debt without bankruptcy. And, in some cases, management/ownership can maintain its position to a large extent, or direct the transfer of control to a friendly buyer with minimal court intervention.
Mark