Tuesday, November 23, 2010

When Companies Are In Trouble

Last Thursday I attended an excellent breakfast meeting/presentation sponsored by my alma mater and two other schools (The Wharton Kellogg London Business School Breakfast Series, in case you are in Atlanta and wish to attend. The next one's in January.) The subject was turnarounds and corporate restructuring and the two panelists were a turnaround consultant and bankruptcy restructuring attorney, respectively. I have several friends and acquaintances in this industry so some of the information wasn't new to me but I received a lot more detail than I had previously known.

For example, the OVERWHELMING majority of company owners practice denial and wait until the nth hour to request assistance. By then, it is nearly always too late and the company either ends up shutting down and selling off its assets or liquidating through a Chapter 7 bankruptcy. The latter occurs if the level and complexity of creditors mandate this. A lot of companies enter Chapter 11 - reorganization - as a means to save themselves but the vast majority of companies NEVER emerge from Chapter 11. The bankruptcy judge either converts to Chapter 7 or appoints a trustee who essentially serves as a liquidation advisor.

Why do so many owners stick their heads in the sand in the face of financial trouble? The company is their baby. They've had it, built it over 10, 20, 30+ years and now they must say that their baby is not just ugly, but really ugly. Many just can't do it.

The CFO (or VP of Finance) is usually the first one to see the signs of trouble. They do forecasting and monitor cash flow. They can identify trending and see that cash is going quicker than usual, that accounts receivables are taking longer to get paid, that one customer comprises the majority of the over 45 days receivables. This financial information provides the crucial first piece in awareness of issues that could seriously adversely impact the company in 6 - 9 months. The first step at the time the CFO spots a downward trend and notifies the owner is to act. Do something.

Do what, you ask? Talk to the customer who is delinquent. Are they in trouble? Can't tell over the phone? Visit the customer's office or talk to their other suppliers. Look at your customer base. Do you have too much of your business tied to one customer? Find other customers to offset that risk as quickly as possible or reduce your overhead to cover the loss of the customer, just in case. (Or develop a plan to quickly reduce overhead in case of the customer loss.)

Do you have an advisory board or Board of Directors? If so, share the financial information with them and get their input. Let your creditors know what's happening. Be frank and work with them to develop a plan. The worst thing for them is to be blind-sided. They are much more flexible and willing to work with a struggling company when they have more information sooner. More data earlier affords them a number of options which disappears as the situation worsens.

Finally, if your company is already on its last legs, DON'T try to restructure by filing Chapter 11. A fully knowledgeable bankruptcy attorney will turn you down. However, there are less knowledgeable and more unscrupulous attorneys out there who will take your business. Chapter 11 can be VERY expensive. If your business won't survive, it would be best to pursue other options for wrapping up the business that are easier on you and more fair to your creditors. Remember, all the money that goes to pay attorneys and bankruptcy court direct and indirect fees is money that could have gone to creditors.

If you are not sure what to do, seek out a turnaround consultant. Not sure where to find one? Ask your banker. He/she will likely give you three references.

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