I’ve seen too many entrepreneurs spend their careers building a company only to lose it in the next business downturn. Often, companies in trouble view the need for an outside advisor as a sign of failure, a point of shame. This can be particularly difficult for small-business owners who have invested their life’s work into their companies. However, hiring the right advisor, particularly one with a great deal of financial and management experience and crisis management experience, gives the company a strong chance to recover and avoid bankruptcy. If the company does file for bankruptcy, a good advisor will ensure that the company is more likely to survive its bankruptcy through Chapter 11 without being liquidated. In many cases, bringing in an advisor is not a sign of defeat, but rather the beginning of a return to profitability.
Getting the Numbers Right
What does a business debt consultant do for a company that’s in trouble? Six things, and the first is getting the numbers right.
When you’re in trouble you must know what’s going on financially. If you don’t keep track your company will die. A company can be either cash insolvent, which means you can’t pay your bills, or balance-sheet insolvent, which means you owe more than you’re worth. I’ve seen many, many companies go broke because they didn’t see the cash crunch coming. They might be balance sheet solvent, but the cash shortfall kills them before they have a chance to succeed. Distressed companies need to have extremely accurate financial statements and forecasts, along with tight controls on cash flow. This is rarely the case, and “surprises” bring sour endings. A good consultant can quickly determine what’s happening, write up the financials and projections, including 13-week cash-flow analyses, so the company knows where it stands and can begin to take action.
The Exit Strategy
The second job is the exit strategy. To survive, distressed companies must act immediately to develop an exit plan, which might mean a recapitalization, a debt restructuring, a Chapter 11, or an outright sale of the company or divisions of the company that aren’t working. Develop a plan and you’ll have momentum and be able to take advantage of every opportunity that presents itself. It also brings creditors on board. Creating that plan is complicated and requires an extensive financial analysis. Unless the owner has done it before, it’s hard to know what the options are, and nearly impossible to do it in the short time companies usually have. An experienced advisor triages the situation quickly, then they get to work - working quickly to develop a strategy that makes sense for you. They can even help you find a buyer for the things you decide to get rid of.
Third, the consultant can take the witness stand. One of the more fearsome aspects of financial problems is being required to testify, whether at a collection hearing, in a lawsuit or in bankruptcy court. And one of the best ways to avoid it, or at least limit it, is for the advisor to be designated the company’s chief restructuring officer, or CRO. When you’re in trouble, an advisor experienced in turnarounds is used to testifying and is deemed expert on financial matters, so he or she can usually take the witness stand for the company. This leaves the owner and managers free to concentrate on running the company - selling products, dealing with customers - rather than worrying about every question that will be asked.
Fourth comes the lender. A distressed borrower can score points with a lender by agreeing to hire a turnaround advisor. Lenders do plenty of workouts and will often prefer to have a turnaround advisor on board much sooner than the company does. Options die fast when things go bad, and leverage with a lender will disappear too. Forbearance is often the response. As for the price, sometimes a bank will forgo a few principal or interest payments to free up cash to pay the advisor, and a good turnaround advisor should be able to quickly make enough cash flow adjustments to make the fee make sense.
Restoring Confidence with Vendors, Customers and Lenders
Fifth is the creditors. The key to surviving a financial crisis is to get your vendors, customers, and lenders to trust you so they’ll keep doing business with you and let you use the cash you have. Credibility is often the biggest challenge for the current management team, because of late payments and shipments and the change in the company’s financial condition from being healthy to being in distress, and they always have an irate phone call from someone. Management has to always be on the defensive. An advisor is an outside voice that is unaffected by the circumstances of the company so they are able to get some rapport with the creditors to re-establish the company’s credibility, and that is what wins back credit terms.
The sixth job is simply being an outsider. A lot of companies that should make it do not make it. And they don’t make it because owners and managers deny that they need help until it’s too late. Having an advisor do an independent assessment while you still have options is vital. Management that continues in denial is typically sidelined by creditors and replaced before a workout is finished. In contrast, management that accepts the fact that a workout is necessary and takes positive action is considered a solution partner and invited to the table. Having the desire to seek help usually means that management is actively seeking a solution.
In short, the job comes down to creating reliable financial statements and a 13-week cash flow projection; establishing an exit strategy without delay; acting as the chief restructuring officer (CRO) when that becomes necessary; negotiating forbearance from the lender; restoring confidence with vendors, customers and lenders; and providing an unbiased external perspective as long as good options remain. The sooner the owner calls, the more options remain open.
