Restructuring

We Are A Company Providing Debt, Corporate, Financial, Operational And Strategic Restructuring, Business Debt Restructuring, Distressed Mergers & Acquisitions, Recapitalization And Pre-sale Preparation, & Chapter 11 Bankruptcy Restructuring.

Restructuring

If you are called in to restructure a company in distress, the first rule is to get back to basics. Each situation is different, but the common denominator in most distressed companies is excessive debt and management lethargy. That doesn’t mean lack of desire to perform. It does, however, mean that there have been some fundamental errors in judgment, strategy and decision-making in the years leading up to that point.

Managers must have access to relevant, current financial and operating information if the company is to have any chance of success. But that’s not all. They must not only have access to that information, but they must be willing and able to analyze the information correctly and employ a disciplined approach which enables them to act on the information to move the company forward and/or protect it from distress.

You could write several books on the lists of reasons that companies get into trouble and in a long career of restructuring troubled companies, there are many stories to tell.

1. Cash management. Cash is the lifeblood of every company. Without cash, the company will cease to exist. Every CEO and CFO should demand a strict control and reporting system for cash management. No excuses. The tone is set at the top and begins with expenditure control. A policy should be in place with a dollar limit on normal and necessary manufacturing and operating expenses that can be incurred by the designated managers. Line managers overspending will quickly drown a company.

In distressed situations, a rolling 13-week cash forecast, along with a comparative cash flow analysis is mandatory. In fact, a consistent rolling cash forecast should be mandatory for every company.

These reports should identify cash inflows from customers, debt issues and investors, and the sale or disposal of assets or business units. You need to identify cash outflows from operations, to suppliers, debt service, and the purchase or investment in assets and other businesses.

If the company has more cash flowing out than flowing in, you are “burning cash”.

If the company is a start-up or troubled company, the cash burn rate is critical. Management must know how much cash the company expends every week, month, and quarter. It is their responsibility to ensure that cash expenditure is within projected budgets given to a Board of Directors and Lenders. Remember, they made their decision to fund your company based on your business plan.

_________________________________________________

2. Profit and profitability (margins) come a close second to cash. In order to increase cash levels, companies become profitable or increase profitability, increase equity in the form of debt or capital issues, and sell off assets.

Even if management exercises one of the latter two options, sooner or later, if the company wants to be a successful enterprise, it has to become profitable. Again, the company culture or attitude starts at the top. Everyone in the company must think and act towards growing sales and revenues, and reducing costs.

Gross Profit is the amount of sales dollars left after the costs of the product or service. In order to set a Gross Profit target, you should consider the minimum dollar amount the Gross Profit needs to be in order to cover the operating expenses, interest payment requirements, debt service requirements, and the net return expected by the shareholders. From this, you can work out what the minimum Gross Margin needs to be. If this minimum targeted Gross Margin causes the sales prices to be noncompetitive, then management needs to study their business and competitors to identify the reasons.

Comparison to a much larger competitor will identify their advantages due to size and volume in areas such as per unit manufacturing costs and increased purchasing power. Conversely, larger companies have a higher fixed cost platform to overcome, which will give them bigger challenges in times of stagnant or declining revenue.

Mid size and smaller companies need to differentiate themselves by unique features and benefits such as location, breadth and depth of inventory, improved technical expertise, customer service and responsiveness, unique products, or any other added value that allows the customer to justify paying a higher price.

Management needs to continually evaluate ways to improve efficiency and reduce operating costs. These may include reducing the number of key management personnel that have become less productive but remain highly paid, reducing the number of locations or space to reduce overall occupancy costs, review company participation in employee benefits, evaluate services that are being outsourced or maybe should be outsourced, consider risk management alternatives to reduce insurance costs, replacement versus high repair costs on machinery and equipment and contributing or raising capital to reduce interest costs. Today’s successful business leaders will dedicate resources to technology utilization which has proven to be an effective tool to increase productivity and improve efficiencies while reducing operating costs.

A fair return to the shareholders is required, but when shareholders have unreasonable ROI demands, management may increase their debt burden, raise their prices to cover debt service requirements and these unreasonable earnings goals which create a non-competitive product or service that will reduce sales and revenues as customers are unwilling to pay the higher price.

Successful business managers constantly study and compare their company to its competitors in product or service offerings which include pricing structures, gross margin percentage, operating costs as a percentage of revenue and actual dollar amount, and operating income (usually EBITDA) as a percentage of revenue.

_________________________________________________

3. Controlling costs is usually the most effective and quickest method of increasing profitability in any company. Reducing manufacturing costs and inventory purchase costs, as well as reducing operating costs increases profits dollar for dollar. A dollar increase in sales is discounted by the Cost of Goods Sold before it improves profitability.

Budgeting is the only sure method to controlling costs. Study the cost data and its’ drivers for every manufacturing, purchasing, and operating account or category. Conduct a consistent monthly evaluation of cost variances, actual to budget, and study their cause and effect. Use this data for future action items or increased accuracy in planning.

Lean and efficient companies are process oriented. All repetitive tasks (actions) should be incorporated into standardized Standard Operating Procedures (SOPs) that can be measured with Key Performance Indicators (KPIs). These KPIs need to be monitored daily, weekly, and monthly to provide assurance that costs are under control. This allows for immediate action to stop the cash burn when performance is outside the acceptable range.

Utilizing technology is becoming the favored method of reducing costs. Technology utilization can improve processes with streamlined data capture, processing, and reporting the right information, processed within approved methods, and reported in a user friendly consistent and timely manner. Technology also improves employee productivity by eliminating unnecessary steps and in turn reducing unnecessary staff and payroll costs.

The most cost effective companies have developed a lean culture to reduce spending on anything unless it is necessary to provide quality products or service.

_________________________________________________

4. Fixed Assets and Inventory make up the largest dollar investment for most companies. Unfortunately, too many business leaders do not focus enough attention on the Return On these Assets (ROA).

Accounting systems should be in place to report the profit earned from these assets individually and as a category.

When the management team repeatedly studies ROA, they will be able to determine any action that may be necessary such as reducing inventory levels, securing new outlets for excess inventory, quicker manufacturing cycles, and changing the inventory mix to increase those with higher ROA.

In respect to fixed assets, a CAPEX budget should be a component of every company’s business plan. The CAPEX budget begins with the line managers creating a list and estimated cost of new machines or equipment (or major repairs) they believe are necessary to maintain or improve quality, service, or cost reduction through efficiency gains. Most companies only have a limited amount of funds available for CAPEX one year ahead, so the focus on ROA will ensure better decision making with facility and equipment investments.

_________________________________________________

5. Accounts Receivable. The Business Cycle is not complete until you collect the money. Sales and Gross Profit can be extraordinary, but if you do not collect the money you can’t pay the bills or make payroll.

Accounts Receivable management requires not only that your company has discipline, but also that your customers pay on time. The temptation to be flexible with customers is greatest when sales are stagnant and competition is high. Many management teams of troubled companies are pursuing revenue growth so aggressively that they fail to enforce payment terms on certain customers, and they may even take on customers who are trying to avoid tough credit policies with their competitors. Guess which customers are most likely to default on their credit.

Many companies borrow against or factor their receivables to shorten their A/R turnover (sale to cash days). The importance of prompt collections does not go away. Generally, businesses can only borrow 85% of their receivables that are not more than 30 to 60 days past due. The business then incurs the interest charges and is still burdened with the delinquent dollars.

Successful companies have a strict credit policy and they begin from Day One with firm and consistent application of this credit policy. The truth is that your customers will have more respect for your company if you maintain your discipline. Your A/R discipline is a reflection of your company’s ability to deliver and perform on difficult tasks and in tricky situations. Failure to follow this discipline registers with many customers and competitors as a sign of weakness. Short-term success may be followed by failure in the long term.

_________________________________________________

6. Debt. In today’s tough business environment, too many businesses are drowning in debt. Companies may have industry leading profit margins, but with leveling or declining revenue growth these companies are struggling to cover their interest costs and debt service requirements. As discussed earlier, many companies, especially start-ups and troubled companies, must determine how much debt is the cap. If you’re burning cash too fast and you have to float more debt or raise more capital, then start back at lesson number one and read the lessons over again. There are underlying issues that need to be cured.

All successful businesses have a fundamentally sound, effective, and efficient finance function. Whether a company is an early stage company or a mature company in a consolidating industry, the basic financial scorecards must be kept and studied. Troubled companies’ management teams are usually in denial when it comes to the financial trends and scorecards.

If all of this sound likes the basics of business, it’s because it is the basics. Unfortunately, there are too many CEOs, CFOs, and Management Teams that do not maintain the intense and persistent focus that is necessary to build and sustain a successful business.

Bankers, private equity professionals, successful CEOs and CFOs are fundamentalists. They guard cash as if the business’ life depends on it. They develop and study the business plan and then challenge the assumptions that the Company’s success hinges on. They hold the management team accountable for the development and execution of sound cash, operational, and CapEx budgets.

Before they invest or loan funds, they are confident in the quality and commitment of the Management Team, feel secure that the business has adequate HR and technology resources, efficient systems and processes, and they are convinced that there is a viable core business purpose within the industry or marketplace. Every business owner would be well served to employ the same discipline and best business practices on a day to day basis.

4 Myths About Restructuring Experts

What is the role of a restructuring expert?

To step into a Company that is in crisis, force some layoffs and slash costs? No. No. No.

Restructuring is a word most business owners want to avoid, yet ongoing restructuring processes are central to the success of the world’s best companies.

Unfortunately, media coverage has associated restructuring with failure, but if implemented appropriately and before a company gets into trouble, can be a key to long-term success.

Myth 1 – Fancy Plan and Walk Away

Restructuring professionals come up with a fancy plan, take a fee and walk away. Not True.

First of all, qualified restructuring professionals are usually Certified Turnaround Professionals recognized by the ACTP and are members of the Turnaround Management Association.

To achieve this designation they have met the rigorous requirements of education, years of experience in the field, completed exams to confirm their technical knowledge, submitted case studies from successful engagements, passed interviews, a screening process and have had professional references verified.

Secondly, CTPs like to be referred to as resultants versus consultants. Meaning results are achieved as opposed to just being talked about. Walk the walk versus talk the talk.

CTPs have proven operating experience in most aspects of business from finance and accounting to manufacturing and distribution to sales and marketing.

If the company owners and senior management are willing and able to acknowledge the need for unbiased expert advice, an independent restructuring professional is much more likely to drive success.

Owners and Senior Managers understand their industry, employees and their company better than anyone.

Restructuring professionals bring experience and a track record from countless real-world companies, where their solutions have delivered long-term health, growth and profitability.

Collaboration between managers and a restructuring professional delivers fast, effective and long-lasting results.

Restructuring professionals provide the leadership, processes and day-to-day decision-making needed to lead the development and implementation of a restructuring plan.

_________________________________________________

Myth 2 – Restructuring Always Involves Layoffs

Not true.

Restructuring begins with a thorough understanding of the current processes and utilization of resources (people and assets), including technology. The Restructuring plan will include changes in the business’ operational model only in areas that increase the leverage of all of these resources to maximize value for the business enterprise.

Areas in the business model that are consistent and repetitive should be standardized and processed with technology to maximize efficiency.

This frees up time for the existing employees to be more focused on adding value with customers, vendors, and other team members with support and training.

It is true that if the company has failed to operate a lean business model, that layoffs are possible, but that is the decision of the owners and senior managers. It is not the goal of the restructuring professional. Employees are the lifeblood of the company.

Remember.
The most successful entrepreneurs are those constantly looking for ways to improve their Company. Restructuring is a cost-effective and integral part of the process.

_________________________________________________

Myth 3 – Too Expensive

Not true.

Too expensive is a relative term. Doing nothing may be catastrophic. You could lose your company if you live in denial and ignore financial, operational and strategic problems. Waiting too long to engage a Restructuring Expert will cost you far more in the long run.

Having said that, you should only engage a Restructuring Professional if you feel confident that they will be able to add enterprise value far in excess of what it costs to hire them. If it costs $25,000 to add $250,000 to the bottom line, you got a great deal.

There are going to be many firms starting up as a result of the financial crisis. You should take your time interviewing a restructuring professional. Seek professional references from banks and attorneys who have hired them to help their clients and have them explain how their process could work for your company.

For a successful restructuring process, you want the experience of professionals who have successfully completed many restructuring projects over many years. It is a specialized skill and requires a specialized expert to add real and lasting value.

When you have researched and chosen the best firm for your company, it is time to be clear on what they need to achieve.

Ask your restructuring expert to detail in writing everything that they hope to achieve for your company.

In addition, you may want to carve out some of their fees into performance-related incentives. If you align their pay with your goals, then they will have additional incentives to perform.

_________________________________________________

Myth 4 – Only a Short-Term Solution

Restructuring is just financial engineering and it will only have short-term effects.

Not true.

Financial Restructuring is only one part of the process. It is, however, critical to the long-term success of your Company.

If your Company has too much leverage or fails to meet the earnings covenants in your Credit Agreement, then the restructuring of your Balance Sheet is required. This involves evaluating all of your Company’s Assets, developing and executing a plan of action to increase the Asset turnover ratio and improve your company’s liquidity.

Debt must be evaluated with a plan of action to reach a debt level that can be serviced and remain within negotiated covenants. This can involve bringing in equity capital, negotiating haircuts with lenders as well as negotiating deals with vendors to inject capital back into your business.

A quality restructuring of your Balance Sheet will position your company not only to survive, but to thrive for many years to come.

Debtsrestructuring.com Advisors provide Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Mergers & acquisitions includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Turnaround, Chapter 11 Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

Debtsrestructuring.com provides Top Tier advice and relationships with Middle America values and work ethic.

Resizing a Business in a Downturn

We are all looking for some good news right now and the subject of this letter suggests the theme is negative. Opposite. This is a wake up to take positive action and encourage others to do the same.

“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
– Theodore Roosevelt

The most successful businesses are those that anticipate early and react to changes quickly.

In good times, that may mean investment in hiring, expansion, new product lines and new geographies.

In tough times, that may mean resizing the business, slimming down operations and focusing on cost controls, debt and creditor relationships.

There is no way to tell if the economy has bottomed out, but we do know that eventually it will bounce back. When it will happen, how it will happen and what the new economy will look like is the million dollar question.

Even without that information, you should be taking positive steps to ensure that your business survives and thrives.

In this article, we will consider 9 Success Factors to downsize your business, look at socially responsible ways to increase loyalty and performance and look at Restructuring and Reconditioning.

10 Success Factors to Downsizing your Business

To start with, we need to remember critical lessons from previous downturns: trust, reputation and communication. The community, customers and employees will judge your business on its behavior during these tough times.

1) Redesign the Organization to Create Value, Not just to cut costs
Revenue growth covers the flaws in an organization’s structure and business model. If a company is failing, because of poor strategy, firing employees doesn’t fix the problem. You’ll lower payroll costs, but still have the same problems.

2) Consider Tactical Improvements
Hiring and pay freezes, reduce travel, re-evaluate all departmental budgets, reduce discretionary spending, reduce other identified SG&A costs and make incremental process improvements.

3) Get more value from your employees
Identify areas to improve efficiencies in the business operations. Create standard operating procedures. Create Key Performance Indicators. Incentivize each employee to create new ways to improve their department’s efficiency.

4) Improve openness and communication during downsizing
Now is the time to be clear, open and honest about your intentions and reasons for the changes. If you withhold information from your stakeholders which include your employees, misinformation will prevail. More often than not, the rumor mill will be worse than the real story.

5) Involve mid-level and lower-level managers
If they participate in the downsizing process, they are more likely buy into the process and more likely to communicate a positive story and effectively implement the new plan. They are on the front line and have valuable knowledge on the workings of the operations. Encourage them to challenge your plans, but mandate they provide an alternative solution.

6) Think carefully about which employees to let go.
A percentage cut across the board does not fix the problem. Carefully select those to go and create increased responsibility, increased opportunities and increased efficiency for those who remain. Everyone needs to feel like a team to pull through the tough times together.

7) Give advanced notice or severance pay
This may cost more in the short-term, but those still working for you need to understand that you will look after them if the worst happens. Again, make your employees feel as safe as possible about what the future may hold.

8) Tell employees in person
Losing a job is humiliating and hurts an employee’s confidence and pride. Be considerate in how you communicate layoffs. Your employees will judge you on how you treat their former co-workers. Moreover, at some stage in the future, talent may be scarce again and you need to be the employer of choice to attract ex-employees and new hires.

9) Consider alternatives to layoffs
Reduction of hours, redeployment to another employer, job redesign, or partially paid sabbaticals with benefits and contributions.

10) Time to be a responsible leader
If the time has come that you and other stakeholders would be able to make better choices with the assistance of experts, it is time to make the call. Consider the value of being able to brainstorm with experts who have been through troubled business situations many times before. Consider how much value they can bring from lessons they have learned. It takes confidence and strength of character to ask for help, but sometimes it is the smartest, most responsible and valuable course of action.

Being Socially Responsible Increases Loyalty and Performance

Few companies will avoid the need to reorganize, restructure, downsize, acquire, divest, outsource or enter into joint ventures.

For most industries and most companies, if the recession has not already caused a significant decline in demand, it almost certainly will at some point. For some companies, the worst may be yet to come.

If you need to resize your company, you need to think about how you are going to make the cuts and how you will deliver the news to stakeholders in your business. The process of change can determine the success and long-term benefits of the restructuring process, as much as the substance of what is actually done.

There are positive steps you can take today to ensure, not only that you can pick up market share while other companies fail, but also structure your company so that you exit the recession on a firm footing, in a lean condition and ready to accelerate revenue growth and improve your margins.

Points to remember:
Show commitment to stakeholders (including employees) and you will reap the rewards when the economy turns around.
Consider the values of your own company when making tough decisions.
Focus on MAXIMIZING VALUE for all stakeholders.

Restructuring and Reconditioning

If you owned a sports franchise and your team had just won the championship, you should spend your off season analyzing why you succeeded last year and finding new ways to improve next year.

Your athletes need to train even harder in the off season to win by a higher margin next year.

Maintaining last year’s performance does not win championships. You need to improve every year.

Whether or not you have made tactical improvements in recent years, you need to spend some time considering tactical changes that can and should be made. You are playing a different game on a different field. You need to make wholesale changes to adapt to the new game.

Remember that doing nothing can quickly lead to failure. You need to consider every option you have open to you and brainstorm every structural change that you could make. Talk through all of your options and ideas.

You need to be able to make changes for the sake of your company and for the sake of your employees.

You need to be able not only to survive, but also to outperform your competitors during a time of reduced volume.

Out of every recession, new market leaders will emerge. There are always a few surprise winners and a few surprise failures. If your company fails, everyone loses except your competitors.

One thing is critical. You need to Act Now. Structural changes can start delivering changes immediately.