With volatility in today’s markets, the financial environment is unforgiving for faltering companies in the middle market. Traditional bank lenders suffer from increasing complexity as a result of greater regulation and underwriting scrutiny. Junior lenders face increasing sensitivity with structural issues from their subordinated position and equity investors are always cognizant of their position in the capital structure.
Disappointing financial results often foreshadow troubling times. However, other factors can impact a company before they are reflected in the financial statements, such as regulatory changes, commodity price movements and rapid technology changes. The sooner the problem is recognized, the likelihood of a successful recovery increases.
Scapegoating “poor management” isn’t always fair. An investor’s perception is management’s reality and re-establishing the company’s viability and future requires strategies, tactics and resources that can be outside management’s comfort zone and traditional approach.
Important steps are necessary to reverse the trends and restore the company to health and maximize value. In these circumstances, management finds themselves facing pressures from various constituencies from lenders addressing loan compliance breaches, to equity investors concerned with value erosion, to trade creditors considering supply chain disruptions, to employees anxious for their livelihood. In addition, family-owned businesses have additional complexities of family expectations regarding performance and value.
The troubled company’s first few actions can determine the trajectory of recovery, so it’s important to get it right from the start.
The following steps are a useful tool for companies facing financial challenges.
- Take your medicine. At an early point in the process, it is important for business leaders to acknowledge that results are below expectations. By taking this simple step, management changes the focus from blaming to addressing the more vital concern for all stakeholders: what are you going to do about it?
Lenders and other investors likely have lost trust. Management should recognize that preserving or regaining the confidence of capital providers is typically the most crucial component to accomplishing a successful turnaround. Engaging Financial Advisors with expertise in this domain will help with the turnaround by creating credibility with stakeholders – especially creditors.
- Look Inward. Take a deep dive into your company to ensure the critical issues are identified. No matter how well management believes they know the company, take the time for another look and, if necessary, get a third party opinion. Focus on detail, accountability and performance expectations inside and outside the company. Quantify as much as possible, as this helps when developing the performance improvement plan and your internal and external communications.
- Communicate early and often. Even before a plan is finalized, let investors and creditors know what you are doing to improve the situation. Early in the process, describe your actions and the intended results taking into account the differing and sometimes conflicting priorities of various stakeholders. Maintain transparency throughout this process as investors don’t like surprises.
- Sweat the small stuff. Know your financial and operational commitments including debt agreements, lease agreements, shareholders agreements, supply agreements, sales contracts and others. Financial advisors provide critical expertise designing business and negotiating strategies. The earlier an advisor engages, the greater impact they can deliver to the situation. Typically, there is a lot to do in a limited amount of time and management still has a company to run. Get help.
As early as possible, management should create a rolling, 13-week cash flow forecast to understand and manage liquidity. Taking this step before others ask for it will build credibility when they do ask for it – and they will.
Going forward, the key metric is “Promises Made” vs. “Promises Kept.” In other words, stakeholders will be looking for progress as measured by the metrics the company establishes for itself.
- Create a business plan and forecast. The plan should be as detailed as possible with performance standards and metrics. These measures form the basis for monitoring progress. The plan constitutes your “Promises Made.”
- Explain the business plan. Once the plan is developed, engage to lenders, investors and employees to discuss the plan. This creates the standard to assess performance – “Promises Kept.” Stakeholders appreciate a direct conversation about the future and the company’s plan to address their issues.
- Take a walk in your investor’s shoes. When negotiating with lenders, creditors and investors, it is beneficial to analyze the situation from the other side’s point of view and be knowledgeable of your company’s commitments and covenants relative to this analysis. The financial advisor should take the lead on this assignment and develop strategies to work with these stakeholders to address their concerns. Talking to investors – debt and equity – with good knowledge of their position will help bring about a quicker and acceptable resolution.
If it’s truly a crisis scenario, these conversations can be difficult and uncomfortable but in the end, companies are well served by engaging creditors rather than fighting them.
At this point, it is important to remember that no plan is written in stone. The company, management and employees must be nimble. For instance, the plan may have called for growing one line of business, but it could make sense to sell it. In general, if stakeholders understand your reasoning, they’ll support the change to help create a healthier company.
This process is difficult on people and relationships across the spectrum of stakeholders. It is especially stressful and draining on executives, investors and family members. One strategy, always on the table, is to sell the business and repay creditors and distribute the remainder to investors. While this may not be the preferred solution, it should be considered in the full analysis of maximizing value, especially if the stress or timing of a turnaround is not acceptable.
The end game is to find a workable solution so that the company can recover and be restored to health. Throughout the process parties engage in give-and-take in an effort to address their most important concerns while considering the company’s concerns as well. Conducted successfully, reasonable solutions arise that create value for all parties. As noted business commentator Mick Jagger said:
You can’t always get what you want,
but if you try sometimes you just might find,
You get what you need.