How to save a business in crisis!
We got a phone call from a manufacturing business on a Wednesday afternoon with the message – The bailiffs ARE COMING! By Monday afternoon, we had put court protection in place. The court protection stopped the bailiffs in their tracks and bought the company 30 days in which to demonstrate to their creditors that the business was viable and could pay the somewhat overwhelming debt.
This business was viable, our analysis showed, because it had purchase orders in the pipeline. The orders had been delayed however due to circumstances beyond the company’s control. This familiar story had created the cash crunch and hence the crisis.
But the reality was that the company had narrowly avoided their creditor crisis for over a year by juggling the cash and making last minute payments. Now all the problems crystalised into one crisis. This was the perfect debt storm.
First we created a debt restructuring plan. To satisfy the courts, in 30 days the company must produce a credible plan to convince creditors that it can pay its bills in full or in part. The payment offered to creditors is based upon the ability to pay. But some creditors are fully secured with asset loans or leases. They expect to be paid as agreed or they can exercise their prerogative and repossess equipment. Canada Revenue Agency is a preferred and dangerous creditor especially with regard to payroll remittances. They demand to be paid within the first year no matter what the terms offered to other creditors.
The hardship really falls on the unsecured creditors. This usually means suppliers and can mean bank loans that are not personally guaranteed.
The company, through its intermediaries and the court, made an offer to the creditors based upon ability to pay. In this instance it was 100 cents on the dollar but paid over 36 months. And, oh yes, interest charges stopped. In many prior instances of this type of agreement with the creditors, the debt was negotiated down to levels that the company could tolerate. Many deals have been struck at 35 cents on the dollar.
But is this the right way to help a company? Faced with insurmountable debt, a company has no operating room, no credit and is in serious danger that any minor bump in the road will send it careening off the edge. Just think of General Motors. And many companies have accumulated huge amounts of debt during this recession – loans from banks, loans from government, suppliers unpaid, Revenue Canada remittances, unpaid taxes. Far too many owners also borrowed heavily from their own resources (house and credit cards) to keep the company afloat.
So if the company gets no help, it disappears, taking jobs and family assets with it.
But a bout of debt relief is not a solution for long term problems. Typically the company has seen falling sales and has lost the art of managing the company. In order to make this succeed, the marketing and sales have to be completely re-worked, pricing and costs have to be addressed, and most of all, the manager or owner needs a set of metrics in order to know when the business is on track.
If you can’t fix sales, a financial turnaround just doesn’t work. If you only fix the sales and marketing, the finances can pull down a very busy and otherwise profitable company.