7 Steps to Restoring a Company in Financial...
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Capstone Headwaters 7 Steps to Restoring a Company in Financial Distress
Transcript of 7 Steps to Restoring a Company in Financial...
Capstone Headwaters
7 Steps to Restoring a Company
in Financial Distress
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 greater
likelihood of a successful recovery.
Scapegoating “poor management” isn’t always fair. An investor’s perception is
a management team’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 itself
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.
Authored By
Frank HundleyManaging Director
520-205-2254
7 Steps to Restoring a Company in Financial Distress | 2
7 STEPS TO RESTORING A COMPANY
IN FINANCIAL DISTRESS
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.
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Look Inward: Take a deep dive into your
company to ensure the critical issues are
identified. No matter how well
management believes it knows 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 businesses 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.”
“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.”
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3 | 7 Steps to Restoring a Company in Financial Distress
Explain the Business Plan: Once the plan is developed,
engage 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 faster 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’s 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, 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.
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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.”
“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.”
7 Steps to Restoring a Company in Financial Distress | 4
CORPORATE RESTRUCTURING ADVISORY
FIRM OF THE YEAR
2018
TOP 10 MOST REFERRED INVESTMENT BANKS
2016
BOUTIQUE RESTURCUTING INVESTMENT BANK
OF THE YEAR
2017
US MIDDLE MARKETS INVESTMENT BANK
OF THE YEAR
2018
REPORT AUTHOR
5 | 7 Steps to Restoring a Company in Financial Distress
Frank Hundley
Managing Director
520-205-2254 | [email protected]
Frank Hundley has a diverse background in turnaround management, bankruptcy advisory, and
corporate finance.
Over the past five years, he has provided interim management, restructuring, and expert witness
services to middle market corporate clients. Mr. Hundley has over 12 years of corporate finance
experience (including middle-market leveraged finance), while working at Bank of America and
its predecessors in Houston and Dallas, Texas.
As a Financial Advisor to the Debtor in a large Chapter 11 bankruptcy in Southern Arizona, Mr. Hundley worked with two
resort hotels and $250 million in debt. He also operated and sold a commercial aircraft maintenance and repair station
and an aircraft parts company while serving as Chapter 11 Trustee. Mr. Hundley performed business improvement
services relative to real estate and golf course development businesses acquired by a family office through foreclosure.
He also led the restructuring effort for a construction materials and services company that suffered an 85% decrease in
revenue with the real estate market downturn.
Over the course of his career, Mr. Hundley has also held a variety of financial roles with turnaround and growth
companies. He served as Chief Financial Officer of NextMed, an Arizona-based provider of lithotripsy and laser services to
urologists. He was also Chief Financial Officer of CyraCom International, Inc., a privately owned language services
provider focused on the healthcare industry. Finally, Mr. Hundley was Vice President Treasurer, and Vice President
Finance, of Service Corporation International, during its capital restructuring.
MIDDLE-MARKET BOUTIQUE INVESTMENT
BANK OF THE YEAR
2019
US - DEBT FINANCING ADVISORY OF THE YEAR
2018
US MIDDLE MARKETS INVESTMENT BANK OF THE YEAR
2019
DIVESTITURE OF THE YEAR
2019
TURNAROUND AWARDS
SEGA BIOFUELS
TURNAROUND AWARDS
Report Title | Q4 2017EXTENDED FINANCIAL ADVISORY
SERVICES TEAM
6
BRIAN DAVIES
Managing Director, Head of FAS Practice
617-619-3328
JIM CALANDRA
Managing Director
617-619-3395
ED SCHATZ
Managing Director
617-619-3396
CHRISTOPHER FERRARA
Director
617-619-3365
JACK SHIELDS
Managing Director
860-334-3782
SAMUEL HAHN
Director
703-509-2001
HARVEY MASON
Director
617-619-3367
DAVID RYCHALSKY
Director
617-619-3329
BRAIN JACOBSON
Director
617-619-3376
Capstone Headwaters is an elite investment banking firm dedicated to serving the corporate finance needs of middle
market business owners, investors and creditors. Capstone Headwaters provides merger & acquisition, private placement,
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enterprises. Headquartered in Boston, MA and Denver, CO, Capstone Headwaters has 19 offices in the US, UK and Brazilwith a global reach that includes over 300 professionals in 33 countries.
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