When a business finds itself on the road to serious financial trouble and unable to obtain financing from new or existing sources of capital, or solve its financial problems quick enough internally, it should pursue a solution through its creditor constituencies. This can be done either out of court or with the assistance of the federal bankruptcy code. Under either of these approaches, the debtor has many alternatives in seeking relief. The appropriate approach will be influenced by a number of variables, including the debtor’s size, financial history, capital structure, nature of the problems and the outlook for the business. In examining the options two major issues must be addressed; should the business restructure or liquidate and should the reorganization or liquidation take place out of court or in bankruptcy court?
In choosing the best alternative it is imperative to understand what caused the debtors current troubles, whether the company will be able to overcome them and, if so, what actions will be required to turn the company around. Advent Valuation, as financial advisor, canassist the Company, or its creditors, in determining how the losses occurred and what can be done to evade them in the future.
To aid in this determination, it may be necessary to forecast the cash flow of the operations for weekly periods for a term of thirteen weeks. This is one of the most powerful cash management tools. The 13-week cash flow projection is utilized by management of distressed companies to help manage and anticipate short-term liquidity needs. Advent can also be helpful in indicating where additional steps will be necessary in order to obtain positive cash flow. The best indication that a failing business has a reasonable chance for a recovery is the presence of three attributes.
- A core business capable of generating cash flow, preferably showing a positive EBITDA and the ability to meet future challenges
- A new source of funding, preferably long term
- A management team capable of assuming operating control of the firm
For existing clients, the information needed to choose the course of action can be accomplished with minimal additional work. However for a new client, a review of the client’s operations will be required to ascertain the company’s situation. Once the analysis has been completed, and unless additional capital is raised or a buyer for the company is found with assistance from its advisors, the client normally makes the decision to:
- liquidate the business
- attempt an informal settlement with creditors, or
- file a chapter 11 petition.
For example where a company’s product is inferior, with declining demand, inadequate distribution channels, or other problems exist that cannot be corrected (either because of economic reasons or management’s lack of ability), it is normally best to liquidate the business immediately. Postponing a closeout strategy greatly diminishes the liquidation value if customers abandon the company and business relationships deteriorate.
Conversely, if the company is determined to be viable the decision whether it should immediately file a chapter 11 petition or attempt an out of court settlement depends on several factors including:
- Size of the company and whether it is public or private
- Number of creditors and if they are secured or unsecured
- Complexity of the situation
- Nature of the debt, prior relationships with creditor constituencies, and pending lawsuits
- Executory contracts, including leases
- Tax implications of alternative selected
- Capabilities of management, including mismanagement, fraud and irregularities.
In summary, hiring both Advent and a component bankruptcy attorney can help a company work through the question of whether to restructure or liquidate. Advent Valuations Advisors is here to work through the difficult questions with you.