We are now experiencing the worst global pandemic in 100 years. COVID-19 hit the U.S.A. in Q1 2020 and businesses were forced to either slow down, shut down, or change the process of how they do business. Now is a critical time to understand the business restructuring process.
Most businesses, large and small, have been affected in some way, mostly negatively. On top of that, the price of oil came crashing down once again. This brought a parallel downturn in the oil and gas industry causing companies to consider a business restructuring process.
Since 2015 business restructurings were at an all-time low.
Just a few months ago businesses were booming, companies were having record years in 2018 and 2019, low-interest rates, access to capital, strong GDP, unemployment low, decent companies had good margins and cash was flowing. If you would have asked me in December 2019, what are the chances of the world economy to come very close to a complete shut down in a few weeks? I would have told you close to zero. The business restructuring process was far less common.
When margins are high, clients are knocking on the door and cash is flowing it is easy to forget about margins, working capital, and cash flow forecasting. There was a false sense of security in 2018 and 2019. We spoke to several business owners of large and small successful business and they did not have time to talk to us about managing cash flow, KPIs, and margins. If their books closed 3 weeks after the end of the month and on a cash basis, they were fine with that. In good times is easy to forget about the basics and having a backup plan in case you have that “rainy day”. Guess what, now we are all living that “rainy day”, but it is not just one day. It is likely to be a downturn for the entire year of 2020. In addition, very few companies had a backup plan for completely shutting down operations for 2 weeks, 2 months or more.
This was never supposed to happen.
Businesses Push for Survival
We have seen some businesses push to partially open and survive. We have seen a few businesses take the punch well because they had positive net working capital and cash in the bank. But we have seen many businesses struggle with barely making payroll and meeting its debt obligations.
NET WORKING CAPITAL = the company’s ability to meet its short-term obligations.
More than ever managing net working capital has become very important.
Business Restructuring Process
Throughout my career, I have helped companies successfully restructure their business because they were impacted by an event that caused them to be in financial distress. As a recent example, there were layoffs and a division of a company was shut down. The remainder of the company was profitable, smaller, and had a future and was able to survive.
How to Successfully Restructure your Business During a Global Pandemic
This blog is intended for all business owners out there, so we all have a chance of survival. Over my 30 years as a professional, I have witnessed countless financially distressed businesses go from struggling to surviving from a successful restructuring process.
The term restructuring can have several different meanings and can be used in different ways.
Restructuring can mean…
- changing the management team
- entering a different industry
- shuffling people around within an organization
- reorganization of your debt and operations out-of-court
- filing for bankruptcy and reorganizing with court protection
Restructuring your Capital Structure and Debt
In a case where a company was impacted by an unforeseen event such as a global pandemic (COVID-19), the business was a healthy business in a healthy market, and from no fault of their own, they have now faced a situation of financial distress because of lost revenue, and debt on their balance sheet.
If it were not for COVID-19, restructuring would have not been needed. Restructuring can happen out-of-court, that means without filing for bankruptcy protection, or through a court process where a company files for bankruptcy protection.
Business Restructuring Process| Out-of-Court Restructuring
Without Filing for Bankruptcy | Out-of-Court Restructuring Process
Out-of-Court Restructuring is where a company attempts to reorganize its debt with creditors without filing for bankruptcy. In order for a business restructuring process to be successful, a Financial Advisor is hired to assist the business owners to restructure their debt with secured and unsecured creditors. This could also include raising capital to recapitalize your business.
In order for an out-of-court restructuring to be successful, it means that everyone wants to play ball. The parties involved are willing and able to enter into discussions to restructure the debtor’s liabilities and support the company with its future business plan. It only takes one major third party to object and this kills the opportunity for the out of court restructuring process to be successful. Also, keep in mind that in an out-of-court restructuring the business has no protection and can be hurt by aggressive creditors.
Business Restructuring Process | In-Court Restructuring
Filing for Bankruptcy | In-Court Restructuring Process
In-Court process, filing for bankruptcy; this is a formal process where the law provides the debtors with statutory protections. Assuming your business is a viable candidate for a Chapter 11 bankruptcy, your business will have the time and opportunity to negotiate and reorganize your debt and capital structure. The company will present a plan of reorganization, a business plan, that shows the court and creditors how the business will survive as a viable business after the bankruptcy.
A Second Chance at Survival for Businesses
The bankruptcy process is long, expensive, and takes a lot out of an organization. But if done correctly it gives the business a second chance to survive and probably with less debt. In bankruptcy, you will be dealing with things you have never dealt with before such as:
- Bankruptcy attorneys
- A court and judge
- Possibly a creditors committee
- Financial advisors
- Strict reporting requirements and deadlines for reporting
- Possibly a Trustee
The Beauty of the Bankruptcy Process
The beauty of the bankruptcy process, specifically Chapter 11, is that if the process and filing are well planned out there is a very good chance of success and emerging the other side with a strong company producing cash flow.
Kicking the Can Down the Road | Hardworking, proud, and out of control?
Common attributes of CEO’s, business owners/entrepreneurs are hardworking, proud, and they have always been in control. This is the first time for many business owners and CEOs not to be in control, it is the first time for feeling financial distress. So many of them “kick the can down the road” and avoid what their balance sheet and P&L are telling them.
The Debt is Not Going Away
Yes, it is true that many banks are being “kind” during the COVID-19 process, and maybe providing waivers for strict financial covenants related to the debt. But the reality is the debt is not going away, and there is still a lot of uncertainty around what is normal and will be the “new norm” for business.
Reclaim Control | Business Restructuring Process
Now more than ever it is critical that your financial statements are on an accrual basis. A cash-basis balance sheet will NOT tell you what your real net working capital is, and you will only be lying to yourself.
Take Corrective Action
Corrective action – talk to a financial professional to determine if you might need to have your company restructured. Your financial professional is NOT the CPA that prepares your tax returns.
A Trusted Advisor
We can provide an analysis and recommendation and walk you through the restructuring process, out-of-court, or in-court through a bankruptcy process. Give us a call and find out how we can become your trusted financial advisor through this difficult time.
Download the free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.