Tag Archives | turnarounds

Warning Signs of a Company in Trouble

When considering an acquisition of, investment in, or employment with a company it is best for your peace of mind, as well as, financially to be aware of indications that the company’s true picture may not be what management would lead you to believe.

The surest sign that something is amiss is a frustrated stakeholder – be it the owner, investors, or lenders. What are their concerns? Have there been repetitive problems with the company? Does management not seem to have the right skill set to handle the most pressing issues? Does management spend too much time assessing blame and not a lot of time accurately identifying the company’s problems and devising solutions?

Where to Start

It is best to first take a look at the company’s financials. Start with the balance sheet. Are they building inventory and not able to sell it? Do they have a negative cash position? Have they maxed out their borrowing base? Also be sure that the balance sheet reflects the true state of affairs. For example, has the company written a check which it has yet to mail despite debiting its accounts payable account?

Take a look at the income statement, preferably one with monthly performance over the last 12 months. Group the items into three categories: sales, variable costs including direct sales costs, and fixed costs. What trends do you see in those categories? Perform a breakeven analysis. What is their contribution margin? Is it declining? What about EBIT? Is the company able to service its debt?

It can be helpful to simplify a company’s financial statements, combining similar items in order to move out of the detail and focus on the company’s overall performance and financial position.

The greatest mistake is not necessarily investing in a troubled company, but rather misdiagnosing the company’s problem(s).

Checklist

Here are some items to consider when performing diligence on a company:

Cash shortfall – does the company seem to be constantly in a cash crunch?

Physical deterioration of facilities – signs of inability to maintain facilities due to lack of proper planning and ability to re-invest.

Poor Accounting Systems – accounting records and reporting are delinquent. Often the company does not know if they are making money or losing money.

High concentration of leased assets – inability to secure traditional financing…

More at WikiCFO.com

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Breaking Debt Covenants

What should you do if you are currently violating or are at risk of violating your debt covenants? The following video addresses this issue. The key is to be proactive and not wait for it to fix itself.

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It’s Not Hot and I’m Not Here!

I was having lunch last week with a workout officer at a large bank. He was commenting on how customers referred to his department were often in a state of denial. Not unlike the man who finds himself in Hell but won’t accept it!

It seems that a lot of businesses are in denial. Their sales are off on average thirty percent, they have been collecting old receivables and are losing money. Furthermore, they know they are going to have a problem with their debt compliance certificate in the coming quarter. Yet, they wait for something to change.

It is important for all of us to accept that this recession will last longer that those in the past. It already is one of the longest!

One of the perplexities of finance is that a company often has more cash when it is shrinking and going out of business than when it is growing. Consequently, a number of companies are generating cash and losing money at the same time. In a way they are consuming their flesh! At some point they will have run through their liquidity and have fewer options to save their company.

What every company should be doing is developing a business plan to reposition themselves to first stabilize the profitability at a lower level of sales and, more importantly, take advantage of the changes taking place. It all starts with making a business plan and putting it in writing.

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Regional Turnaround Management Conference

Last week I attended the Turnaround Management Associations’ regional conference in San Antonio. Several interesting trends and comments were made. The most enlightening were from an economist, Don Reynolds, out of Fort Worth. If you ever get a chance to hear him, do so! He is very entertaining and filled with common sense. Some of his predictions were as follows:

– The recession (yes, we are in a recession) will last longer than people think. Most probably 12 – 15 months vs the 6 months that is being tossed around.

– Housing has yet to see the 2nd shoe fall

– same for the credit card markets. Their next!

– There is a major de-leveraging of risk going on in the global markets which will take 5 years to work out of the systems. Presently, we are 2 1/2 years into the cycle.

-Underwriting standards at banks are going up. (Even in Houston, Texas!)

– Finally, there is a commodity bubble that will have to be dealt with.

You would think that in the middle of oil country everyone would be optimistic. However, the mood would best be described as nervous. We all know that the world is a global market. If everyone has a cold chances are you will too.

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Is the Tide Begining to Fall?

Today I attended a luncheon for the Turnaround Management Association of which I have been a member for approximately 10 years. During this time I have seen good economies and bad. For the past 3 years the economy has been so good that the TMA meetings looked like a Maytag repairmen convention. Today was different!

The room was packed with people I had not seen in 6 months. What was more thought provoking was the speaker. Not what he had to say but his recent career change.

Trained as a bankruptcy attorney the speaker had spent the last 6 years as an investment banker. Sometime during the year his firm was sold to Merrill Lynch. He recently left Merrill Lynch to join a major law firm. Doing what? Bankruptcy law!

So when the investment bankers start becoming bankruptcy attorneys maybe we should be watching the economy more closely!

Check out the warning signs of a company in trouble

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