RESCUE & RECOVERY ASSIGNMENTS
The majority of companies that avert disaster do so with the assistance of an independent professional, who works directly with stakeholder groups. While each assignment is unique, we have found there are basic phases common to all engagements involving rescue of a troubled business:
It is often necessary to complete a rapid analysis of the current situation. Facts of the present situation must be established quickly and sometimes confirmed in an effort to determine whether the business is worthy of rescue and rehabilitation.
Should the situation assessment fail to indicate the prospect of profit realization within a reasonable period of time or any other benefit for continuation of the business, the recommendation might be an orderly liquidation of the assets.
Not all troubled businesses can be rehabilitated. In spite of faultless management, a business can cease because of external forces such as unforeseen government regulations. Tariffs, such as those imposed in the softwood lumber dispute, can have a devastating impact on a business. At the very least, creditors deserve the benefit of an orderly liquidation and to be informed of the reasons for discontinuance of the business.
However, many troubled businesses do have the potential to continue business operations, correct their problems, and survive to make a valuable contribution to stakeholders and the economy of the country.
Once the facts are known and having recommended a continuation of the business, it is frequently necessary to stabilize the current situation.
Cash may not be available to service the weekly payroll, unpaid creditors may restrict supplies of raw materials, or similar crisis situations may require immediate attention. Financial disaster often appears imminent.
Urgent and often difficult negotiations with banks, suppliers, and government agencies are necessary in order to resolve the crisis. The credibility of management is usually at an all time low with creditors. It is necessary for the consultant to play the role of mediator, in order to keep the negotiations from deviating from the main objective - to avert disaster.
During the situation assessment and the stabilization process, the consultant observes and gathers information on management. In planning for the rehabilitation of the business, interviews are conducted with employees, customers, suppliers, bankers, and shareholders.
Future plans, strategies, and budgets are assessed and a detailed review of the company's financial information is completed.
In this phase of the engagement, the situation is monitored and reports are issued to interested creditors and/or shareholders. An attempt is made to identify and assemble a core management team that will assist the business to achieve reasonable business objectives.
A business plan is then presented to the owners and the management of the troubled business. This is a critical step in the rehabilitation process and the point at which many rescue attempts come apart. Often managers are unwilling to accept and implement recommendations, which reflect unfavorably on their past performance. However, it is a fact that 95% of the business failures in Canada can be related to managerial deficiencies, such as incompetence or inexperience.
Changes in the management team and organizational structure of a troubled business are common ingredients of the rescue plan.
Also, a rearrangement of debt is not unusual for a troubled business. A list of some options available for consideration include:
- Conversion of existing loans and liabilities to some form of equity or participating debt in an effort to significantly reduce interest expense.
- Renegotiating terms and conditions of existing loans or leases.
- Certain assets with associated debt may be eligible for 'carve-out'.
- Informal proposal to creditors, if practical.
- Purchase of loans with accompanying security from secured creditors.
- Formal proposal to creditors under the Bankruptcy & Insolvency Act or the Companies Creditors Arrangements Act.
Assuming the business plan and recommendations for a rescue are accepted, the consultant normally monitors the progress of management and the business for a reasonable period of time. Frequent consultations between the new management team and the consultant are normal until owners and management are confident that past problems are history.
It is encouraging to note the actions of major financial institutions and governments in recent years - rehabilitation of the troubled business often emerges as a preferred alternative to receivership or bankruptcy. There appears to be greater emphasis on rehabilitation of troubled businesses as compared to ten years ago. Perhaps the increased interest in rehabilitation of troubled businesses can be attributed to media publicity given to successful high-profile rescues.
Whatever the reason, experience has proven that many troubled businesses can survive if there is an early detection of problems and if a business plan is implemented to create a viable business concern.