{"id":57827,"date":"2022-06-08T12:53:51","date_gmt":"2022-06-08T12:53:51","guid":{"rendered":"https:\/\/www.capital-tactics.com\/?p=57827"},"modified":"2022-08-24T14:14:20","modified_gmt":"2022-08-24T14:14:20","slug":"dealing-with-financial-distress","status":"publish","type":"post","link":"https:\/\/www.capital-tactics.com\/dealing-with-financial-distress\/","title":{"rendered":"Dealing with Financial Distress"},"content":{"rendered":"
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Overcoming financial distress for the business owner can be enormously challenging. And frightening. Many businesses tilt and run low on cash. Doing nothing in such a situation is like running on a treadmill, going nowhere fast. And this almost inevitably leads to failure.\u00a0\u00a0Far too many business owners have suspended operations and liquidated their companies, only to say afterwards, \u201cif only I had acted sooner\u201d, or \u201cI wish I had known these things when I was going through it\u201d.\u00a0\u00a0\u00a0Financial distress can be paralyzing, and to the business owner no solution may seem possible.\u00a0\u00a0This is not always the case.\u00a0\u00a0Action is warranted.<\/p>\n

Often, remedies can be found prior to collapse, even in very difficult situations, and restructure \/refinancing plans can be developed to live to fight another day. What\u2019s not helpful is a belief that distressed situations will remedy themselves.\u00a0\u00a0A good sales month, a new product introduction, a new salesperson, or other such optimisms are generally insufficient to remedy distress.\u00a0\u00a0Oftentimes business owners in distress will have lost credibility with their vendors and financial partners. Easier said than done, the path to recovery includes building a plan of recovery, sourcing additional capital, shedding non-core assets, restoring confidence with the business partners who may otherwise have felt the distress impacting their own businesses. Or finding new, patient sources of capital.<\/p>\n

Don\u2019t get \u2018stuck\u2019<\/span><\/strong><\/p>\n

What’s true is that banks don’t want to go through distress with a borrower any more than the borrower does.\u00a0\u00a0Banks are under pressure to keep their businesses healthy and cannot craft effective solutions the way that owners can.\u00a0\u00a0But what banks do have is capital that can be lent under the right circumstances.\u00a0\u00a0A recovery plan presented properly to an incumbent financial institution or to an alternative financial institution can provide a rescue program from collapse. Many business owners are fearful of making any maneuvers in distress, thinking somehow, some way, things will work out.\u00a0\u00a0Generally, that is not a valid assumption. What’s true is that business owners are risk takers. They deserve to be treated with respect and often situations will occur that create distress. That’s nothing to be embarrassed by or hidden; proactive management and restructure programs can be the solution in many cases.\u00a0\u00a0In some circumstances, the only way to overcome distress is a restructure under protection of the bankruptcy code, most commonly via a Chapter 11 filing for restructure with court protections from creditors.\u00a0\u00a0While extreme, at times this is the best last chance for recovery.\u00a0\u00a0GM did it, Federated Department Stores (now Macy\u2019s) did it.\u00a0\u00a0Many others have done it and are thriving now.<\/p>\n

Distress, then recovery<\/span><\/strong><\/p>\n

Recently we encountered a situation with a company having their bank attempting to take control of the company, having sent liquidators in. This was a \u201crespectable\u201d bank, but they made the wrong decision. It happens.\u00a0\u00a0We were able to get involved to secure new outside capital to remedy the urgent crisis and give the company growth opportunities. This company is now building a big backlog of work and is almost nearly recovered four months after the crisis. They weren’t going to get out of it on their own. And no amount of legal maneuvering was going to fix the problem. What they needed was rescue capital and a plan of reorganization. We were able to source that, and the company is now sustaining. This business owner, in the worst position possible, literally having liquidators on site, was able to reach out and we were able to provide solutions.<\/p>\n

Distress, capitulation, then disaster<\/span><\/strong><\/p>\n

On a less positive note, recently a $60 million home d\u00e9cor distribution company was drowning in term debt.\u00a0\u00a0Their bank was insistent on liquidating certain assets to pay down some of the debt. \u00a0The debt load had outpaced the company\u2019s profitability and cash flows.\u00a0What was necessary was a restructure under Chapter 11 of the US Bankruptcy code.\u00a0\u00a0<\/em>But instead, the company capitulated, looking under every rock for a rescue lender.\u00a0\u00a0Except the company metrics did not support that line of thinking.\u00a0 The indebtedness was just too much, and more would not be the answer. \u00a0The leadership of the company refused to embrace the inevitable, and waited several months to take meaningful action, hoping for a parachute to provide a soft landing.\u00a0\u00a0That parachute never opened.\u00a0\u00a0Months later, the company\u2019s distress is much worse.\u00a0\u00a0Vendors have put the company on COD terms, exacerbating an already cash-starved position, and the company has had to eliminate much staff. With reduced inventory levels, the company sales are dropping.\u00a0\u00a0With the company structure now in tatters, the leadership decides to do what it should have done 6 months ago.\u00a0\u00a0Only now the condition is much worse and the prospect for survival is much more dubious.\u00a0\u00a0Liquidation is now imminent.<\/p>\n

Mistakes to avoid<\/span><\/strong><\/p>\n

One consistent error that distressed business owners make is to wait for a bank to take action against them. The simple truth is that once a bank has deemed a company to be in distress, the company needs to immediately reach out for help. Most bank loans now contain a term \u2018material adverse change\u2019, whereby the bank can decide, in their own logic, if a company\u2019s position has materially changed in a negative way; and if so deemed, the bank can and often will begin seizing assets or freezing credit lines. The bank is not in a position to provide a restructure plan.\u00a0\u00a0They generally are prohibited from doing such. Banks must be careful not to interfere with business operations lest they be charged with a claim of \u2018lender liability\u2019. In simple terms, banks need to be careful to not have interfered with a business\u2019s operations in such a way that they be accused of creating or worsening a company\u2019s financial distress.\u00a0\u00a0But what they can do is try to lay claim to the assets for which they have a lien.\u00a0\u00a0Banks have limited options.\u00a0\u00a0Business owners who find themselves in difficult situations with the bank should not wait to take action. Craft a recovery plan, using realistic expectations, and if that doesn’t seem plausible, third-party assistance is there. But time is of the essence. Every day that goes by after a bank has taken some sort of negative position or aggressive action represents lost time for the business to find a meaningful recovery program.<\/p>\n

When the skies start to darken over your company\u2019s future, grab an umbrella and seek shelter.\u00a0\u00a0Don\u2019t look up and hope it doesn\u2019t rain.<\/p>\n<\/div>\n<\/div>\n

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Overcoming financial distress for the business owner can be enormously challenging. And frightening. Many businesses tilt and run low on cash. Doing nothing in such a situation is like running on a treadmill, going nowhere fast. And this almost inevitably leads to failure.\u00a0\u00a0Far too many business owners have suspended operations and liquidated their companies, only…<\/p>\n","protected":false},"author":2,"featured_media":57829,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[528],"tags":[532,550,534,530,549,546,543],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/posts\/57827"}],"collection":[{"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/comments?post=57827"}],"version-history":[{"count":1,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/posts\/57827\/revisions"}],"predecessor-version":[{"id":57828,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/posts\/57827\/revisions\/57828"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/media\/57829"}],"wp:attachment":[{"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/media?parent=57827"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/categories?post=57827"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.capital-tactics.com\/wp-json\/wp\/v2\/tags?post=57827"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}