I am being advised to do inconsistent things by different professionals and Board members. How do I sort this out? One group says to sell assets to pay down debt. Another says to avoid divestitures, and to buy as much time as possible. Another says to go into bankruptcy and let the court sort it all out. All those points of view obviously can’t be simultaneously right. And something that was appropriate in one situation is not likely to be appropriate under a whole different set of circumstances.
Questions that Keep CFOs Up at Night
My company is in financial trouble. Where do I go to get advice? The typical sources available to management may be highly conflicted or otherwise problematic when a company becomes financially distressed. Lending banks may give advice targeted at getting their outstanding balances repaid. In-place lawyers and investment bankers may not have the requisite experience with financial distress. Or worse, their insolvency partners care a lot more about the well-being of their repeat creditor relationships than they do about a one-shot gig with a debtor. And most Board members haven’t been through the experience before.
Dealing with the prospect of financial distress is obviously unsettling. People can potentially lose everything they have worked for their entire lives. Risks abound, with cash crises, creditor pressures, employee defections, and so forth. In addition, professionals and others have their hands out for fees (going broke ain’t cheap) and companies should be rightly concerned about “agendas” that may differ dramatically from those of the company, its owners and its management.
Why do I care what happens in the financial restructuring? Why not just give the company to creditors? One constant across a sea of distressed restructurings is that the various constituencies of a company will have differing views as to values and related parameters. After all, each is myopically focused on its own recoveries. Left to their own devices, these groups may squabble as long as they can.
Every situation is different, and needs its own legal scrutiny. And we are not attorneys. But we will tell you that Board members will be inundated with many lawyers and well-wishers telling them that they need to sue for peace with the creditors in order to get releases. Many of these directors, particularly those who have never been through the distressed experience, will be rightly concerned.
How do I get others around me to understand we have a BIG problem? Denial is a very common reaction to financial distress. And the messenger is sometimes shot, or at least treated like Chicken Little. The first order of business should be to identify the timing and extent of near-term crises.
What happens if we go into bankruptcy? It depends on how well you and your team have planned, as well as the company’s accessible resources. If an illiquid company stumbles into chapter 11 with little preparation, it very well could end up being sold in a quick bankruptcy auction, or even liquidated. Adequate planning (and this also means addressing the problem as soon as possible) generally means that the decision to go into bankruptcy would be well-informed.
The company is running out of money quickly. What do I do? A cash shortage may be a symptom of a larger problem. The company needs to be stabilized, from a cash perspective – and otherwise. Until management creates a stable platform, the company will likely careen in a very bad direction. And if cash concerns and creditor crises are becoming overwhelming, management probably needs to engage financial help from investment bankers or other such professionals.
What’s in it for me? Am I better off quitting?Maybe, maybe not. Depending upon the circumstances, there may already be litigation risk, and an officer or director may be better protected by staying with the ship. Companies can also enact plans with hefty bonuses for turning the company around and righting its capital structure. There may also be opportunities to benefit from compensation packages established in connection with new investment. And it’s probably better to be seen as taking steps to fix the problem rather than leaving serious issues behind. On the other hand, a turnaround is risky and would require a great expenditure of time for each officer and director. There certainly would be no guarantee of success and any litigation risk could even expand.
How do I evaluate different financial and legal advisors? If a company hasn’t been through a selection process like this before, it may be tempting to simply go with its existing professional relationships. However, like in most areas of life, blind faith is generally inadvisable.