Distressed organizations and their shareholders face a harsh and uncertain environment.
This environment is exigent, resources are scarce, data is flawed, there are threats from numerous stakeholders, and time is limited.
As each day passes shareholder value erodes even further and the threat of attack increases. It is essential that the company quickly optimizes the chances of recovery using an effective methodology.
This methodology will be governed by two factors;
1/ A lack of time that represents a rapidly closing window of opportunity for analysis and action. If it is not used properly a second chance is not likely. And time lost represents an erosion of any corporate value.
2/ It is likely that management information systems have been adversely affected by extraordinary demands for resources. Data produced is late, erroneous, insufficient or incomplete. It the worst cases no useful data is being produced. A paucity of quality data is one of the most common symptoms of distress.
Given these two factors a methodology for value optimization must consider the threat derived from both cash and time constraints while concurrently seeking the most viable strategic choice for recovery.
This choice involves optimizing value through a turnaround process that restores enterprise value, or the disposition of assets in some manner. Restoring a company to health will provide a far better return that an asset sale.
Thus the turnaround is an option that is frequently picked, even when it is not a viable choice. By far most turnaround attempts fail. Some estimates indicate that the failure rate is as high as 90%.
It is important that before a strategic choice is made that the company is evaluated it terms of the probability of success. Any attempt at an evaluation must face the current milieu head on. This includes addressing any threats, cash resources and inadequate information.
A complete process of cash management is essential both for shorter survival and the selection of an appropriate strategy.
This process will establish accurate revenue and expense, hoard cash resources, find new sources of cash, and yield a whole host of relevant information.
Cash management begins with an iron fisted control of disbursement and the establishment of a cash budget. Properly completed the budget yields rich dividends for the decision making process. It will quickly reveal opportunities for revenue enhancement and cost reduction, accurate and current data, information relevant to other reports, correction of some MIS deficiencies and management competence.
The budget should be very accurate in terms of actual revenue and expense. It should look forward at least one year but should not be extended beyond its reliability.
The Balance Sheet must also be completed with a critical eye towards existing data. The actual presence of assets should be verified including both tangible and intangible assets.
A competent appraisal should be completed on al tangible assets.
The balances of both short term and long term debt should be confirmed. Particular attention should be paid to less obvious liabilities such as third party liability and contingent liabilities.
The goals of cash management were: to control disbursement, to provide accurate data, and seek additional sources of cash. During this process a wealth of information will be revealed relevant to the choice of strategy and its implantation.
It will be used to evaluate the strategic choice for recovery and provides useful information either for a turnaround or dissolution. Often the restructuring of debt has become synonymous with a turnaround. This is incorrect. Companies in distress possess a scope and depth of dysfunction that takes much effort and time to correct.
The criteria necessary to attempt a turnaround are: Management, a viable core product, and sufficient capital resources.
It is possible for a turnaround without all of these resources abundantly present. By far management is the most critical resource. A successful turnaround must have competent and experienced management. It is crucial that the architect and implementer of a recovery strategy have experience in the distressed environment.
Cash resources must be obtained sufficient for the implementation of strategy. Great insight into the amount required and its source will be provided through the process of Cash Management.
A viable core product must also be present. It must possess volumes and margins that will support recovery.
Optimizing shareholder value in the distressed organization is a matter of strategic choice between an attempted turnaround, and disposition of assets.
Most often the turnaround is the option of choice as it yields the best return. Often attempts at the turnaround fail. This is because they rely merely on the mitigation of debt and ignore the necessary criteria for success. These are management, a core product and cash resources. The most important of these criteria is management
The evaluation of turnaround viability must concurrently address the limited time available and threats to the company. This process begins with a cash budget and extends to the establishment of a new balance sheet. This process yields a whole host of information relevant to any turnaround attempt and successful implementation.
Once complete the process will provide the correct strategic choice and the basis for effective implementation.
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Disclaimer: This article is based on publicly available information intended only for informational purposes. CanadianSME Small Business Magazine does not endorse or guarantee any products or services mentioned. Readers are advised to conduct their research and due diligence before making business decisions.
