By John Haralovich - Sunday, June 28th, 2009

Times are tough. Sales are lagging, your accounts receivable are being used as a credit line by some customers and creditors are knocking on the door. Money is tight. Perhaps too tight. If this status quo persists, are your creditors going to take action? Is a bankruptcy filing far off?

A company that has slipped into such dire straits that it cannot meet its debt obligations is at very real risk of having one or more of its secured creditors appointing a receiver (either court-ordered or privately appointed) pursuant to the Bankruptcy and Insolvency Act. In this grim scenario, the company is effectively being controlled by secured creditors who will seize company assets and liquidate them to satisfy the outstanding debt.

But a company that finds itself struggling can work to avoid this outcome. The onus is on the management team to proactively scrutinize its operations and make the tough decisions for the long-term benefit of the organization.

The informal approach to restructuring

A well-run company should see the warning signs and take action long before creditors have reason for discontent. The cost of restructuring through a formal process can be avoided by bringing on board a strategic advisor, such as the KPMG Rapid Response team. Their role is to help drive efficiencies, find cost savings and provide the strategic guidance that will make for a leaner, meaner organization better able to manage through the tough times.

It all begins with a granular analysis of cash flow. What money is coming in, what money is going out? Sound cash flow projections are crucial to survival. But accurately forecasting the future is impossible without a deep understanding of historic trends and patterns. Often, many expendable costs that drain cash flow only become apparent through this exercise.

Once this picture is clear, a company can look at a number of areas to cut overhead and improve cash flow, such as:

• Negotiating with suppliers to extend payables
• Asking the simple question, do I really need it? For example, office space in excess of projected needs, non-monetary employee perks, excess support staff, and spending on travel rather than using web-based meetings.
• If I need it, can I find a cheaper alternative? This extends to everything from office leasing costs, to telephone and wireless services, travel and corporate fleet leases.
• Looking at the product/service mix. Are there significant carrying costs to support products with weak or lagging sales? Would the company be more efficient and profitable if it refocused around a few key products and discontinued/divested others?
• Often, this leads to the question about manpower. Can we cut staff, even temporarily, and still be viable? Are their other options we can consider, without making permanent staff cuts, such as implementing unpaid days off and work-share arrangements?

In addition to these points, is it possible to come to terms with your creditors without entering a formal process? This will depend greatly on the trusted relationships your business has built over the years. Companies may find that they have an unsecured creditor who will settle for nothing less than the full value of what they are owed. In this circumstance, there may be no other alternative but to engage in a formal restructuring process to protect your business and those creditors who are prepared to support the company.

The formal restructuring route

Businesses that seek to protect themselves from creditors have two options, depending on their level of debt. Companies with total debts of less than $5 million can file a division one proposal under the Bankruptcy and Insolvency Act. Companies with total debt greater than $5 million have the preceding option, or they can elect to file for creditor protection under the Companies’ Creditors Arrangement Act.

In either circumstance, the key advantage to this strategy is that the business, referred to as the debtor, has bought the time it needs to get its affairs in order and negotiate a mutually agreeable settlement with its creditors. Often, this means reaching an agreement with creditors who accept a lesser amount than what they are owed, such as 30 to 40 per cent of their unpaid amount. The uncooperative creditor cited above cannot attempt to petition the business into bankruptcy and bring down the house of cards. Instead, they will be bound to abide by the terms agreed upon by the majority of unsecured creditors.

Once a company has taken this route, its restructuring plan, and cash flow forecasts, must take into account the various legal costs involved with this process. When a company has been preoccupied for an extended period by its immediate needs, developing a viable long-term plan for its cash flow can be a significant challenge that requires external professional counsel.

OK, the creditors are appeased, now what?

A company that has emerged from this process must expect that much of its business, for a certain period of time, must be carried on a cash-on-delivery, or COD, basis. It must rebuild trust and a demonstrable track record before suppliers will once again be willing to extend credit. This too, impacts the cash flow aspect of the restructuring plan.

But over time, suppliers should become more lenient as payments and repayments are met. There is always an element of risk, but everyone has a product or service they must sell. If one supplier has become gun shy with your restructuring, there will always be another willing to do business with you. What’s important is that you will have put your business on a sound fiscal footing that will allow it to continue operating with optimism for the future.

To benchmark where your business stands and whether it is time to consider bringing on board a trusted advisor, please refer to The Crisis Meter. It provides a visual guide to risk and crisis management levels, and the value of an advisor who can work with management to avoid a negative outcome.
 

Category: Expert Advice.
Industry: Technology, Retail, Services
Functional Area: Finance
Tags: bankruptcy, Bankruptcy and Insolvency Act, CCAA, Companies’ Creditors Arrangement Act, creditor protection, restructuring