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90 Second Lesson: How to assess whether a distressed business can be turned around?

QUESTION:

Bill H., a business consultant in NYC, asks, how do I determine if a business I am being asked to help is just too far gone to save?

ANSWER:

Bill, if you have to ask this question, you might be doing your client a service by finding someone else who knows the answer already. In any event, this may help you decide:

  • Does the business have a way to fund its immediate critical obligations such as payroll? If not, any turnaround effort may be over before it starts.
  • Does the organization’s current strategy, or at least some significant portion of it, seem appropriate and logical? If not, what will it take to change it? In studying this question, one must be careful to differentiate between the strategy itself and the effectiveness of its implementation.
  • How committed to the company’s survival are its various constituencies? Some of them, such as lenders, will no doubt be more important than others. All, however, can have an impact.
  • Where is the business in its downward spiral? Warning signs become easier to spot (and harder to ignore) as they become more severe. However, the difficulties that need to be overcome also become more pronounced with the passage of time.

[Editors’ Note: This lesson was originally published in March 2014; it is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to info@dailydac.com and we will try to answer it.]

[Editor’s note: You may also be interested in Dealing With Distress For Fun & Profit – Installment #4 – The Lifecycle of a Distressed Company and A Primer on the Chief Restructuring Officer (CRO).]

[Editor’s Note: This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.]

About The DailyDAC Editors

The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.

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