Editor’s Note: For a great discussion of options available to struggling businesses, we recommend Help! My Small Business Is In Trouble, a webinar by Financial Poise.
When a company is distressed, incumbent management may see the need for restructuring, but also may find itself overwhelmed in tending to day-to-day operational issues plus the demands of a restructuring process. Management may consider bringing in a Chief Restructuring Officer (or “CRO”) equipped with turnaround experience and crisis management resources. Crucially, the CRO will also offer a fresh perspective on all facets of the business, from balance sheets and financing to operations.
The role of the CRO is, in sum, to act as the architect and implementer of a strategy. In a troubled organization, optimizing shareholder value usually requires a complete turnaround or a disposition of some or all of the company’s assets.
In the harsh, unforgiving, and exigent environment of a business’s financial instability, it is likely that the organization is experiencing losses on its operations, i.e., operating expenditures are greater than operating income. The company surely faces scarcity of resources like cash, management talent, reliable data, and, most important, time. Notwithstanding its earnest efforts, current management may lack perspective, be bound by habit, and shrink from bold action.
Threats may loom from various sources. Of course the company will have heard from its secured creditor, but suppliers, customers, or employees may also have expressed disappointment and made demands. Management may logically hope that hiring a CRO will placate the secured creditor and these other constituents, which may buy the company time to retain control of its own reorganization. The secured lender may want assurance that cash is being handled appropriately and transparently. In the unusual circumstance where management departs or is removed, a board of directors may hire a CRO to address the crisis.
In my experience, a CRO’s successful recovery of a business is built upon assessment and analysis, which inform a plan of action that is executed at speed. The first step is “viability analysis,” in which the CRO answers a fundamental question: Can a turnaround be completed or not? If a turnaround cannot be completed within a reasonable probability, then alternatives —such as liquidation, going-concern sale, or other disposition — should be pursued.
Turnaround probability is calculated from three principal factors: financial resources, the viability of the core product, and the competence of management. If all three of these are present, then the probability of a turnaround is strengthened. Because time is of the essence, the CRO must begin acting before completing analysis and clarifying strategic choice. While the fundamental analysis is ongoing, cash can be controlled, costs reduced, operations improved, and the CRO can learn the business and gain insight into further improvements. The primary goal of this stage is to determine the correct choice of strategy. Necessarily, this stage often involves significant components of crisis management.
CROs are often hired by a company at the insistence of lender, but generally report to the board of directors. Alternatively, CROs may be appointed by the debtor-in possession[i] with court approval in a chapter 11 bankruptcy case. Compensation structures vary. Hourly rates are common and the engagement may or may not include some form of incentive or “success fee” – with the latter depending on how the parties define “success.” Alternatively, compensation could be based on a percentage of the dollar value of a transaction (sale or refinancing) or a portion of the improvement in financial performance the CRO is able to implement.
The following real-world case illustrates what a CRO does. A group of four Skilled Nursing Facilities (“SNFs”) having about 450 beds and 600 employees was in catastrophic shape. Here is a long list of factors that contributed to the company’s distress:
This group of SNFs was moribund. Management could no longer cope and lacked credibility with all stakeholders. The shareholders — a family — wished to continue as executives, but also realized the need for help. The shareholders engaged me as a CRO for a period of about ten months. After analysis and assessment, I recommended that the company be saved.
After deciding upon the appropriate strategy, the CRO must act. For example, the steps taken in the above case study included:
Thus the SNF was protected from short-run threats, while cash and other resources were carefully husbanded. Concurrently, organization improvements were implemented. The immediate steps abetted examination of the key factors of cash control, core product viability, and management capability. The stage was set for the strategic decision to massively restructure the group financially and operationally.
Over a period of about ten months, the bulk of such restructuring was complete:
The above example illustrates the role of the CRO as an adjunct to management in a distressed company, where the CRO is able to implement a strategy before any insolvency proceeding has been launched. Situations in which management has been ousted or has left, or where insolvency proceedings are already pending, present additional challenges for a CRO’s craft.
[i] See “DIP or Debtor-in-Possession” entry in the Glossary on this site.
[ii] See “Automatic Stay” entry in the Glossary on this site.
Tom has acted as advisor and has served as Chief Restructuring Officer, Chief Executive Officer and Chief Financial Officer in a diverse range of distressed organizations where he successfully directed a number of complex and difficult corporate renewals in a broad range of business sectors. These include; structural steel, garment manufacturing, yacht building, agricultural equipment…
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