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When you Can't Find the Exit...

November 25, 2009

There used to be six ways for a business to get out of trouble - and fixing it was only one.   

Think about that, you can get out of a major jam six different ways. That was very good for American businesses and the economy. 

These days there are only about 1½ways to get out of trouble in a distressed business.  And the one solid way is the worst; liquidation. 

Quickly; here are the six ways in order of preference (reverse order of woe):

1. Resurrection. Fixing the business and restoring financial health.

2. Refinancing.  Taking you loan/debt to another friendly neighborhood bank.

3. Re-Equitizing.  Bringing in a partner who has lots of cash.

4. Re-Amortizing.  Having your friendly neighborhood bank extend your payment terms, or even lowering your debt.

5. Going Concern Sale. Selling to someone who’s always wanted to run a business like yours or, a healthy larger company, or a private equity / hedge fund who needs to invest and has oodles of money.

6. Liquidation. 

With all those options, turnaround guys like me could always post a win and most business owners could get out alive.

Fast forward to 2009.  Refinancing  is out of the question and "friendly neighborhood" banks of old have been replaced by something a bit less cuddly.  Re-Equitizing only works if you can find someone with both money and a taste for risk. Re-Amortizing; although you might think this would be happening more, banks simply want you off their balance sheet.

So an increasingly common option is Liquidation. I’m working one now that was in the housing business.  The bank called and made it clear that there would be no turnaround, simply a prompt liquidation.

But what about Resurrection?  It’s still the most desirable option and still possible.   What has changed is the length of time needed.  With all the other options gone; you need plenty of cash and time to pull this off.

Here’s a quick story about a company I am working with…

In two months we got them profitable, cash positive, increased backlog 42% and cut breakeven 25%.   AND, we still may liquidate in Spring. 

Why?  Because we got called in after all the cash was gone and the company was seizing up.  Six months prior the trend was obvious but no one reached out for help while there was still a fighting chance.

The topic of Time and Cash could go on for longer than I have time in this blog.   Contact me through our website if you’d like a better explanation and/or easy ways to gain the luxury of time.

www.DorsetPartners.com 

Lastly, Banks watch the calendar and move to liquidate at the best time.   For Retailers that is right after Christmas when cash is high and inventory is low.   Gift Manufacturers have a different time window.   You may not know when that is but your banker does.