COVID has unquestionably caused unprecedented distress in many industries. Many businesses are facing liquidity constraints or are being required to redesign their business model to respond to evolving consumer trends or supply-chain disruptions. But businesses can take steps to manage risk and survive.
Call in the professionals. A prudent step is to engage outside restructuring or financial advisers to help develop and implement short- and long-term plans. Incurring the expense of outside advisers while the company is focused on reducing expenses might seem incongruous. But existing management will likely already be overextended and might not have the requisite experience in navigating financial distress. Experienced restructuring advisers can assist management in developing a liquidity management strategy, business restructuring options and creditor communications and negotiations.
Restructuring advisers will also have industry contacts that can assist with securing nontraditional financing, managing the efficient liquidation of assets and engaging investment bankers or others who can advise the company in implementing its restructuring plan.
Manage liquidity. The board and management teams of a company faced with a deteriorating financial position must make difficult decisions while complying with their fiduciary duties as directors and officers. They must evaluate the company’s capital structure, liquidity runway and financial forecasts.
The board of directors, management and advisers should collaborate to implement short-term measures to ensure survival while developing a new long-term strategy. Short-term measures might include a reduction in force, sales of assets, expense reduction, debt refinancing and negotiations with creditors. Midterm or long-term planning might include corporate or financial restructuring.
In addition to government relief or available stimulus packages, companies might also consider third-party financing, including bank or non-bank asset-based lending, accounts-receivable factoring or purchase-order financing.
Also important is expense reduction. The company and its advisers should identify potential cost savings and situations where the company might have leverage to renegotiate. For example, a landlord might prefer to accept temporarily reduced rent payments rather than manage another vacant property.
Communicate with creditors. Managing communication with creditors and others is an important component of any restructuring plan. The message should be consistent and realistic.
Regular communication with a company’s lenders is of paramount importance, particularly as the company might need to request a waiver of existing defaults and payment reductions. With its advisers, the company should analyze which relationships are a priority and how to preserve those key relationships.
The company should also remain mindful of the vulnerabilities in its supply chain and customer base. Insolvency of a key supplier or loss of a significant customer can create strain on operations and liquidity. Developing a contingency plan for the loss of a critical supplier or customer should remain a priority.
Plan contingencies. While the objective might be to complete a successful restructuring, a dual path strategy is advisable. The board and management are required to focus on maximizing value for all stakeholders, which includes planning for the possibility that the turnaround plan could fail. The company and its advisers might consider whether a bankruptcy case or state court insolvency proceeding would be required or whether an out-of-court liquidation might be possible. Developing a contingency plan as soon as possible will best position the company to preserve its options, maximize value and create the best possible outcome for all involved.
As we all navigate the post-COVID world, businesses that have remained proactive and nimble in their response strategies will be well-positioned to thrive. Implementing swift short-term measures to reduce costs and manage liquidity is important, but equally important are long-term strategies and contingency planning.
Act quickly, plan thoughtfully and recruit the right team to guide you through the process.•
Britton is a partner at Faegre Drinker and member of the firm’s finance and restructuring practice in Indianapolis.