Turnarounds & Restructuring

Overview

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Since 1983, Owners, Executives, Managers and Boards of Directors of financially underperforming and financially distressed companies have turned to MorrisAnderson for professional advice and more importantly to be an agent of change. Most of our clients have cash flow problems due to some fundamental change in their business model. Other clients have an over-leveraged balance sheet with more debt than the company can currently service. Some clients may be in an over-advance position on their borrowing base as part of an asset-based loan. Companies may have encountered significant adverse change such as losing a major customer, incurring a cost increase that couldn’t be passed through to its customers, making a failed acquisition, funding a major investment that has drained the business of its liquidity, or some other event.

Frequently our potential clients are placed in their lender’s Special Asset or Loan Workout Group which often results in a reduction in borrowing capacity to protect the lender but coming at a time when the company needs access to additional capital the most. The Special Assets Officer must decide whether the business’s financial performance will improve within a reasonable time frame such that the lender will want to retain the loan or alternatively, whether the lender will want to exit the loan and force the company to refinance during a time when the company is financially weak (which is a difficult proposition for the company).

Management credibility with a lender is a major component of the lender’s decision equation. Unfortunately, many of our clients have damaged that credibility by providing financial projections that the company doesn’t achieve, often on multiple occasions. In addition, management sometimes commit to their lender to take specific actions, but don’t follow through on those commitments. In these cases, management has severely damaged credibility with its lender and is inviting its lender to exit their loan. Most often, lenders prefer to maintain a loan as opposed to exit the loan. However, the Special Assets Officer who is now managing the relationship with our client needs credible information and a reliable action plan or Turnaround Plan that will quickly improve a company’s financial performance to support a “maintain loan” decision. This is where MorrisAnderson steps in to provide significant value to both the client company and its lender by organizing and delivering sound financial information and working with management to develop a reliable action plan.

Our Approach

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Most of our engagements start with a Business Assessment where a small MorrisAnderson team spends three to four weeks on-site working alongside senior management to assess the business, its operations, its financial condition, and its management team. Our assessment is totally independent and a very direct third-party analysis of the key elements of your business performed by an experienced consulting team. A MorrisAnderson Business Assessment work scope typically includes the following components which are analyzed and summarized in a written report.

1. Independent Assessment
2. Profit and Liquidity Improvement Recommendations
3. Agreed Turnaround Plan to Improve Financial Performance
4. 13-Week Cash Flow Projections
5. Monthly Income Statement and Balance Sheet Projections for Approximately 12 Months.

Note that our financial projections are always done in direct collaboration with our clients. We work with our clients on a draft report to correct any inadvertent factual errors and fairness in the descriptions of issues. Once the final report is approved by the client and shared with the lender, MorrisAnderson and the client meet with the lender to discuss the report.

Approximately 70% of the time our clients request that the MorrisAnderson team assist with debt restructuring negotiations with its lender and other creditors (as appropriate), and to be involved in the implementation of the Turnaround Plan. The temporary addition of MorrisAnderson’s experienced consultants to supplement the client management team to help guide the implementation of the Turnaround Plan significantly improves the odds of our client’s future success at a time when failure should not be an option.

The MorrisAnderson senior consultants who manage our projects typically have a CTP (Certified Turnaround Professional) certificate. A CTP certificate means that a MorrisAnderson consultant has successfully passed rigorous testing and experience criteria as established by the TMA (Turnaround Management Association). We work primarily in a hands-on and collaborative manner with client management teams. Our client companies are typically experiencing both financial and operational distress and are financially under-performing to the expectations of both owners and lenders. Over 80% of our engagements are in an out-of-court setting, but we are also experienced working in a Chapter 11 setting.

Business Assessments

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Many of our client engagements start with a Business Assessment which most often is done at the request of a company’s lender or bank group. The purpose of an assessment is to get an independent and totally objective viewpoint from experienced MorrisAnderson consultants on the good, bad, and ugly of a specific business and its financial condition. A Business Assessment benefits both the client and its lender. The end-product of a Business Assessment is a written report.

Our process for doing assessments starts with a modest document request of primarily financial statements and reports, as well as a company’s loan documents and any financial projections. However, most of our work is done on-site at the client location where we meet with the CEO, CFO, and other senior managers of the company one-on-one and in small groups to get their viewpoint on the company’s problems, opportunities, and potential improvements. Typically, we spend between three to four weeks on-site at the company and do interviews with management, owners, board members, lenders, auditors, outside counsel, and anyone else who can provide their candid opinions about the company.

The assessment process is really geared around identifying root cause problems, developing options for solutions to address the problems, and creating financial projections for short-term cash via a 13-week cash projection as well as a monthly Income Statement projection to understand likely future EBITDA (i.e., earnings). However, our work is not purely financial. We strive to understand a company’s primary operational issues, the effectiveness of management, its position in the market and the drivers for the company’s long-term viability and profitability.

The small MorrisAnderson team which is often led by a CTP (Certified Turnaround Professional) meets multiple times each week with the CEO and CFO to keep them updated on the status of the assessment, share key learnings and brainstorm potential solutions. MorrisAnderson prepares its assessment and its list of recommended changes independent of company management. However, it prepares all financial projections in a hands-on, collaborative style with management. In summary, the assessment process helps the company to rebuild credibility with its lender by pinpointing critical issues within the business, proactively identifying solutions, delivering accurate information, and improving overall communication.

Financial Modeling

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MorrisAnderson has strong expertise in financial modeling, requiring all incoming consultants to have significant training and experience in this area. If clients already have financial models built, we import the underlying data into MorrisAnderson based models. We always use our own financial models for client work. There are two reasons for this: first, financial models are typically shared with lenders and our models are presented and formatted in a time-tested manner familiar to your lender. Second, MorrisAnderson needs to stand behind its financial modeling work as materially accurate. This is impossible to do with a client’s financial model without spending many hours reviewing and testing it. Years of experience has shown that it’s faster and cheaper to use our models.

The two primary models we use on virtually every project are a 13-week Cash Flow Projection model and a monthly Income Statement and Balance Sheet projection model. The 13-week Cash Flow Model is best viewed as “checkbook accounting”, in that it is 100% cash-based, with no accounting accruals. Major cash receipts and major disbursements are scheduled out by week in our 13-week Cash Flow Model. The purpose of this report is to see how cash is generated and used by the business, to understand the drivers behind the financial and operational issues within the business, and to get a grasp on current and future levels of cash. The last point will warn management in advance of potential future cash shortages. This provides time for management to take actions to avoid a cash crisis. Lastly, we incorporate into the 13-week Cash Flow Model any asset-based loan structures (borrowing base calculations) in which you pay down a revolving loan as cash receipts from customers come in, and you borrow money weekly or more often to fund disbursements as they hit your bank account. The 13-week Cash Flow Projection is built in a “budget vs actuals” structure, in that actual financial data is inserted for the prior week and compared against the budget or forecast for that week. Additionally, it is dynamic in that any anticipated changes to the rolling 13-week forward projection can be made as more information is gathered. We show you how you can accurately project near-term, but it takes three to six weeks of “actuals” to get this model highly accurate.

Also, we typically do a monthly financial model for at least the next 12 months of your Income Statement and Balance Sheet. In essence, this is a budget. The purpose of this is to project and illustrate financial improvement over a longer period, which can be used as a baseline to re-set financial covenants with the lender. In addition to 13-week Cash Flow Projections and Monthly Income Statement and Balance Sheet Models, we have built a wide variety of financial and operational models that are client and situation specific including but not limited to: Valuations, Liquidation Analysis, Bankruptcy related reporting (such as “Monthly Operating Reports”), Operational Models (such as Materials Resource Planning “MRP” models), and various other ad hoc, cost/benefit analysis. MorrisAnderson gives our models to our clients when our engagement ends after training you on how to use them, so clients get a long-term benefit from our work.

Turnaround Plan Development and Implementation

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Most of our clients are in a situation where they need their business to improve financially or they risk losing: 1. their investment, 2. control of the business, 3. their jobs, or 4. all three. Therefore, they have a strong motivation to make changes.

Time or “runway” until cash runs out is a key factor impacting options for a financially distressed company. Your options are greater in number with six months of “runway” as opposed to one month. Engaging professional assistance sooner rather than later allows for a more robust Turnaround Plan and inevitably more “runway”. We craft Turnaround Plans based upon the following factors:

1. Current/Run Rate and Historical Financial Performance
2. Industry Comparisons and Benchmarks
3. Input from the Client and its Management
4. Our Experience in similar situations
5. Cash “Runway” as discussed above

The key concepts and action items of the Turnaround Plan are developed collaboratively with management. It does no good for MorrisAnderson to write-up a Turnaround Plan and have management refuse to implement it because they never agreed to it. The Turnaround Plan needs to be presented to the Board, owners, and lender so that each stakeholder understands and buys in. We specialize in out-of-court Turnaround Plans targeted to first stabilize a company’s financial performance and then to further improve it over a longer period.

70% of the time our clients ask us to assist in Turnaround Plan implementation. This is an area where we excel. We don’t simply write a report, place it on your desk and walk away. We partner with our clients to push the plan through to completion – we are group of “doers”. Our involvement in implementation may be as an advisor, project manager or even as an interim manager of the client company. This is all at the discretion of the client. We are well versed in project management and often handle various stakeholder communications such as weekly cash reports, monthly EBITDA reporting, loan covenant compliance, key task status updates and more for our clients. We understand the significance of clear and regular communication to key stakeholders (attorneys, banks, customers, suppliers, internal parties etc.) during a turnaround.

One of MorrisAnderson’s advantages is its long-term historical client experience that we always draw upon. Having started the firm in 1983 and having worked on over 2,000 projects, we have developed a wealth of experiences and learnings providing us with a broad set of game changing options to turnaround your company. Additionally, the majority of MorrisAnderson’s senior management have a CTP (Certified Turnaround Professional) certificate and are very active in the two primary industry associations for service providers to financially distressed and underperforming companies: TMA (Turnaround Management Association) and the ABI (American Bankruptcy Institute).

Financial Advisory

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While financial distress may a limited number of root causes, these situations can quickly result in a multitude of complex and intertwined issues. Distressed companies almost universally have cash shortages which means lenders and general trade creditors are often being paid in over longer time frames and in amounts less than mutually agreed upon when their original business deal was struck. To make matters worse, distressed companies are generally operating in default or soon to be in default of one or more loan, lease, or supplier agreement and have several different stakeholders breathing down their necks.

In times like these, MorrisAnderson provides much needed clarity, and sound financial advice on strategies and options to improve financial performance and to preserve and enhance the value of the business. Since 1983, MorrisAnderson has advised companies, lenders, and creditors in loan workout situations. There are many tactics and options that only very experienced financial advisors can provide clients in these difficult situations.

Financial Advisors work closely with company counsel and company management determining how best to present Turnaround Plans to lenders and make requests for concessions from lenders that are often necessary in distressed company situations. Financial Advisors work to create financial, business, and legal solutions and they are the primary advocate for the company with its lenders. MorrisAnderson takes a balanced approach in this role and will push both the client and the lender to come to a realistic and fair agreement allowing the company adequate time to recover from its financial distress.

Business Valuations

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The value of a business is an important “fact” in the world of distressed companies. Unfortunately, in many instances, valuation can be more of an art than a science. In general, there are two types of valuations: 1. Going Concern Value and 2. Asset or Liquidation Value. There are multiple questions that valuations can answer such as:

1. 1. Is there currently equity value for the owners in the company?
   2. Is the secured debt currently covered by Going Concern Value?
   3. Is the secured debt adequately covered by Asset or Liquidation Value?

Answers to these questions have an impact on whether the owners or lenders should provide additional capital to the company. Additionally, these answers can determine whether a lender needs to take fast and decisive action (such as a forced sale or a liquidation) or can be more patient during a distressed company work-out. Assessing value is traditionally done based upon four methods:

1. Comparable Company Sales
2. Earnings/EBITDA Multiples
3. Net Present Value (NPV) of Future Cash Flows
4. Asset or Liquidation Value

The Comparable Company Sales method analyzes actual market sales data and is generally great for larger companies. Actual sales values are typically expressed as a function of a multiple of trailing 12 months of EBITDA resulting in a market tested high-low-average EBITDA multiple range. Hence, a Comparable Company Sales analysis is typically converted into an Earnings/EBITDA Multiples analysis.

EBITDA Multiples are widely published and typically categorized by industry and broad size categories (either by annual Sales or annual EBITDA). Many investment banks regularly publish EBITDA Multiples by industry and company size. These provide a broad view of the market for company sales.

NPV of Future Cash Flows is largely a method used in non-distressed situations as well as academia and in litigation. Few professionals use this method in practice as it is heavily assumption dependent on such things as earnings projections, appropriate forward interest rate and terminal period Going Concern Value.

Asset or Liquidation Value is heavily used in the distressed company world when a company has minimal or negative EBITDA. Each asset is analyzed separately, and assumptions are made on how much cash can be generated from these assets in aggregate if the company were to be liquidated net of liquidation costs.

MorrisAnderson regularly performs valuation assignments either as part of a broader engagement or on a stand-alone basis and matches the valuation methodology with the client situation and need.

Cash Flow and Supplier Management

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When cash is tight and your company is falling behind paying your trade suppliers and your lender, you should develop a reliable 13-week Cash Flow Projection to guide your decisions on who to pay and when. Often, we enter engagements where our clients are in payment default with multiple creditors and of course creditors are demanding commitments form management on future payments.

The worst strategy a company can undertake is to make a commitment to a creditor about future payments without a realistic cash projection and then immediately fail on that commitment. Nothing will destroy management’s credibility faster than promising to make a payment and then failing to live up to that promise.

We assist clients in the communication and negotiation regarding these cases of payment default. To get agreement with lenders and trade creditors to continue doing business with the company and convince a creditor on the reliability of future payments, the company must have a realistic and conservative weekly cash projection that it can trust and rely upon.

Interim Management

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MorrisAnderson is often asked by clients to assume an interim officer or a Board of Director position within a client company. This happens because distressed companies need Directors and Officers who have solid experience in distressed company situations and are willing to act decisively in a difficult situation. Typically, MorrisAnderson senior consultants who have a CTP (Certified Turnaround Professional) certificate assume these very important client fiduciary roles. Over 80% of our engagements are in an out-of-court setting but we act in these roles for Chapter 11 engagements as well. The most frequently assumed interim positions are:

1. Independent Board Member
2. Chief Restructuring Officer (CRO)
3. Chief Executive Officer (CEO)
4. Chief Financial Officer (CFO)
5. Chief Operating Officer (COO) or VP of Operations

There are a variety of reasons why a distressed company may need interim management. An employee may have quit, died, or got fired, and a director or officer needs to be engaged fast. However, hiring a strong permanent director or officer is often a difficult task when a company is financially distressed because few executives want to join a financially distressed company due to the career risk inherent in these difficult situations.

Perhaps the company will be sold, and the owner is interested in buying back the company, yet the company appears to be worth less than its liabilities. In this case, an Independent Director may be retained to fairly guide the company marketing and sale process such that the owner isn’t given an unfair advantage over outside prospective buyers, risking a lower purchase price and potential impairment to the creditors’ recovery.

For very distressed companies a CRO will be engaged to manage the restructuring process and to work in tandem with the CEO and management team on the financial restructuring and critical business issues. A CRO is a position unique to the Financial Restructuring industry where an experienced consulting professional is given an Officer position to handle use of cash and to negotiate the Financial Restructuring with creditors. This frees up the CEO and CFO to continue to manage the business and not have their workday consumed by the restructuring process.

A CRO is typically responsible for, at a minimum, all financial restructuring, turnaround plans, cash management, financial reporting, and lender and other creditor communications. In some situations, the CRO’s responsibilities also include all duties typical of a CEO even though the CEO may remain in his or her position.

Chapter 11 Bankruptcy Reporting

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When a distressed company files Chapter 11, it subjects itself to a level of scrutiny very similar to the intrusive due diligence process of a business being acquired except that it occurs in the very public venue called bankruptcy court. Most of this extra bankruptcy reporting falls on the company’s financial team. The reporting burden is substantial, especially for the weeks leading up to the Chapter 11 filing and the two months immediately after the filing.

The forms and reports required in Chapter 11 are familiar and well understood by MorrisAnderson, however, without professional assistance they will be a bit of a foreign language to your finance staff. There are two primary groups of reports in a Chapter 11 bankruptcy:

1. Statement of Financial Affairs (SOFAs) and Schedules
2. Monthly Operating Reports (MORs)

The SOFAs and Schedules are a one-time data production by the company as of its Chapter 11 filing date with certain data required for the pre-filing period as well. These reports are typically provided approximately one month after the filing date unless an extension is requested.

The MORs are variations of cash-based income statements that are required approximately one-month after each calendar month-end while in Chapter 11. These reports are critical to the Chapter 11 process. All Chapter 11 reports are accessible to the public (customers, suppliers, employees, competitors). In addition, the submitting company Officer must certify them as accurate under penalty of perjury.

In addition to assisting, you and your firm prepare these very important forms and reports, we assist you throughout the process by managing the business side of the bankruptcy process and ensuring effective and accurate information is communicated to relevant parties from the pre-filing planning stages until the Chapter 11 case is finished.