Francisco López Lubián. Professor. IE Business School
30 September 2014
Corporate restructuring is not just a question of refinancing, and yet the two things are often seen as being one and the same. This is one of five mistakes that often lead to companies blowing their chance of salvation.
A company needs a restructuring process when it is in a situation of insolvency, that is to say, when it is not generating enough liquidity to meet payments related to its debt. In recent years the continuity of many firms has hinged on the negotiation of business restructuring processes, a task that will have taken up a great deal of time of the senior management of the company in question. What is certain is that companies in highly diverse sectors have survived – or not – due to their ability or lack thereof to restructure their business and refinance their debt.
In a restructuring process the future of the company is at stake. It is therefore a good idea to use all available means to achieve objectives, and avoid mistakes that make it more difficult. Here is a list of the five errors that are to be avoided when embarking on a corporate restructuring process.
1. Thinking that it is only a financial restructuring process.
A corporate restructuring process means introducing a series of changes into the firm, which will have to be transformed from an economically unviable and unprofitable organization to become economically viable and profitable. These changes and improvements are not just a question of securing refinancing or changing the company’s capital structure, they have to impact the ability to generate a permanent cash flow that will enable the firm to cover its debt servicing needs and provide enough remuneration for shareholders.
2. Blaming the bank.
When a company is in a situation of insolvency, it is not all (in fact not even mostly) the bank’s fault. The insolvency situation arises because the firm is not generating the permanent liquidity it needs to meet its debt commitments. The situation arises because of the incompetence of the management team when it comes to managing the operative aspects of the business, from sales and cost control to investment policy, along with the control of working capital and expenses. Resolving the problem of lack of operating liquidity is not just a question of financial restructuring, it also requires operational improvements, not just financial ones.
3. Not being sufficiently prepared for negotiation
A restructuring process is, basically, a negotiation process. Before a negotiation process starts, it is essential that the management team have a clear negotiation strategy, in terms of key aspects such as: negotiable and non-negotiable issues, the limits of the guarantees offered, possible counter offers to the banks, and difficulties that might arise during the process complete with anticipation of possible solutions. Draw up a distribution of the possible economic value that restructuring could produce, complete with risks and who will be in charge.
4. Presenting plans that are unrealistic or inconsistent
Identify the causes of the lack of liquidity. Prepare a coherent and credible business plan (operative and financial) designed to improve the company’s liquidity. Identify short, medium and long-term needs. Try to ensure that the “sacrifices” required of each “type” of economic agent are balanced and fair. Remember that from an economic point of view banks will only agree to go ahead with a restructuring plan if they consider that the value of the restructured firm to be greater than its liquidation value. The management team have to convince the banks that this is the case.
5. Getting lost in the process
Regardless of the legal side of things, the limits imposed by regulatory and fiscal frameworks, and cultural differences among countries, it is important to remember that a restructuring process is about reaching a private agreement with debtors that will enable the survival of the company. This agreement will only be possible if the restructuring process is treated as an opportunity to resolve the company’s problems. Do not get lost trying to tie up the many loose ends that have to be considered and discussed in the course of the restructuring process. Always keep the final objective in sight, namely to resolve the problems that are preventing the firm form achieving stable liquidity.
How can you know if the agreements reached in the course of the restructuring will be enough to generate this stable liquidity in the future? Make sure that the agreements will lead to solutions that provide a reasonable distribution of profit and loss among the parties. Verify that the future design includes and reflects the company’s value generators in the proper manner, then make the most of future opportunities and prepare the company to achieve those objectives.