Restructuring – when things go wrong

For more COVID-19 information,
see our posts Resources and Response Framework.

Things go wrong – if your business cannot afford to pay its debts, what do you do? If you’re an entrepreneur, you can either do something about it early or let things happen to you. Many entrepreneurs hold onto the “hope” that things will get better – cash flow, profitability, personal circumstances, etc. In my experience, letting anything just happen to you or your company is a bad thing (of course I’m guilty of “do as I say not do as I do” just as much as everyone else). Once things get out of hand, corporate restructuring helps.

Corporate restructuring is the process of communicating and negotiating with debt holders in order to avoid bankruptcy, foreclosure, personal credit damage. Outside consultants, outside of the business’ operations and ownership, provide the best means of accomplishing meaningful restructuring.

DSV Consulting LLC

Most businesses with less than $25M revenue are required by commercial banks to provide personal guarantees, which compounds the problems when things go bad. This contributes to a “credit no man’s land” for business with revenue between $10M and $25M – the operations aren’t mature enough to support the credit needed and the owners’ credit isn’t robust enough either. Personal guarantees, “credit no man’s land“, debt collectors, business associates that aren’t happy – face these head on by reading on…

Before things get worse, some rules

Before we look at corporate restructuring in depth, here are some ground rules for your business to head off problems before they are intractable. Note that these ground rules are for emerging businesses with $10M or less in revenue. First, here are items at the board of directors’ level with help of your board of advisors:

• Require board approval for any loans, leases, or any indebtedness over 5% of monthly revenue ($1,200,000 annual revenue and $100,000 monthly revenue’s rule is set at $5,000;
• Seek board approval for opening credit card or revolving credit accounts, even if personally guaranteed;
• Notify the board if loan covenants are breached; and
• Report to board if Days Payable Outstanding (DPO) or like key performance indicator for accounts payable is above its trailing 12 month average.

Secondly, here are operating level rules to implement:

• Set expense report standards for employees, including required manager authorization;
• Limit corporate credit cards on a per employee basis;
• Issue corporate credit cards only to management level personnel;
• Monitor vendor revolving credit usage; and
• Create a monthly recurring charge schedule and review monthly.

Defining restructuring

Restructuring is referred to under many different names, all of which mean roughly the same thing (see our definition above):

• Out-of-court restructuring,
• Debt restructuring,
• Work out, and
• Distressed debt restructuring

Up next…

Don’t forget our other management consulting services at DSV Consulting LLC, including:

• Business development consulting, and
• Crowdfunding consulting and support.

---