EMAGroup/Enterprise Management Advisors, LLC | Assisting Companies in TransitionEnterprise Management means taking a holistic approach to business issues and guiding clients on operational, strategic and financial advisory plans; including operations management and hands-on implementation assistance, strategic repositioning, product mix and pricing, and the alignment of management (and other stakeholders) with targeted goals and objectives.
EMAGroup focuses on guiding clients through the maze of tactical and strategic issues in dealing with lenders, creditors, and capital sources. In an out-of-court workout, we help clients deal with secured and unsecured creditors, assist with cash management, provide data analytics, assist in rebuilding a turnaround and business plan, and assist with execution. The process leads to a combination of restructuring existing debt, refinancing with new lenders, raising incremental capital (such as mezzanine debt), or helping with the sale of the business in a manner that maximizes stakeholder value and recoveries.
Financial advisory services in Chapter 11 take on a more complicated role involving strategy and guidance in managing through myriad issues related to court proceedings, lenders, creditor rights and related creditors’ committee, and helping to create options that support a successful reorganization.
Bankruptcy is an often-mentioned but little-understood response when a business is experiencing problems and can’t pay its debts. Reorganizing in bankruptcy is a very expensive process. Our focus is to keep companies out of bankruptcy in order to have more options to preserve value and to mitigate the costs of restructuring and repositioning the business.
In many circumstances, bankruptcy or Chapter 11 provides that best option to place a hold on aggressive creditors and lenders, and to provide a forum in which debt obligations can be restructured. In any business that has numerous lease obligations and other onerous executory contracts, Chapter 11 is the best way to mitigate financial obligations and to re-emerge in a business form that can be more successful.
Out-of-court Restructuring is a process whereby a plan of reorganization is negotiated and structured outside of a court proceeding/Chapter 11. In these instances, we work closely with the client to manage this process while management continues to operate their day-to-day business operations. Through this process, we work closely with the secured lender and all creditors to develop a plan that under the right circumstances is the same of better than what might be attained through a Chapter 11 proceeding. Success in this process involves EMAGroup’s ability to find additional options for value preservation and creation and creating success through a transparent process.
Assignment for the Benefit of Creditors (“ABC”) is an out-of-court restructuring whereby the company negotiates settlements with its major creditors (lenders, suppliers, vendors and employees) and allows stakeholders to exist the business operations without a further loss of value. There are additional strategic options that with the help of counsel can be structured to attain the same benefit as feasible through a Chapter 11 reorganization but without the substantial cost.
If a company files for bankruptcy to reorganize its business, it does so under Chapter 11. Management, often with the assistance of a Chief Restructuring Officer or a financial advisor, remains in control of the business during the reorganization process. In a Chapter 7 proceeding, a trustee is appointed from a panel of approved parties who are selected by a bankruptcy judge to administer the estate. Chapter 7 is frequently used or occurs when a business’s operations are immediately going into liquidation process. A Chapter 7 trustee has the additional authority to pursue recoveries including fraudulent conveyances and litigation for recovery of value. The primary difference between the two Chapters is that under Chapter 11, management remains in control of the company throughout the bankruptcy process whereas under Chapter 7, a third-party trustee takes control of the company.
EMAGroup follows a process developed over 30 years of restructuring and consulting to various kinds of businesses. Our process provides for consistency in how we approach each situation and maintains a high level of professionalism. Our process simultaneously considers crisis management issues while determining how to preserve and create value. Through each phase of the process, we maintain a focus on leadership, communications, deliverables and optimizing the end-game results.
In each case, EMAGroup maintains a focus on communications, transparency, deliverables that need to be generated, and on developing a plan for the path forward. We work closely with management and the operating team to maximize the value of the business and the estate, and to preserve shareholder value wherever possible. In most instances, we find ways to generate new value through strategic repositioning and cost savings, or by allowing management to focus on the core business while we manage the extraneous issues.
That said, each restructuring is somewhat unique due to many factors, such as general product and business viability, experience of management, changing industry factors, regional marketplaces, technological or product innovation, capital structure, and the mix of secured and unsecured creditors.
The timetable for a restructuring is situation-dependent and is affected by the level of operating losses, liquidity (working capital), debt, and the extent that management has already started its own restructuring process. Our process is to incorporate and build on what management has already put in place. Then we work with management to efficiently and cost-effectively arrive at a resolution.
A quick process may involve simply dealing with the symptoms of a company in distress and be completed in a matter of six to eight weeks. All too often, the source of the problem with a secured lender is misunderstanding or miscommunication. Once the facts are surfaced and an agreed-upon plan is set in place, the Company is in a position to move forward with additional support that might involve a seasonal over-advance from a lender, extended trade terms or incremental financing from a major vendor.
A lengthy process may involve a complete reengineering of a Company’s business enterprise from the inside and out and may take over a year (not necessarily full-time involvement) to conclude. EMAGroup’s focus is on short-term stabilization and then helping clients execute against a plan that allows them to preserve and generate new value. After our initial involvement, management is usually able to take on most roles and then EMAGroup fills the gaps as needed. As part of this process, EMAGroup focuses on providing pay-back value to cover the cost of services. In many situations, EMAGroup’s ability to provide a fresh look helps with gross margin management, cost structure improvements, sales conversion management, and working capital cycle management.
Chief Restructuring Officer is frequently used interchangeably for services needed during a restructuring process. The role of the CRO is to help manage the restructuring process and can take on various duties to satisfy stakeholders and to support management.
Shareholders and boards of directors hire a CRO based on the advice of counsel or outside stakeholders (such as lenders major creditors) to assist existing management through a cumbersome and complicated process. Having a CRO to help with the restructuring process allows management to focus on preserving and managing the core business. The restructuring process can be time-intensive and cause management to become distracted from the core drivers of the business.
Lenders may require a CRO be hired who is independent of existing stakeholders and can take an objective review of the business and identify alternatives for a path forward. Although the CRO may report to shareholders, there will be a requirement for direct and unobstructed communications between the CRO and lender(s). In all situations, EMAGroup works closely with shareholders and management so that there are no surprises but allows the lenders and frequently unsecured creditors confidence in the accuracy of information and experience in the restructuring process.
Investors (private equity and mezzanine) sometimes require the hiring of a CRO to help both in the restructuring process but to also improve communication, transparency, and preparation of selected deliverables. The CRO may be required to report directly to the board of directors to ensure there is a complete understanding of the situation and strategic alternatives. However, as is the case in all EMAGroup engagements, EMAGroup maintains regular and detailed communication with all parties involved. This includes confirmation of issues identified, strategic alternatives, and options for the path forward.
Loss of confidence in management can cause stakeholders to force the hiring of a CRO and related services. These services are frequently necessary when outside parties lose trust in management for a variety of reasons. For example, a secured lender may require CRO services when i) management has lost credibility with the lender, ii) a board may believe interim management satisfies its fiduciary duties by involving an independent party in the restructuring process, iii) senior management may not want to be the “responsible-person” in a bankruptcy proceeding, or may be necessitated due to the untimely departure of key executives at a crucial/critical time. In these situations, EMAGroup can have a much more impactful role as CRO than serving as an independent board member.
EMAGroup specializes in mid-market companies. How is that defined?
Generally, mid-market companies have annual revenues of $50 million to $500 million. Many of our clients are privately held and frequently family-owned businesses. EMAGroup is very familiar with unique aspects of family-owned businesses, such as generational transfer concerns, owner-supported capital structures and long-tenured employees. As companies increase in size, there is usually a more complicated capital structure involving ownership, debt, geographic operations, and other structured financial obligations that make the restructuring process more complicated. So, the more complicated the business, the more effort is required to complete the restructuring process.
EMAGroup also works with larger companies where an experienced financial advisor or CRO is needed but not the full complement of staff that are provided by a large firm. The EMAGroup team is experienced in guiding multi-national companies with billion-dollar plus revenues through the restructuring process. Our focus is to provide targeted services without leveraging numerous junior staff into a larger-than-needed project.
With smaller companies, we take a lighter touch by focusing more on guidance rather than day-to-day crisis management or implementation support. After a quick assessment, we help clients develop a high-level plan and provide regular guidance on needed deliverables and communication requirements.
EMAGroup provides i) broad industry experience, ii) complex big-case experience, iii) combined financial advisory and operations improvement to meet critical restructuring goals, and iv) a defined approach to the middle market restructuring process. EMAGroup’s senior leadership team, combined, has decades of consulting and management experience including time at some of the largest restructuring/turnaround and Big-4 accounting firms.
Importantly, EMAGroup senior professionals take an active role in working with management to make the restructuring process work. The standard consulting joke is that the consultant asks the client to borrow their watch to tell him the time of day. The EMAGroup team has restructured dozens if not hundreds of companies before and helped manage companies across a range of complicated industries. So, when the EMAGroup team is hired, there is not much of a learning curve. We can almost immediately provide value and pay-back on our fees. EMAGroup’s joke about consulting is that other restructuring professionals tell you the house is on fire and how long they think it will take to burn down. We run into the fire and help you put it out, and then repair and rebuild the damage. It is a huge difference in philosophy that makes for a value-driven process.
Asset-based lending is a type of commercial financing that occurs when an operating entity pledges assets to a lending company in exchange for a term loan or revolving line of credit. The amount of availability from the loan is based on the lender’s value assessment of collateral. In most cases, the availability is expressed as a formula which typically consists of a percentage of the assessed value of those assets or class of assets. As the loan is secured by an asset, asset-based lending is considered less risky compared to unsecured lending (a loan that is not backed by an asset or assets) and, therefore, results in a lower interest rate charged. In addition, the more liquid the asset, the less risky the loan is considered and the lower the interest rate demanded.
Examples of assets which can be used as collateral most often include accounts receivables, inventory, marketable securities, equipment and machinery, real estate, and other fixed assets.
Asset-heavy companies such as manufacturers, distributors, and wholesalers are the best candidates for asset-based lending. It is also ideal for companies that experience seasonal lulls or cyclical fluctuations in their profits, have erratic earnings, or produce marginal cash flow from operations.
Both asset-based lending and factoring provide working capital for companies to use at their discretion. A factor will purchase accounts receivable and advance money to the operating company upon the issuance of a customer invoice. An asset-based lending facility offers a revolving line of credit. Frequently, a factor also manages the process to collect outstanding invoices. Last, factoring is based on the quality of your customer’s credit whereas an asset-based lending facility may partially consider the credit of your company.
Asset-based loans are usually a good option for companies that are on their way to being able to secure a traditional bank loan. Many commercial business loans require companies to have a stellar credit history while remaining profitable. Also, asset-based loans are appropriate for companies that are distressed, have had recent financial performance challenges or have been asked by their bank to replace an existing facility.
Unlike qualifying for a bank loan, an asset-based lender doesn’t focus as much on a company’s credit history and earnings as they do on the value of assets, making it a great option for companies that are growing faster than the cash is coming in or that have less-than-perfect credit. This allows companies that would otherwise not be able to take out a bank loan to still secure working capital.
One of the main reasons firms choose asset-based lending is simply to provide more working capital availability than they could obtain from traditional sources. Asset-based loans are particularly useful in financing lulls in the business cycle. This availability can then be used for day-to-day operational costs.
Asset-based lending is also a great solution when a company needs relatively quick business funding to finance an expansion, is undertaking a merger/acquisition, or even for companies facing bankruptcy.
An asset-based lending facility provides a company with the necessary operating capital needed to function and grow. Asset-based loans are typically easier and quicker to obtain, generally include fewer covenant restrictions and come with lower interest rates as compared to other funding alternatives. Asset-based lending facilities can also provide a predictable cash flow because it can be customized to the individual business’s needs.
No. The business financing available through asset-based lending is always evolving. As a company’s assets grow, so will the amount of money it can borrow. One thing to keep in mind, however, is that while some assets will appreciate in value over time, such as real estate, others may depreciate, such as a company vehicle. This is why frequent appraisals are important when using asset-based lending to ensure the company is maximizing its potential.
As the name implies, mezzanine financing fills the middle layer of the financial structure between traditional secured debt or asset-based lending debt and equity on a company’s balance sheet. The unique characteristics of mezzanine financing are that mezzanine financing generally has a longer term in maturity, is more flexible than secured debt, is less dilutive and less expensive than raising equity.
Mezzanine financing solutions can be particularly advantageous for middle-market companies and management teams that are going through a recapitalization, an ownership transition, or require more “availability” because they are planning an aggressive growth strategy, organically or through acquisition.
Mezzanine financing is designed to support a company’s growth. In some cases, owners can potentially receive a partial cash-out of their equity ownership. Through mezzanine financings, the equity holders can generally maintain “control” of the company with minimal equity dilution. The structure also allows for flexibility in amortization schedules and covenants. In addition, mezzanine lending teams frequently can provide strategic advice and support in the operation of the business. Many mezzanine lenders possess the ability to continue to invest in a company to support future growth needs or assist in further ownership transitions.
Mezzanine groups are lenders first, albeit more flexible than secured lenders. Mezzanine lenders frequently insist on covenants which may restrict the business owner’s ability to borrow, or refinance, and may mandate quarterly or annual measurement of financial performance. Additionally, cash expenditures, including owner compensation and dividend payments, may be limited to a “reasonable” amount. The cost of mezzanine financing is typically higher than secured lending arrangements. As well, the company will have a have a financial partner who will require approval rights over a certain range of financial decisions and may require board rights to observe and review all board actions “firsthand.”
There is a wide variety of providers of mezzanine capital who can offer smaller financings of $2-$5 million at the low end and up to $100 million for larger transactions. It is important to lay out and communicate a strategic plan to attract the “right” partner.
Finding the “right” partner is just as important as attracting the appropriate amount of capital. You should consider the following in determining which mezzanine provider you will choose:
Filing for bankruptcy allows a company to seek protection from creditors while management reorganizes the company to return to profitability. Management continues to operate the company and files a plan to pay creditors. The plan must be supported by a majority of the creditors and approved by the bankruptcy judge.
One is the automatic stay which essentially prevents any party from taking any action against the company, such as lender or creditor requiring the company to make a payment on outstanding debts. Another is the ability to assign executory contracts, such as a lease, to another party. A third is a cap on the amount of a rejected lease claim filed by a landlord.
Bankruptcy is a public process. Management will be required to disclose many aspects of the business, such as compensatory information or payments to insiders. Bankruptcy is a very expensive process. Not only will the company have to pay for its advisors, but also those of the committee representing the unsecured creditors. In addition, many of the material actions taken by management will require court approval, such as financing. Those actions will require the company’s attorneys to file pleadings with the court seeking the court’s approval and also providing the other parties-in-interest, such as the lender or the committee representing the unsecured creditors, the opportunity to file pleadings voicing their opinions on the request. Unsecured creditors must generally be treated the same (same recovery percentage and same timetable).
A typical bankruptcy case lasts between nine and eighteen months. While some bankruptcy cases have been confirmed in a matter of months, other have taken many, many years.
The company is required to file a schedule of creditors and list its liabilities. The company will also file a claims bar date. If a creditor disagrees with the amount the company says it owes the creditor, the claims bar date is the date by which a creditor must file a proof of claim with the court reflecting the amount the creditor believes it is owed. The parties often are able to reconcile the two amounts. If the parties are unable to come to agreement, a hearing may be held to adjudicate the claim.
There are a number of other people, often referred to as parties-in-interest, in each bankruptcy case. A bankruptcy judge will be appointed to oversee your case. If you have secured debt, the secured lender will be a participant in the bankruptcy, as will the committee representing the unsecured creditors. The company’s shareholders are also parties-in-interest.
In most bankruptcies, there will be a hearing about once a month. The hearings will always be attended by the company’s bankruptcy attorney. Depending on the agenda, certain corporate officers may also have to appear in court. For this reason, many companies choose to retain a Chief Restructuring Officer (“CRO”). A CRO not only takes the lead role in the restructuring process, allowing management to focus on the day-to-day operations, but will also attend most of the hearings on behalf of the company.
The company will prepare a plan to pay off its creditors called a “Plan of Reorganization.” The company will also prepare a report, the “Disclosure Statement,” describing the company’s assets, liabilities and operations. The plan of reorganization and the disclosure statement will first be approved by the judge and then sent to the creditors to solicit their support. In certain situations, a party-in-interest may also file a plan of reorganization.