Month: September 2020

Categories
Insolvency

Driving Value in a Distressed Transaction

torn paper with word value

Valuing a company, distressed or not, is the easy part; creating that value in the first place is the more challenging task. In transaction terms, value is determined by what a willing buyer will pay to a willing seller. Add distress to the equation, and the “game” could affect stakeholder class outcomes (secured lenders, mezzanine lenders, unsecured creditors, equity holders) in substantially different ways.

Given Covid-19, investing in and disposing of under-performing companies/distressed companies is increasing in interest. The following are key considerations in creating and obtaining “value” in the sale of a distressed organization.

6 Tips to Obtaining Value in a Distressed Organization

Strategy and Timeline: Spend time assessing the company’s strengths, weaknesses, opportunities, and threats to develop a believable recovery and operating strategy. Simultaneously, the company should develop a liquidation strategy and associated timeline. Time is money. Moving swiftly and gaining the buy-in for all stakeholders is important. The team should weigh the tradeoffs of taking additional time to execute a transaction versus the risk and cost of running the company. Make an assessment. In some cases, it’s worth it to negotiate with vendors, customers, lenders and other vested stakeholders.

Revised Financial Forecasts, Cash Flows and Budgets: Create short- to intermediate-term cash flow forecasts, budgets and revised financial statements. Financial statements should contain reasonable adjustments to EBITDA for non-recurring and other extraordinary expenses. Furthermore, they should be shown in a manner that is easy to defend and assist the buyer in understanding the cost of the “distress.” Since the past results are typically negative, specific emphasis should be put on forecasting near-term numbers to illustrate the opportunity and potential value to a buyer. The financial statements should also include a forecast for multiple years (five years) and include an accompanying balance sheet.

Financial Support: If required, speak with your secured lender to offer additional support or availability to assure that the company can get through the transaction. Of course, there will be give and take with the secured lender in terms of cost and time. If additional capital in required, you will need to provide a specific timeline and illustrate how the secured lender’s “position” is improved or at worst, not harmed. Try to create a win-win situation with the secured lender by offering incentives (higher interest rates, fees, etc.) to the secured lender.

Due Diligence: Contract a reputable third-party firm to conduct sell-side due diligence and provide seller diligence support for any potential buyer. Diligence services are being used more in transactions, especially in distressed sales. Key considerations in determining whether to use these services are: reducing time to close, identifying potential problems and risks prior to starting the process, justifying adjustments relating to the distress and giving the buyer with an independent analysis of the company’s historical performance.

Focus On Go-Forward Performance: The traditional transaction will focus most value expectations on historical performance. This methodology does not hold true for a distressed company. The team must focus the potential buyer on the potential opportunity as evidenced by a “run rate” EBITDA of forecasted EBITDA, which reflects the expected improvements.

Management: It is important to critically and honestly assess key managers. In particular, with distressed transactions, carefully evaluate management capabilities and their ability to execute on the turnaround post-transaction. Sometimes potential buyers will have already identified the management team. However, buyers frequently assess the existing management/ownership for their ability and desire to continue with the company. Because of the past challenging financial history of the company, continuing management, if asked to stay on, is frequently compensated with bonuses, increased fringes and other forms of incentive pay.

Companies in distress, with proper assessments and processes put into practice, can survive and even thrive in a challenging economy.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Categories
Enterprise Performance Improvement

How To Prepare Your Company For Sale

42673538 - are you ready for change concept on green blackboard with businessman hand holding paper plane

You have started a company and have grown the company and now you’re starting to think what’s next. Is your company’s industry changing and you’re not certain of what the future holds? Do you want to spend more time with your family but can’t find the time to spend with family and run the business? As owner, you should always be thinking about your exit. Whatever the reason, business owners should plan for an ultimate “exit” from your business enterprise. In doing so, consider the following keys to growing and building value for your enterprise.

What to consider when crafting a business exit strategy:

Leadership: Hire or develop a C-Suite or board of directors with experience in value-creation. The team should be directly involved in making decisions to achieve a “successful” sale. The team is accountable for all outcomes. The leadership team should demonstrate competence in:

  • Developing and implementing business strategy and financial structure
  • Developing management talent and building productive teams
  • Growing profitable sales
  • Linking management performance to organizational goals
  • Managing crisis, transition, and rebuilding processes

Strategy: An effective strategy is key to enhancing enterprise value. You must establish a credible vision, distill the vision through the organization and implement the vision. Focus the company’s strategy on profitable products/services, profitable markets/segments and developing and incenting the organization’s human resources.

Growth: The value of the company increases substantially by demonstrating the growth in profitable sales. A company can increase sales by selling new products or services to existing customers or selling existing products or services to new customers. Organizations should tailor their growth strategy to the market and adapt their products/services to changing market conditions.

Reasonable Capital Structure: Create reasons for buyers to buy your company. A sound strategy with a viable market, efficient delivery and production, coupled with a dynamic management team, will attract potential buyers. As important as having access to cash to finance working capital is making certain that cash resources are used for appropriately-structured debt obligations. Establish relationships with secured and unsecured lenders and make an effort to be transparent with all stakeholders.

Systems and Processes: The development and implementation of processes and systems in the business to control the day-to-day operations allows management the available time to focus on building strategic value. Many managers waste time on tasks where results are essentially the same. Focus on the important things: sales, cost of sales and cash, among others. Processes help layout expectations and create a de-facto delegation of authority. Also, highly functioning systems and processes bode well for value from potential buyers. Essentially, great systems allow for new owners to focus on value rather than spending time on “fixing.”

Value Resources: Invest in, develop and leverage resources, especially human resources. Frequently, potential buyers value the target company’s personnel the most. As owner, you invest appropriate financial resources in developing both senior and middle management. After all, they are the people that execute and implement the strategy.

Exit: “Cash is King.” Running a business is a risky proposition and the longer you hold on to that business the more chance you risk loss or failure. As such, anytime an opportunity arises for a liquidity event, you should seriously consider it.

Planning how to exit your business and implementing the strategies listed above can help assure that you are getting the best possible value for your business.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Categories
Insolvency

Closing Up Shop: How an ABC May Be a Better Alternative to Chapter 7

Closed Business Bankruptcy or ABC

Client Situation:

An underperforming $223 million revenue family office investment (mall-based beauty salons) was originally acquired from a public company with the expectation that its store operations could be improved. The goal was to increase profitability by significantly streamlining back office costs and improving gross margins through a lower-cost supply chain.

  • The Company had been rationalizing its salon footprint, closing underperforming locations.
  • Company could not easily improve customer traffic “across the board” as performance at each salon was heavily dependent on the stylists at each location and also foot traffic at the mall.
  • The Company continued to use the prior owner’s POS system which was used for inventory replenishment and payroll tracking.
  • Because the prior owner had “rolled up” various salons and concepts, there were nearly as many compensation programs as there were salons.
  • The family office was capital-constrained; thus, it was not able to update the décor of the salons, many of which were “tired” in appearance.
  • The company was in violation of certain financial and operating metrics required under the sale agreement with the prior owner.

Challenges:

  • In some malls, the company operated multiple locations under different formats. By closing underperforming locations, the company hoped that those stylists and customers would relocate to the other location in the same mall or relocate to a mall in the general vicinity. However, consolidating stylists (and their customers) proved to be difficult. Because the other mall location was a different format, this was unattractive to the stylist. And, the next closest salon may not have been convenient for the stylist and/or their customers. Closing locations caused too much dilution in revenues.
  • Replicating performance of the higher-performing locations was dependent upon the quality and number of stylists at each location. The artistic talent of the stylists is not something which can easily be transmitted across the salon base.
  • As the client rationalized its locations, regional and district managers were stretched thin across a broader coverage area, reducing their effectiveness at training and sharing “best practices.”
  • The Company was never able to wean itself off the prior owner’s POS system which was used for inventory replenishment and payroll; thus, the savings on shifting to a lower-cost supply chain never materialized.
  • Management was not able to transition the employees to a single compensation program through a lower-cost third-party payroll service.

Solution:

EMA’s significant experience in the retail, consumer products and personal services industries was highly beneficial to this particular situation and enabled EMA to quickly make assessments.

  • EMA reviewed the financial and operational data, including the detailed 4-wall cash models prepared by the management company’s analysts. EMA was able to analyze trends from comparable historic performance and project the company’s results under various scenarios. Further, EMA assisted the company in developing various materials used to introduce the company to potential investors.
  • EMA outlined options for exiting the investment, identified potential wind down liabilities to the management team and the family office under various scenarios, prepared a path which ended the cash outlays by the family office, liquidated the excess salons without wanted publicity and met the terms of the settlement agreement.
  • A settlement was reached with the prior owner which required certain of the salons to be sold. The form of the sale was subject to further negotiation.
  • After presenting various options for exiting the remaining business and effecting the sale under the settlement agreement, the company agreed to use an ABC to transact the sale and wind down the excess salons. The secured lender agreed to the transaction and the structure did not require assignment of leases. By using an ABC instead of a Chapter 7 liquidation, the transaction closed without any disruption to approximately 250 salons which meant about 1,500 jobs were saved. Further, the family office was able to immediately stop funding operations when the assignment occurred.

Lessons Learned:

An ABC is an effective process to liquidate a business in a timely, cost-effective manner while avoiding unwanted publicity. While bankruptcy provides helpful features, such as the automatic stay, assignment provisions for executory contracts, and cram down on secured lenders, it is also cumbersome, expensive and public. Owners seeking to quickly wind down an investment or transition the business to buyer with minimal disruption may find an ABC to be the right process.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Categories
Enterprise Performance Improvement

4-wall Analysis: An Essential Tool for Multi-location Businesses

47263941 - beautiful outlet mall

Every business should provide management with timely reports of key drivers of the business. Management must then read and, as necessary, respond to the results in order to successfully operate the business. For a business that operates multiple locations, such as retail locations, a 4-wall analysis is an essential report that must be created and maintained.

What is a 4-wall analysis?

A 4-wall analysis is a profit and loss schedule for each location and is a combination of what happens within the four walls of the store as well as transactions incurred outside the four walls of the store but that need to be allocated to the store. Direct items include sales, sales returns and allowances, discounts, and cost of goods sold which should all be easily identified with each location based on each store’s POS system. Examples of direct expenses include occupancy, compensation and benefits, utilities and other operating expenses.

Some expenses incurred beyond the four walls need to be included in the 4-wall analysis. These indirect expenses are captured outside the four walls but are attributed to a store, such as freight, insurance, regional marketing and advertising programs, regional field support and interest expense (funded CapEx or operating losses applicable to individual locations).

Why is a 4-wall analysis important?

A 4-wall analysis allows management to stratify store performance using various filters, such as store contribution or EBITDA, by state or region, or by line item such as sales, sales per square foot, sales per head count or other expense line item. Often the 4-wall analysis is sorted from worst to most profitable from an EBITDA perspective as EBITDA is a proxy for cash. By sorting in this way, management can monitor underperforming locations. Store attributes, such as headcount, staff hours, and square footage enhance management’s ability to dive deeper into the metric by looking at line items on a comparative basis, such as sales per square foot. Comparative analytics allow management to quickly identify outliers and begin to take corrective measures.

Are any expenses excluded from the 4-wall analysis?

Generally, costs which are not impacted at the store-level are excluded. Examples of these costs include back office support like corporate sales/marketing, human resources, legal, IT, finance/accounting and corporate management.

Are there limitations to a 4-wall analysis?

The 4-wall analysis is intended to capture the performance of each location. As eCommerce has grown in significance, the importance of traditional brick and mortar locations may not always be reflected in the 4-wall analysis. The value of a brick and mortar location in support of eCommerce activity (e.g., comparison shopping, exposure to new products, sizing/fitting, color validations, customer pickup and returns) is not easily allocated to stores.

How often should the 4-wall analysis be updated?

Since a 4-wall analysis is an essential component of management’s toolkit, it must be updated on a daily basis. In order for the information to be produced in a timely manner (often it is included with the CEO/CFO morning financial dashboard), the 4-wall analysis is generated directly from the company’s financial reporting system.

A 4-wall analysis is a vital reporting tool that provides management with timely and critical operating and financial information and comparable metrics enabling management to quickly identify problems and take action.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Categories
Insolvency

Is an Assignment for the Benefit of Creditors (ABC) Better Than Bankruptcy?

ABC acronym for Assignment for the Benefit of Creditors

When a company has exhausted all available remedies to turn itself around and wishes to wind down its business in an orderly manner, an Assignment for the Benefit of Creditors[1] (“ABC”) can be a cost-effective and relatively quick way to sell the assets and distribute the proceeds to creditors. Assignments are creations of state law, so unlike bankruptcy, which is governed by a uniform federal code, the laws governing assignments will vary across each state.

Here’s how an ABC proceeding compares with bankruptcy[2]:

Who can file an Assignment for the Benefit of Creditors?

Nearly any insolvent business can avail itself of an ABC. The company must obtain shareholder approval which may make it impractical for a public company to avail itself of an ABC. A board resolution is also required authorizing the assignment.

How does an assignment start?

An assignment begins with the company (the “assignor”) reaching an agreement with the firm or individual (the “assignee”) who will act as a fiduciary on behalf of the assignor’s creditors. The agreement will transfer all rights, title and interest to the assignee who then liquidates the assets and distributes proceeds to the creditors.

What are positive attributes of an assignment?
  • The sale of assets under an assignment are completed faster than a 363 sale in bankruptcy because assignments do not require a court process. There are no pleadings, bid procedures, and sales motions to file.
  • Management and the assignee work collaboratively on preparing communications about the assignment. This alleviates negative publicity of the winddown whereas a bankruptcy liquidation is a very public process.
  • Management controls the selection of the assignee. In bankruptcy, there are many parties with a voice in the process, such as the court, the Office of the United States Trustee and the unsecured creditors committee. And, in a Chapter 7 bankruptcy, a trustee will be appointed to sell the assets.
  • An assignment does not cost nearly as much as a 363 sale in bankruptcy. The assignor only has to pay the assignee’s fees and costs. In a bankruptcy, the debtor not only has to pay for its professionals, but also the unsecured committee’s professionals. Furthermore, since the bankruptcy process is so much longer than the assignment, the debtor has to pay for both sets of professionals over a longer period of time.
  • An assignment provides a way to shield the officers, directors and the buyer from litigation of a fraudulent transfer of the assets to the buyer.
  • The ability to complete the sale quickly by the assignee reduces the disruption caused by a bankruptcy filing and helps to maintain continuity of the business thus saving jobs.
What are the limitations of an assignment?
  • An assignment does not provide an automatic stay which means creditors can continue to pursue actions against the assignor. However, since the secured lender is a cooperating party in an assignment, the risk of the secured lender foreclosing on its collateral is unlikely.
  • An assignee cannot assign executory contracts to the buyer. The assignee must get the contract counterparts, such as a landlord, to agree to accept the buyer as the new obligor.
  • An assignee cannot sell assets “free and clear” of liens or “cram down” the secured lender as in bankruptcy. Thus, the secured lender must agree to the sale if the secured lender isn’t going to be paid in full with the sales proceeds.
What does the assignee do during the pre-assignment period?

From the commencement of the assignment until the date the assets are transferred to the assignee, the assignee will be working with management in conducting its due diligence on the background of the company, the liabilities, any litigation, reviewing debt agreements and collateral positions, and ascertaining the highest and best offer for the assets (reviewing the company’s marketing efforts as well as performing its own marketing efforts, if necessary). It is during this period that most of the cost of the assignee will be incurred.

What does the assignee do during the assignment?

Upon the effective date of the assignment, the assignor transfers its assets to the assignee. The assignee often then immediately sells the assets. The assignee will contact the unsecured creditors and notify them of the assignment and the bar date which is the deadline for the creditors to file their claims. The assignee will distribute proceeds from the sale, if any[3], to the unsecured creditors.

Companies in distress should consider an Assignment for the Benefit of Creditors vs. bankruptcy to more more quickly satisfy creditors, conserve any remaining capital, avoid negative publicity and benefit from a more timely dissolution.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

[1] An ABC is a state law creation, so rules and regulations vary by state. It is important to retain counsel familiar with the assignment laws applicable to your state.

[2] In California

[3] As is often the case, the sale proceeds are not sufficient to pay the secured lender’s claims in full which means there are not distributions to the unsecured creditors.

Categories
Capital Solutions

What To Do When Your Bank Wants You To Find A New Lender

Pushing the button on Business Loan to find a New Lender

Getting asked by your bank to find a new lender is happening a lot right now. It’s not personal. You have taken some losses and maybe invested more capital or provided supplemental collateral to boost your availability under your credit facility. You have explained the recent losses caused by the Covid-19 shutdown to the bank and everybody else seems to be getting a reasonable forbearance. So why is the bank picking on you?  Well, it can be for any number of reasons that have nothing to do with the nature of your long-term relationship.

Suffice it say, banks often do not have much latitude once a default occurs and certain other measurement conditions exist either related to your business or the bank’s portfolio.  So, when your bank does ask, be gracious, as you may need the bank’s help with additional time or a temporary over-advance. A good banker will also give you some guidance about what you need to do to get refinanced and even give you some direction or options to help with the refinancing.

Actions to take when your business needs refinancing:

  1. Get referrals on non-bank lenders from trusted sources. There are a lot of non-bank lenders with varying objectives that may align with your business needs. That non-bank lenders do not have the same regulatory requirements as banks cuts both ways. These lenders can provide you a lot more credit availability but can also have tripwire covenants that will cost you a lot of money.
  2. Prepare a comprehensive restructuring plan that ties to a detailed budget model. The bank asked you to find a new lender for a good reason. Be introspective and recognize that something fundamental needs to change with the business. The goal is getting to a level of profitability that can support your debt levels. If you have too much debt, sell off non-performing or non-core assets whether inventory, equipment, real estate, an unprofitable business line/division, the company airplane. Maybe it’s time to find a financial partner or prepare the whole business for sale. Take the dramatic action needed and show you will be able to meet your plan milestones and objectives.
  3. Prepare a detailed cash flow forecast that covers the next 90 to 180 days. A new lender wants to make sure you can get to a closing. Keep in mind that the new lender may want you to have a pay-down plan for vendors that are getting stretched. A good lender will want to make sure you are properly capitalized.
  4. Prepare a financing plan. You need to explain what happened to the business and how the actions taken will get your business to targeted business plan objectives. This may sound odd, but you will need to succinctly explain how your business makes money. You would be surprised how many business owners and CEOs of investor-owned businesses will say that they just need to generate more revenue. It is not enough.
  5. Access collateral condition. Preparing a detailed cash flow forecast will provide you with an immediate assessment of how much time you have and how much additional money your business requires. Review your business assets. For example, conduct a detailed review of accounts receivables and inventory to determine the lendable condition of each. If there are aged receivables or inventory, develop a plan to convert these into cash.
  6. Consider outside help. Putting together a comprehensive “package” to propose to a lender may take some time. Because you are also managing the day-to-day business, you may require a consultant to manage these “extra” activities. Furthermore, a consultant with experience in refinancing may be able to facilitate the process in a more expeditious manner that is beneficial to the company and the lender.

    In an uncertain business environment, it is best to be prepared for the possibility of a “You need to find a new lender” call. If or when that call does come, taking the steps above can lessen anxiety, streamline the refinancing process and create less disruption in your business.  

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Categories
Enterprise Performance Improvement

What Could Possibly Go Wrong? Indicators of a Failing Business

Indicating Failing Business vs. Successful Business

Some businesses start out small but over time, grow to occupy more space, add employees, increase capital expenditures for equipment, technology, marketing or raw materials, acquire other companies, and take on new and bigger goals. But often the basic business processes do not keep pace with growth. Management, too busy with the day-to-day, may neglect the company from a financial or operational standpoint. The result? A company that is in distress with a prognosis that can range from “We can turn this around,” to “Sorry, this company can’t be saved.” Recognizing relevant issues and implementing solutions can possibly keep a business…in business.

Here are some of the common issues found in troubled company situations:

  • Poor accounting practices and weak financial reporting. Nearly every company that experiences financial distress utilizes poor accounting practices that lead to a lack of timely, detailed, and accurate financial information. There often is not a clear correlation between financial reporting and operational reports, but the combination of both in the right form supports a more profitable business.
  • Poorly designed operational workflows which become overly complicated. Over time, cycle times increase for design and engineering, production, and customer delivery.  Management needs to ask: “How does the operational floor look and how efficient do operations appear?” Sometimes the answer is obvious, as when it appears disorganized, it is disorganized. Think in terms of Five-S and LEAN practices: Sort, Set in Order, Shine, Standardize & Sustain.  “Are there good measurements in place and daily reporting?”  Some very simple process improvements can have a dynamic effect on productivity.
  • Procurement practices are not carefully managed.  It is too easy for controllable costs to increase when business is very profitable. Material costs, production services, and administration expenses can easily increase without close monitoring. Packaging materials, including boxes, labeling, print materials, and marketing services are areas where costs incrementally increase each year without meaningful oversight. As a result, this is usually an area of simple and quick savings.
  • Logistical costs and product movement costs are not closely managed.  Product movement costs can become disproportionately high in relation to product costs, because of a shift in volumes or a customer accommodation.  And suddenly a product line is no longer profitable. But management continues to assume the product is making money, if even on the margin. Instead, the marginally profitable product line that was helping to support higher production volume is losing money.
  • A lack of benchmarking to peer groups or to historical performance. Production costs components and administrative costs get out of sync with key drivers to profitability. Companies lose sight of gross margins and overhead in relation to sales. 
  • Cost accounting and product cost analysis are frequently a lower priority.  But for many businesses it easy to lose track of cost to product and an increasing variance against original targets.  Sometimes the answer is that costs have gone up and it is time for a price increase.  Do not be shy, customers will push back but ultimately know you need to be profitable to continue as a supplier.
  • Temporary labor and over-time are used to control headcount but turn out to be a higher overall cost.  There are frequently opportunities to better manage over-time and to negotiate better rates on temporary labor. Also, it is important to have a standard operating procedure in place of when to convert temporary employees to permanent.
  • In-house versus outsourcing and third-party logistics. High growth sales and marketing companies frequently try to quickly build their own infrastructure which results in higher than standard production costs and a high cost distribution network.  Can the company really be best in class in all aspects of its business?  It is an important analysis and sometimes biased when performed in-house.  With the dramatic shifts in business models, it may be more profitable to never touch the product and make a third party accountable. Instead, be expert in design, marketing, costing, sourcing, and customer management.
  • Recognizing the need to decrease workforce or close facilities may be the only way to rescue the company.  It is hard to resize the business after so much effort was expended to build it up. Management never wants to do lay-offs or implement a Reduction in Force (RIF). They never want to close store locations or warehouse facilities.  A successful business requires an ongoing 360-degree view of finance and operations and a willingness to quickly sort out issues that, left unresolved, may lead to failure.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Categories
Insolvency

COVID-19 Effect: Is Your Company In Trouble?

Covid 19 business decline

Underperforming or insolvent companies usually have a flawed or broken business model. With the onset of Covid-19, weaknesses in an operation get amplified. What was an annoyance is now sapping working capital and resources from your core and more profitable business operations. Focus on what needs to change and think in terms of how to run a world-class business.

Middle-market companies owned by entrepreneurs, closely-held family operations, and private equity investors all make similar mistakes but for different reasons. For non-investor-owned businesses, it is easy to get comfortable earning enough but not dealing with the tough personnel, operational, customer or product issues. Private equity firms focus on growth, leverage and short-term performance gains. Consequently, they will accept new sales revenue for growth that is not profitable. Debt leverage and short-term performance gains mean limited investment in capital expenditures and innovation. So, whether you are an owner, investor, or a lender who wants to help a borrower, consider the following red flags and how to fix them.

In this new Covid-19 business environment, beware of these red flags:

  1. Lack of access to timely and accurate operating and financial reporting. These issues did not matter as much when there was a solid flow of business and a consistent supply chain. But all that has changed and now a better roadmap is needed. You cannot properly run a business without good detailed and timely data. It may be time to update or invest in improved data systems.
  2. Keeping marginal product lines and customers that were intended to grow into sources of higher contribution and profitability, but the transition never occurred. Consider phasing out product lines and customers that are not contributing to the bottom line.
  3. Sub-optimal utilization of equipment. Investment in equipment that is not optimally-operated because of downtime, change-over requirements, missed software upgrades, preventative maintenance, or lack of proper production planning. It may be time to sell outdated equipment.
  4. Unfavorable variances on unit labor and material costs. Companies frequently lose sight of or do not update costs standards, and do not want to implement price increases. If you are not meeting or exceeding industry benchmarks, figure out why.
  5. Cutting production labor but not wanting to touch administrative overheads. In every business cycle and in every type of organization or ownership structure, administrative costs can get bloated. It may be time to evaluate not only a reduction in production labor costs but administrative personnel as well.

    Tougher times may call for tougher measures that ultimately contribute to improvement in the enterprise overall.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.