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:
- 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.
- 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.
- 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 It may be time to sell outdated equipment.
- 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.
- 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.
