Do you feel like you’re at the helm of a ship that’s slowly sinking? If you’re a private equity investor with a struggling company in your enterprise, you might be nodding your head.
After all, your success is closely tied to theirs. When they thrive, you thrive. Unfortunately, the pendulum also swings in the opposite direction – when one of your investments experiences business distress, it can negatively affect your position, along with your profitability.
Thankfully, financial restructuring and operational restructuring can help you initiate the turnaround necessary to help these companies address their weak points and fortify their business structure for future growth. It all starts with knowing the warning signs.
Today, we’re sharing a few ways you can identify if a company has entered, or is soon to enter, a state of distress. This way, you’ll know when and how to take action.
Struggling Companies: Dump or Fix?
As a dedicated investor, it’s understandable that your knee-jerk reaction might be to dump a company from your portfolio at the first sign of a problem. However, there are many times when it’s worth the effort to step in and fix a company. The key is to consider the most financially-sound path forward.
We recommend starting by determining the root cause (or causes) of distress. Otherwise, you’ll be left to guess at the problem or piece the puzzle together from disparate details, both of which can result in inaccurate calculations.
Once you know what’s really going on, you can perform a basic cost-benefit analysis. First, assess the cost and time you’ll have to invest in addressing root causes. Then, calculate the anticipated earnings and other benefits you’ll incur as a result.
Often, you’ll find that with the right tools and guidance at your disposal, restructuring is a more feasible option than rejecting.
Restructuring Success Story
Panorama built trust and loyalty and effectively managed vendors, which generated $7.2M in sales.
Common Root Causes of Business Distress
What causes a business to fall into distress in the first place? While there are many reasons why operations can go south, a few of the most common ones include:
- Resignation of key finance staff
- Failing margins
- Poor sales growth or decline in revenue
- Large contingent liabilities
- Unresolved near-term debt maturities
- Shrinking EBITDA/margin
- Reduced capital investment programs
- Management and talent turnover
Common Root Causes of Business Distress
With so many potential causes at play, how can you determine which ones are negatively affecting the companies in your portfolio? Unless you’re working directly with a business turnaround consultant, it can be difficult to pinpoint the causes of business distress.
In partnership with your consultants, here are some key ways you can determine the issues at hand:
1. Conduct a Strategic Assessment
First, you’ll need to conduct a strategic assessment of the business. What are its current processes and procedures? Is its operational strategy aligned with its overall enterprise strategy?
Analyzing a company’s business plan will reveal key details about its structure, including the following components:
- Market analysis
- Competitor analysis
- Management team
- Organizational hierarchy
- Products and services offered
- Sales and marketing strategy
When conducting a strategic assessment, you should also consider recent change initiatives and cultural shifts within the company that are not reflected in the business plan.
Ultimately, a strategic assessment will reveal a host of financial and operational issues that could threaten the business’s financial stability.
2. Implement Metrics and Measurement
It can be difficult to understand what’s really behind a struggling company if there are no concrete metrics or measurement systems in place to assess performance.
It isn’t enough to say that sales seem to be down or that clients seem dissatisfied. Exactly how much are they down, and what specific percentage of customer feedback is negative?
As you seek to gather the details you need, it can help to set key performance indicators (KPIs) and other benchmarks to track progress. This way, you can identify weaknesses almost immediately.
3. Provide Interim Management
As you assess the situation, you may also provide periods of interim management. Doing so can help you see firsthand any weaknesses in the C-suite.
For instance, you may find a lack of accountability. In these situations, you can help enact new policies, implement new technology and conduct business process reengineering to enable transformative change.
Identify and Correct Business Distress in Struggling Companies
No private equity firm wants to hear that a company in their portfolio is going through a difficult time. While there are certain instances where it’s more beneficial to cut ties, most of the time, a transformation is possible.
As you seek to help a struggling company identify and correct its root causes of business distress, we’re here to help. Our business restructuring consulting experts can help you push past the gray areas, zero in on specific inadequacies and provide struggling companies with the resources they need to initiate positive change. Request a free consultation below to learn more.
