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The Secret Weapon of Struggling Businesses: How Restructuring Capital Drives Turnarounds
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
WHAT IS THE DEFINITION OF 'RESTRUCTURING CAPITAL'?
Businesses focusing on financial restructuring are looking to change their finances and operations, and are often under pressure to do so - Numerous reasons create the need for restructuring, including lower profits or losses, too much debt, and a very competitive environment in their industry. That competitive landscape threatens overall financial stability and requires a roadmap back to profit and growth while revitalizing the firm's competitive advantage.
Redefining Business Resilience: The Impact of Restructuring Capital on Turnaround Success
Job 1 is often taking a look a the balance sheet and assessing the need for financing during the restructuring and turnaround - at this point it's all about what is the business worth and how is business capital being utilized.
Options include a major refinancing, or in some cases selling assets and looking into alternative funding sources to avoid formal insolvency processes.
There are numerous financing options for business turnaround financing. Business finance solutions via an informal turnaround can improve your company operations and your overall financial position with a focus on profit. The most common methods in a business turnaround include debt financing, equity finance, and asset-based lending solutions for cashflow management.
Restructuring capital options and business turnaround financing services for operational improvements leave many clients we meet feeling as if they are business financing outsiders. Knowing they have to focus on some ' financial recovery ' on the entire company without knowing their sources of potential financial capital / financial institutions and not having access to financial and legal advisors can leave owners and the management team in a very undesirable ' limbo.'
WHAT IS A BUSINESS TURNAROUND
Business turnaround implementation is all about financial recovery - which requires identifying key issues and being willing to embrace change and solve real problems.
At 7 Park Avenue Financial, we work closely with owners to identify problems and focus on an appropriate financial strategy. A skilled turnaround consultant assesses the financial management process of the business, suggesting appropriate solutions.
RESTRUCTURING BUSINESS DEBT
We're reviewing some financial options, techniques and go-to strategies for the desired turnaround when restructuring a company in Canada.
A company may also benefit from capital and a restructuring process even if they are not severely financially challenged.
Not all business owners might recognize that point - that it is not always bad news but an opportunity to look at how you operate and optimize the firm's sales and asset turnover. While solutions such as private equity or venture capital might be available, they bring with them a major dilution of equity.
If your firm's efforts are successful in this whole process, the company will be poised to both survive and grow, even when general conditions are more difficult or, on the other hand, severe, such as a recession, etc. Pandemics included. Let's dig in to effect a proper turnaround in restructuring in business both time and financial skills are required to assess the company's overall liquidity.
That involves a detailed examination of the 3 parts of a business financial statement ( balance sheet/income statement/cash flow statement ) and some modelling and ' normalizing ' of those financials. Cash management is critical! .. as well as the need for business plans that focus on the turnaround. More often than not, negotiations with current and new lenders are a large part of a restructuring. Here the focus is on both the position of owners as well as external lenders.
WHY RESTRUCTURE? CORPORATE RESTRUCTURING 101!
There are several reasons why a business restructuring process might be required. In some cases, it is necessary to understand the true value and price of the company. In other cases, mergers and management buyouts might be under consideration. Even more common is that a company in some financial distress might require a turnaround finance solution. Finally, a company might be raising equity as part of a restructuring strategy - therefore, the need for a ' re-jig ' of the balance sheet.
The key point is simply that business conditions have changed, and the company must respond with the best type of refunding based on current conditions in the company restructure.
Balance sheet ratios might be out of line, or creditors and the senior lender might be considering a ' workout ' situation of some kind. The bottom line is that the financials must be 'remodelled' to assess new financing, probably with the help of a restructuring company/business advisor.
RESTRUCTURING BENEFITS
Although the time of change is always a challenge for a business, it is at the same time an opportunity to address long-term financial stability. Arranging new financing/capital structures or refinancing assets allows owners and management to position the company for future profits and growth, as well as the opportunity to address new markets, products and services, etc. Even the promise of operating more efficiently under a reorganization of any sort will benefit the company and give comfort to secured creditors.
That said, it is safe to say that management will always be challenged in refinancing due to the competing interests of owners, lenders, suppliers, etc. It is interesting to note that one industry expert has compared the debt restructuring process to a ' home improvement, 'and it's probably not a bad analogy. That 'remodelling' and enhancing the outlook of the business typically will improve the reputation and value of the company and the company's ability to generate borrowing.
So whether it's general economic conditions (or a pandemic?), the firm's goal is to protect assets and allow the company to survive and move forward in business operations.
Suffice to say that in business financing and financial restructuring, knowing the problem is a huge part of the solution. While the worst-case scenario is going out of business, the desired solution is financing that works. Companies struggling with debt will require either a take out of current senior lenders and new debt and cash flow options, and it's safe to say that some cost-cutting usually is required. Finally, even asset sales must be on the table based on the advice of the advisor/restructuring company.
CAPITAL RESTRUCTURING FROM A BANK?
Various types of finance sources exist, both traditional and alternative, to help companies need a restructuring strategy when there is an operating loss or current financial structure that does not allow you to pay suppliers and lenders, much less grow. While the 'go-to ' for most firms is a bank, various reasons preclude many firms from restructuring via traditional bank solutions; some of those issues include regulations, covenants and ratios that support the financing and stricter margining of assets.
While the owner or new outside equity might sometimes be desired or even mandated, that type of capital is often hard as you're turning around your business. One strategy explored by many is the possibility of merging your firm with another strategic partner or, dare we say it, competitor, in many cases, declining sales and being assisted in ways such as cost-cutting and operational efficiencies such as asset turnover.
Having solid cash projections from the management team and a realistic business plan is key to a solid turnaround strategy. That coupled with a solid understanding of current business assets and their value is the key to bouncing back financially. How you generate revenue is key to understanding potential turnaround financing solutions.
Ensuring payroll deductions and CRA remittances are up to date or a repayment plan in place is also key in turnarounds.
WORKING WITH SENIOR LENDERS DURING THE RESTRUCTURING PROCESS
Generally, a company will have debt obligations to a senior lender. This might be one loan or a combination of loans that hold security over the company's assets. This senior debt must be addressed so that a company can free up collateral and cash flow in discussions with a new lender/lenders. The loans in place with senior lenders are typically a business line of credit, i.e. an ' operating line. '
Security for these loans is typically all or some combination of inventory, receivables, equipment, and real estate if applicable. A term loan, typically ' cash flow ' based, might be in place in certain cases. Other debt in place and ' unsecured ' might be working capital loans, equipment leases on specific collateral, etc. After new owner equity considerations and possibilities have taken place, it is then necessary to consider reducing or refinancing debt, the potential sale of any assets, etc., as part of a ' restructuring loans ' process.
RESTRUCTURING FINANCE - FINANCING SOLUTIONS AND FINANCING SOLUTIONS FOR DISTRESSED COMPANIES/CHALLENGED BUSINESSES
1. Unsecured cash flow loans
2. A/R Financing - Proper refinancing of sales receivables will always get you more cash; optimizing current assets for their quality and turnover is key to a successful refinance strategy
3. Inventory Loans
4. Asset-based non - bank business lines of credit (loan advances for these credit lines are much more generous than traditional Canadian chartered bank alternatives
5 . Sale-leaseback strategies - In many cases, proper appraisals of fixed or current assets may well be required by external sources. The sale-leaseback strategy is often a key part of any refinancing. Assets owned by the company, which might include equipment and real estate, typically can be ' resold ' to the leasing company or other commercial lender. The asset, still used by the firm, can be refinanced over a fixed period that allows for cash flow to be injected into the firm and a monthly installment program initiated on the repayment based on cash flow projections.
The ability to generate new cash flow from long-term assets is a key aspect of a sale-leaseback solution. It's an add-on to your firm's other debt and operating facilities when potential financing has been exhausted and time is of the essence. It is important to determine which assets are critical to the company's value and which assets are most suitable for refinancing. The most common refinance assets include equipment and real estate. In some cases, technological equipment such as computers/software etc. can be considered for refinancing.
While traditional chartered banks might view a refinancing of an equipment loan in normal bank lending with an emphasis on financials, cash flow, profit, etc., an equipment lessor, on the other hand, will focus on the value of the asset and its role and importance in your business. Established leasing companies have a significant amount of expertise in valuing assets and will, on occasion, use the services of a third-party appraiser.
The cash raised by the leaseback is new working capital for the business and is more often than not used for general working capital purposes. The leaseback refinance strategy allows you to match the loan's maturity with the useful economic life of the asset as it pertains to your business operations.
Leaseback refinances works simply because it recognizes the value of the owned assets in the company and monetizes them to release the cash value of those assets. Owners must ensure those assets being refinanced are key to the business's core operations and future needs. Otherwise, those assets must be considered for sale.
Naturally, larger hidden values might typically come from company real estate/owner premises where a combination of high depreciation and tax benefits might make great business sense to refinance and bring liquidity to the company. The building refinancing could also introduce new amortizations that might make better financial sense.
Like unused equipment, business-owned real estate must be assessed in the context of the company's core business. In the leaseback process, it is all about the company's core focus going forward, allowing the owners and advisor to act accordingly in the disposal or refinancing of assets.
6. PO Financing Sales/Royalty financing
Asset Turnover is key! Proper financing of your current assets ( A/r / Inventories ) allows you to turn inventories into receivables into cash in an ongoing cycle. In many cases, turnaround financing is a temporary fix - typical time frames are from 12-24 months; naturally, business owners should also focus on the long-term plan.
Some of the strategies mentioned above involve your ability to maximize asset turnover and recognize the proper valuation of your assets. Survive and then thrive might well be the mantra! Outside collateral and personal guarantees of owners will almost always (unfortunately) be on the discussion table. Also, it's important to note that cash flow also comes from effective payables mgmt and limiting extended terms to your customers.
Simple strategies in company restructuring, such as the ' sale leaseback ' of assets you already own, can bring invaluable capital to pay off or re-arrange debt. In any turnaround strategy, it's important to address any government debt such as CRA arrears, HST, etc. New ' turnaround ' financing will often address this government debt because of the 'super-priority the government has on all businesses. Once new financing is in place, your focus should be on managing cash flow and balance sheet activity.
Just the ability to properly forecast a realistic future cash flow need goes a long way in arranging new financing. While lenders always focus on ' getting out and getting paid, the business owner/manager's skills in showing control and minimizing risk are key. When a business undertakes a restructuring strategy, both the overall financials and how the company operates will be the focus.
Financial pressures will often force a company in some way to address how it does business. The goal? Simple. Fixing the business and making it better. The firm's goal will be to ensure sales and operations can cover cash flow needs and debt repayment, trying to avoid the worst-case scenario, which is, of course, business failure. ' Fixing ' the business internally is certainly possible and requires a total management focus on costs, profit potential, employee headcount and even a potential sale of a part of the business.
Remember also that in addition to reducing costs, there are, somewhat ironically, costs associated with a proper restructuring. Those costs might come from asset write-offs, facility closures, and the purchase of required new assets. At times, certain industries will find themselves ' out of favour' with lenders, thereby affecting even the strong players in an industry segment.
Whether it's oil, automotive, or building, the issues are sometimes systemic to the whole industry - even the best planning in good times cannot avoid an entire industry segment becoming out of favour with either customers or lenders.
DOES YOUR MANAGEMENT TEAM NEED A RESTRUCTURING?
7 Park Avenue Financial is an expert at providing alternative capital to small and medium-sized companies when traditional lending solutions may not be possible in restructuring a company.
Via a combination of debt financing, monetizing assets for cash flow, and energizing working capital facilities, the firm provides solutions to traditional funding challenges. Financial restructuring via asset-based lending solutions, combined with lease financing/sale-leaseback strategies, can save a company via creative solutions specific to a company's needs.
Non-bank alternative financing solutions fill the void left behind when Canadian chartered banks are unable to or unwilling to fund a business.
CONCLUSION - RESTRUCTURING CAPITAL BUSINESS TURNAROUND PLANS
In today's ultra-competitive economy understanding your refinancing options is critical to get back on the road to long-term success.
Focusing on your current capital structure and fixing the balance sheet will help revitalize your business via a plan that works.
If you are looking for a custom solution specific to your company or industry and asset base/business model, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with more information in business turnaround financing services/options, allowing your firm to provide services/sell products.
FAQ: FREQUENTLY ASKED QUESTIONS
What is restructuring?
Restructuring is a corporate action taken by a business to save the company from the financial crisis and harm and improve its business operations. Proper restructuring improves the business and typically modifies debt and structures to limit financial insolvency, focusing on profitability and performance improvement with the goal of eliminating severe financial distress via crisis management and a return to financial stability and sustainable growth.
What is the difference between turnaround plan and restructuring?
Turnaround and restructuring are two terms often used in the same way when it comes to the use of restructuring consultants and turnaround consultants, but they have different meanings. Turnarounds are the process of reviving a struggling business to avoid a formal insolvency process and ensuring the continued economic value of the company and an experienced turnaround consultant will focus on a more appropriate financing arrangement. Large corporations will typically hire a chief restructuring officer with restructuring skills via recommendations from large accounting firms with a focus on a problem solving strategy.
Restructuring is the process of changing the organizational structure of a business via business planning via company management around restructuring services from banks, commercial finance companies, asset-based lenders, or investment banking groups. an experience turnaround consultant works with company management on a turnaround implementation. Restructuring can be a formal insolvency process aimed at assisting a business in financial distress via analyzing debt carrying ability or looking at manufacturing production.
What is the business turnaround process?
The business turnaround process is the steps a business takes to revitalize the business based on key issues such as sales decline, poor management, or financial distress around the company's capital structure. Turnaround implementations will typically include cost-cutting and financial reorganization of company debt for financial stakeholders to avoid formal insolvency processes aimed at saving the business.
What is the main objective of a turnaround strategy?
The main objective of a turnaround consulting strategy is to return a challenged business back to growth and profitability around a formal process via turnaround services. Issues around the decline of the business will include an assessment of the causes of the decline and a focus by an experienced and skilled turnaround consultant to restore the company's reputation with suppliers and business lenders. A holistic turnaround consultant will employ a targeted solution to a turnaround via a more complex operational exercise around liquidity management.
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