How to Refinance a Troubled Company
Range Advisors is well known for its successful track record helping financially troubled companies refinance with new lenders.
Why are we successful? Because we understand that troubled companies can not be marketed the same as financially healthy companies. Specifically, the sale process for a troubled company requires tailored presentation materials, a different target list and a business plan that addresses head on the existence, cause and fix of the financial trouble.
Here are ten tips to consider:
1. Admit you are in trouble
We see so many companies fall into Receivership because their management teams refuse to accept reality. Salvation is always around the corner.
When you admit to yourself and others that you are in trouble, the actions required to save the business become very clear and easier to implement. A realistic and well documented turnaround plan is critical to attracting a new lender whose primary concern is financial deterioration after the loan is placed.
More on this topic HERE.
2. Identify the trouble and the people responsible
Critical to a new lender’s positive review of the opportunity is the belief that you have a clear understanding of why things went wrong, who was responsible and that a plan is in place to make sure it will never happen again. You should adopt the attitude that ALL financial trouble is a failing of management. Management teams that position themselves as a victim of circumstance will likely not be successful.
More on this topic HERE.
3. Make a plan to fix the problem
Once you have identified the problem and the related management issue, start making changes. You need a clear and simple plan to fix both.
New lenders need to see a reasonable opportunity in an ugly set of circumstances and they will not work very hard to find it. You must tell them the opportunity in the form of a turnaround plan and a simple, attractive and consistent message.
As an example of messaging, consider: “we are in trouble because our revenue dropped 25% last year, but we fully expect it to rebound this year”. From a lender’s perspective, this is a message that is likely not financeable.
As an alternative, a financeable message may be: “we are in trouble because our revenue dropped 25% last year and we failed to react quickly enough. As a response, we have identified the reason for the decline and put a stop to it. We have strengthened our management team and reporting and reduced costs so that we are more responsive and profitable at this new, lower level of revenue. When revenue rebounds, as we expect it will, our profitability and cash flow will exceed our past performance. ”
This isn’t just about messaging of course. You must make the changes and your new lender will hold you accountable to the new plan.
4. Prepare a written business plan with a monthly rolling, multi-year model
Your CIM (confidential information memorandum) and financial presentation need to address head-on the cause and fix of the problem. This is a significant difference from financing a healthy company where often you can simply present historical financial information and an internal budget or forecast.
Your CIM should be supported by a professionally prepared financial model that extends beyond the time period required to normalize the financial health of the company. If possible, deliver a soft copy of the model to a prospective lender so they can conduct their own sensitivity on your plan.
5. Prepare a 13 week cash flow
Monthly models are great for communicating the big picture turnaround. 13 week cash flows are critical to demonstrating your ability to survive in the short term. Also, they are an excellent management tool.
More on 13 week cash flows HERE.
6. Understand your security value
Lenders to troubled companies are predominately focused on security value.
Your goal is to clearly and simply communicate an opportunity so that a prospective lender takes the time to listen and consider the situation. It helps a lot if you understand what that lender does for a living and you have realistic expectations from the beginning.
Often in refinancing troubled companies, there is a shortfall between the financing that may be available based on the borrower’s security value and the amount the company needs in order to pay off the existing bank and support the business plan. Knowing this in advance and having a plan to address the shortfall, rather than expecting the new proposed bank to extend itself, provides the prospective lender significant comfort with the sophistication of the management team.
7. Understand the Universe of Lenders and Lending Structures
There are countless different lending structures available to companies and it is very important for you to understand this in advance. Healthy companies may not see value in alternative senior lending structures but a troubled company needs to understand what is available and what is possible so that they can focus their limited resources in the right direction.
8. Expect to pay more
Financial difficulty means higher risk, which means a higher cost of capital. Accept it, and focus on improving your business.
We encourage our clients to think of the new lender as an interim solution, someone to help finance the turnaround. The incremental interest is a turnaround fee – the cost of saving your business.
9. Expect to report more
Higher risk means more monitoring. Accept it and make sure you have the accounting resources to handle the increased reporting.
10. Consider other options
Financing a troubled company with a new senior lender can be difficult and sometimes it doesn’t work. Even though there are numerous lenders in this market, you also have other options. For example, shareholder or angel money, equity, junior secured or term lenders, supplier credit, leasing, a strategic partner or sale of all or part of the business are some of the options that should be considered.
Posted by Scott Sinclair, Managing Director, Range Advisors
Our passion is to support business owners in pursuit of their dreams.
We believe that for professional advice to be truly valuable to medium, small and entrepreneurial businesses, the adviser’s professional skills must be world-class, the adviser must participate in the effective execution of the solution and the advice must be affordable by the business. With this, these businesses can overcome all challenges.
You have captured the essence of what every struggling company needs to understand when things are going rough. The number of times I have seen paralysis in a business due to management’s fear of not knowing what to do, or the eternal “Next quarter everything will be better” silliness which just makes doing the deal tougher. The only other point I would make that while businesses are incredibly resilient for a period of time, when you pass that period, enterprise value deteriorates quite rapidly. Just like going to the doctor when you are ill, a company should consult with a firm like yours to get the appropriate medicine to get well.