Keys to turnaround success

it is a polarized situation, but yes, many companies in Finland are facing deteriorating operating and financial conditions. Even if supply side disruptions have become a thing of the past, they have been replaced by high inflation and high interest rates as top worries.  Combine this with depressed demand and a weak balance sheet, and you have a recipe for potential disaster. 

Typical symptoms of financial stress or distress include failure to meet company guidance on earnings / current business plan estimates; financial losses; failure to meet financial covenants; and failure to meet contractual payment obligations to debt holders. In early stages of distress, the creditors will often work to adjust the terms of the repayment, including lower interest rates and/or extending the repayment schedule. This could go on for years. However, in more challenging times, banks do tend to tighten the screw, and there are already emerging signs of lenders’ tougher stance towards troubled companies.

The tipping points are likely to be renewal of credit facilities or a liquidity squeeze. This is a dire situation, particularly if the company is caught unprepared. Acting proactively and early yields the best results.

Voluntary financial restructuring, or out-of-court workout, of a company involves a deliberate and proactive effort by the company’s management to reorganize its financial structure, operations, and obligations to improve its financial health and long-term viability. 

A financial workout typically aims to address immediate financial issues while setting the stage for long-term sustainability.

The key components of a financial workout for a company include:

1. Assessment and Diagnosis: The first step is to conduct a thorough assessment of the company’s financial situation. This includes analyzing financial statements, cash flow, debt levels, profitability, and other key performance indicators. Identifying the root causes of financial distress is crucial for designing an effective workout plan.
2. Cash Flow Management:  Managing cash flow and ensuring liquidity is a top priority in a financial workout. The company should develop a detailed cash flow forecast to understand when and how cash will be generated and spent. This helps in identifying potential shortfalls and allows for proactive measures to maintain liquidity. The business plan and cash-flow forecast for the business will be used to determine the debt capacity for the business and as key input for valuation report.
3. Valuation: In essence, valuation serves as a foundation for the entire financial workout process as it guides negotiations and shapes restructuring plans. Valuing a distressed company is tricky, as conventional valuation approach tends to understate the impact of financial distress. In a distressed situation, several additional factors will have to be factored in valuation. Furthermore, value is ultimately determined by what someone can afford or is willing to pay in a transaction. It is typical to a workout situation that a solution must be found. The task of your experienced financial advisor is to ensure that there are several different options on the table right up until the very end.
4. Debt Restructuring and Negotiation: If the company is burdened with high levels of debt, debt restructuring is likely to be necessary. This could involve negotiating with creditors to modify repayment terms, reduce interest rates, extend payment periods, or even reduce debt principal. The goal is to alleviate immediate financial pressure and create a more manageable debt structure. Sometimes you are even able to raise new debt or capital while existing lenders accept a haircut. There are many available options and instruments.  An enormous amount of value can be created or lost during this phase. Prepare well and thread carefully! Speed is always of the essence in a workout, particularly if your company is burning cash, and our experienced financial advisor can tell you what could work and help you to achieve the desired outcome.
5. Operational Efficiency: Streamlining operations and optimizing efficiency is essential for cost reduction. Evaluate all aspects of the business to identify areas where expenses can be reduced without compromising the quality of products or services. If the situation is truly severe, it may be necessary to cut into the muscle as well to get through the worst of it. No successful company has been built solely on cost-cutting, but it’s astonishing how much can be achieved in the short term when it becomes imperative. By the way, any astute acquirer of distressed companies is aware of this fact. Functions like product development, where the benefits materialize only in the long term, are in a particularly vulnerable risk zone.
6. Revenue Enhancement: Certain strategies to increase revenue, such launching new products or services or entering new markets, are extremely tough to execute in a distressed situation, and the revenue-generating actions focus primarily on the existing line of products with the emphasis on the marketing mix (product/service mix, pricing, positioning, servicing, quality, territory, distribution, etc.).
7. Asset Management: Evaluate the company’s assets and determine if there are opportunities to sell non-core or underperforming assets to generate funds and improve liquidity. The sale could include for instance a business unit or even the entire company. Running a sales process on distressed company or acquiring a distressed company can be very different from a conventional M&A. I can tell you quite a bit more if you are interested.
8. Workforce Management: In some cases, companies may need to make difficult decisions about workforce management, including layoffs, furloughs, or reduced hours. These decisions should be made carefully, taking into consideration both short-term financial needs and long-term organizational health.
9. Negotiating with Suppliers and Vendors: Engage in negotiations with suppliers and vendors to potentially extend payment terms, reduce costs, or obtain discounts. This can improve cash flow and reduce immediate financial strain.
10. Stakeholder Communication: Open and transparent communication with stakeholders, including investors, lenders, employees, and customers, is crucial during a financial workout. Provide updates on the company’s progress, plans, and efforts to restore financial stability. This is very important. In a distressed situation, trust between parties has already been shaken severely if not lost completely. A successful workout will re-establish trust.
11. Financial Forecasting: Develop financial projections and scenario plans to assess the potential impact of different strategic alternatives and market conditions. This helps in making informed decisions and ensures that the workout plan has sufficient financial headroom.
12. Strategic Planning: As the company works through its financial challenges, consider boosting of long-term strategic planning to position the business for sustainable growth once financial stability is regained.

If this sounds like a lot of work, you are right. However, depending on the company’s situation a light version of the workout plan may just do the job. The light version includes some operational and financial restructuring. For instance, the existing lenders may agree to modify repayment terms, reduce interest rates, extend payment periods, or even lend more – in return for an equity injection from shareholders. The degree of difficulty increases in relation to the company’s operational challenges and if existing owners are unable or unwilling to contribute more capital to the company.

In recent years, the number and quality of alternative debt and equity providers taking interest in turnaround situations in Finland has increased tremendously, but this remains a tight market, particularly for small and medium sized companies. Consortiums made of businessmen investing on ad-hoc basis have traditionally been filling this gap. It is noteworthy that in many cases turnaround investors are not the same investors and lenders as in the conventional market, and your financial advisor should know who they are.

Out-of-court workouts can be an effective alternative for financially distressed companies to resolve their challenges and avoid the detrimental effect on business and reputational damage associated with formal bankruptcy. However, successful out-of-court workouts require cooperation, negotiation skills, and willingness to compromise from all parties involved. The company’s debt structure should also be reasonably transparent.

Sometimes out-of-court workouts just don’t work. Other choices in hard version of the workout are corporate restructuring and bankruptcy.

A bankruptcy may not be the end of the road for the company and sometimes it is even a preferred choice for owners.  It is important, however, to understand that corporate restructuring will never alone restructure the company succesfully. You really need a good workout plan too with operational levers and meticulous execution of it.

One of the most important choices that the company is making in the early stages of crisis is hiring professional advisors. Executing a successful turnaround requires the company’s management and board to possess quite a unique set of skills and tools, which are rarely found within most companies beforehand.

I strongly recommend the hiring of financial advisors, consultants, and legal experts with extensive experience in corporate restructurings and turnaround situations, who can work as a cohesive team together. Their collective expertise ensures that the company receives the best advice and guidance during its most challenging moments.

The sooner the work begins, the greater the range of options available and the potential to salvage or even create value. A cost-effective and swift way to start is by requesting a preliminary assessment of various alternatives from a financial advisor.

Conclusions: A successful financial workout requires a combination of financial and judicial acumen, strategic thinking, and determination. It’s important for company leadership to be committed to the process, stay adaptable, and take a proactive approach to addressing financial issues to achieve a positive outcome. Should you have any questions concerning your situation, please contact CEO Jussi Majamaa (tel. +358 40 842 4479) in confidence.

About the writer:  Jussi Majamaa has extensive experience in providing financial advisory services to companies struggling with financial difficulties, and he has been involved in advisory roles in several voluntary restructurings, corporate restructurings, and bankruptcies involving both private and listed companies, as well as in the sale and acquisition processes of distressed companies, since the early 2000s, some of which have been among the largest transactions in Finland to date. Majamaa has also served on boards in challenging situations, deliberating, and implementing various options for business continuity.