Business Restructurings, Turnarounds And Remobilization Of A Nation’s Economy

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Fixing our broken businesses and bolstering our true economic growth - Douglas E. Castle

 

In industrialized nations, particularly the USA, the prevailing attitude is in either 1) the instant success or in 2) the disposable item. That disposable item can be a small to medium-sized business which is experiencing some financial turmoil and might well be on the road to Reorganization pursuant to Chapter 13, and more often than not, to a Chapter 7 liquidation proceeding.

The terms and notions associated with business “repairs,” or outright cures such as turnarounds (i.e., turnarounds leading to sustainable solvency with a healthy and consistent positive cash flow), restructurings, negotiations, workouts, re-amortizations, debt-equity conversions, debt-service coverage increases, re-budgeting, a Re-Emergence Plan,  creditor settlements,  investor arrangements, employee buy-in /buyout plans, and management buy-in/buyout plans. [Please feel free to look under the DEFINITIONS Section in this blog’s navigation bar if any or all of the foregoing terms seem or seems unfamiliar to you.]

The calculus of this focus on start-ups to the extent that troubled businesses have become neglected or stigmatized as “corporate raider targets (Dell Computer, anyone?) or “extinct” simply because they are not genesis centers for new technologies, or because they do not have venture capital curb appeal (anyone interested in saving a ball bearing or paper clip manufacturing business? – I can hear your deafening silence as I watch [I can’t literally look at you through your computer or device, but I like to be as fearsome and awe-inspiring as possible] you look down in shame at the floor).

You don’t have to be a calculus superstar to visualize that a small start up entity might create five jobs this year, and fifteen next year, and perhaps a number more (if they are not bought up by Google, in which case, some of those jobs will likely evaporate into a consolidation), while saving the Cruddleston Corrugated Packaging business [fictitious, but which would possibly be located in in the “Rust Belt” of the USA or near Newark, New Jersey] might conserve 80 existing and productive jobs, and might create new employment (perhaps another 10 – 20 permanent full-time positions as well as some precious student internship training.

Perhaps the bloom is off of the proverbial rose when it comes to manufacturing and industrial businesses in the small ($1 million up to $100 million in sales revenues) to medium-sized ($100 million up to $500 million per year in sales revenues) sectors. Part of the difficulty is that these businesses cannot necessarily be fixed and set on the right trajectory without investing some serious analytic, planning and implementation time. Negotiations, correspondence, restructuring and a multitude of changes, some of which will be painful but which are necessary, will have to be implemented and monitored. This usually requires the retention of an outside specialist, in additional to legal counsel — there are a plethora of law firms, but very, very few positive-minded, tough turnaround advisors (or business leaders of this age in general) who understand that 1) not every business problem can be cured by throwing bundles of cash at it, and 2) that it is not pre-ordained by any “Higher Authority” that because a business has problems that they must be fatal.

If these prospectively viable turnaround clients fail (and it isn’t a failure which is based upon technological obsolescence or a colossal and uninsured legal judgment or settlement) it is because they were convinced that they could never recover, and that the path most frequently taken is either directly to Chapter 7 or being on Chapter 13 “life support” – with the expectation of a fatality so no restructuring and Re-Emergence Plan is even hinted at. Working to save the company and its jobs is definitely the road less traveled. Death of the entire mid-section of America — which is not the true subject addressed by the JOBS Act or anyone’s legislative, regulatory or professional menu —  has been occurring at an increasing rate, and is perceived as a self-fulfilling prophesy.

In my professional capacity, I am keenly aware that most company owners, management, directors or even legal counsel do not know who to turn to to perform this type of special precision surgery.

The problem is one of epic proportions. The following statistics for court bankruptcy filings of businesses were provided by The American Bankruptcy Institute for the entire United States, based upon data accumulated from judicial records:

Quarterly Business Filings by Year (1994-2012)

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
1994 13,858 13,617 12,878 12,021 52,374
1995 13,123 12,216 12,648 12,891 51,878
1996 13,388 13,992 13,198 12,887 53,465
1997 13,831 13,991 13,456 12,653 53,931
1998 12,410 11,552 10,346 9,888 44,196
1999 9,180 10,378 8,986 9,020 37,564
2000 9,456 9,243 8,211 8,413 35,472
2001 10,005 10,330 9,537 10,013 40,099
2002 9,775 9,695 9,433 9,500 38,540
2003 8,814 9,331 8,446 8,294 35,037
2004 10,566 8,249 7,574 7,778 34,317
2005 8,063 8,736 9,476 12,798 39,201
2006 4,086 4,858 5,284 5,586 19,695
2007 6,280 6,705 7,167 7,985 28,322
2008 8,713 9,743 11,504 12,901 43,546
2009 14,319 16,014 15,177 15,020 60,837
2010 14,607 14,452 13,957 13,030 56,282
2011 12,376 12,304 11,705 11,149 47,806
2012 10,998 10,374 9,248

You’ll note that the highest number of filings was in 2009, one year following the central banking system and capital markets meltdown that decimated this country’s economy, with the rest of the Global Economy to follow soon thereafter.

One insidious implication, referring again to the above table, is that businesses in the United States (as well as their clients and consumers) were so dependent upon access to credit and the expectation of serial refinancing to prop up cash flow, that they had no cushion of equity in the form of cash reserves, and the other implication was that these companies were taking some liberties with what they considered to be collateral assets, profits and earnings.

These companies, and their legal representatives where virtually running to the courthouses to throw their businesses away. They were collapsing like dominoes, and the overwhelming negativity in the emotional drivers of the economy accelerated this flight to the express route. Many of these companies were unaware that possibilities existed for a reversal of their fortunes — and those who actually thought of the possibility of a means of saving the business by bringing an outside expert inside simply did not know where to find an expert.

Applying some simple and strictly hypothetical assumptions to the numbers set forth in the  above table for the second calendar quarter of 2012, let us say that :

  • 10% of the companies (that’s 1,037) could have been saved;
  • That each company, while operating at full capacity, had on average of 75 full-time employees;
  • That if all of those existing jobs could have been saved, the total of persons seeking unemployment assistance or very low-paying jobs would have been reduced [just for that quarter!] by 77,779.

I believe these numbers to be reasonable.

In sum, companies do not have to die for their mistakes, transgressions and lack of adequate stewardship. There is help for them. It shouldn’t be a secret.

Thank you for reading me and for sharing my articles with your colleagues, connections and contacts over your numerous social networks.

Douglas E. Castle

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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


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