Testimony To The Company's Fortunes

When a company collapses, what should restructuring involve? Should a company sell its best assets? Presenting a rescue plan to the shareholders is a vital stage in survival and revival.
Companies have recently faced some of the toughest trading conditions in living memory. For many, this has led to serious and in some cases irreversible, difficulties. Managers of troubled businesses frequently need the help of outside experts, and as a result the skills of corporate recovery specialists have seldom been in such demand from so many companies: Eagle trust, Polly Peck, Brent Walker, Berisford International and so on. The recession is particularly claiming victims in the construction and financial service industries, but business failures and turnarounds within the last year have encompassed the whole range of commercial activities.

Troubled firms come in a variety of shapes and sizes. Some may be profitable, but simply underperforming against the rest of their industrial sector and under pressure from shareholders (as in the cases of BAT and ICI) to do better. Some are highly geared, perhaps as the result of a management buy-out and equity holders may be concerned about the riskiness of their investment and bankers about their security cover and whether interest payments can be serviced and example is Gateway. Others may be making losses, but still operating within their banking covenants. Here, the matter is perhaps more urgent and many of the same issues - strategy, quality of management, cash generation and financial structure - have to be addressed rapidly. Finally, there are those firms which are virtually or actually insolvent, where the question is whether value can be salvaged by a more creative method than simply calling in administrative receivers and disposing of assets to the highest bidder.

What warning signs should tell shareholders, bankers, trade creditors and managers of a company that the wheels are about to fall off? Any number of signals have been identified that should give cause for concern. Late accounts are often eloquent testimony to a company's fortunes, but suspicion might also be aroused by a flurry of boardroom changes, falling profit margins (where management is making a desperate dash for market share) or unusually large financial items (where the finance director is trying to bail out the operating business by trading in the money markets).

Sometimes a firm's directors will respond to pressure from creditors and shareholders (or both) by calling in expert advice. But sadly in most cases it is the lenders and shareholders themselves who insist upon an independent review, because they are not being given the relevant information upon which to make decisions. Once a company has traded to the point of insolvency, the chances of salvaging it are relatively low; a massive internal and financial reconstruction is required, possibly using the insolvency procedure of administration if appropriate; or in smaller cases a voluntary arrangement will suffice.
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