Triage Before Turnaround: Full Series

December 19, 2014

When a business is in distress, it is imperative that a leader stabilize and get control of the situation to afford time to implement a turnaround plan. In effect, perform triage on the ailing company – prioritizing actions to gain control and stability.

This four-part article sets out the key actions in order to stabilize the overall situation of a distressed business. Namely, in order to preserve and maximize the resources needed to survive in the short term and be able to implement a successful turnaround, it is imperative to establish controls over all cash and assets.

Triage Actions to Prepare for a Turnaround

  • Part One – To ensure that sufficient cash is available to fund short-term needs and to fund the restructuring process.
  • Part Two – To ensure management buy-in and to establish a core team that is committed to the success of the project.
  • Part Three – To ensure that assets are safeguarded and preserved to maximize resources available for turnaround.
  • Part Four – To understand the key financial and operating issues in order to rally short term support from stakeholders.

Part One

Triage Action Plan

Whether you are sitting in the driver’s seat as a beleaguered CEO/President or you’re a frustrated Board who has hired an interim CEO or CRO (chief restructuring officer) hired to “stop the bleeding,” the key to the next 60 days is prioritization. Below are the triage actions, but the order will depend on a number of internal and external criteria – such as the patience of your creditors (and investors), the capabilities of the rest of the management team, sales projection status, burn rate, and the list goes on. Every situation is different and there isn’t a magic bullet. However, our advice, if you are unsure of where to begin is to always remember that cash is king – begin by establishing a cash-conservation program.

Establish a Cash-Conservation Program

  • Obtain and/or prepare detailed rolling short-term weekly cash flow projections and lender borrowing base calculation (minimum of 13 weeks) to understand the size of any short-term liquidity issues (the “liquidity gap” availability per operating lender line of credit vs. funding requirements);
  • Conduct high level review to confirm:
    • Current opening financial position/updated snapshot re:accounts receivable, inventory, AP, etc. (e.g. ensure payable listings are complete, rebook outstanding held cheques),
    • Assess accuracy, availability and appropriateness of management reporting information,
    • Examine opportunities to expedite billings and accounts receivable collections;
    • Assess opportunities for postponement or deferral of payments with major creditors/suppliers;
    • Review other non-cash working capital items to determine the potential for accelerating conversion to cash;
    • Conduct a detailed review of operating expenses and capital spending to identify expenditures that can be deferred or eliminated without compromising the business or “cutting into muscle”;
    • Assess the need to immediately centralize control of expense approval & cheque issuance;
    • Identify redundant assets that can be sold;
    • Identify any excess leverage capacity to support additional short-term borrowings; and,
    • Develop documentation and system changes necessary to effect short-term cash conservation measures.
    • Complete high level financial diagnostic – typically address issues relating to strategy, operations, management, support infrastructure and financial issues; typically leads to identification of “quick hit” opportunities –with short implementation timeframe, which produces immediate cash savings.

Part Two: Management

In the first part of this four-part article, we discussed that when a business is in distress, it is imperative that a leader stabilize and get control of the situation to afford time to implement a turnaround plan. In effect, perform triage on the ailing company – prioritizing actions to gain control and stability.

The first step in the triage to prepare for a turnaround: ensuring that sufficient cash is available to fund short-term needs and to fund the restructuring process.

Now, we’ll look at management and how by focusing on your management team, you can stabilize the overall situation of a distressed business.

Triage Actions to Prepare for a Turnaround

Part Two – To ensure management buy-in and to establish a core team that is committed to the success of the project.

Establish the “Go-Forward” Management Team

As we all know, ineffective management can cripple a company…or can paralyze a crippled company. If a company is in distress, leadership is required to assess, mobilize and motivate, and move forward with talented and tough individuals who are committed to righting the ship.

  • Obtain organization chart and confirm current roles, responsibilities and gaps;
  • Conduct management and Board interviews to determine management strengths and weaknesses;
  • Identify the key employees with special skills and knowledge;
  • Remain objective, fair but firm in human resource decisions;
  • Review management contracts terms and conditions vis-à-vis right sizing;
  • Assess Director and Officer exposure and extent of insurance coverage;
  • Form Go-Forward Management team, including:
    • Changes to organization structure
    • Employee retention and severance strategies
    • Terms of reference for a potential Chief Restructuring Officer, if deemed appropriate

Part Three: Assets

In the first two parts of this four-part article, we discussed that when a business is in distress, it is imperative that a leader stabilize and get control of the situation to afford time to implement a turnaround plan.

In effect, perform triage on the ailing company – prioritizing actions to gain control and stability.

Earlier, we discussed the first step in triage is to prepare for a turnaround: ensuring that sufficient cash is available to fund short-term needs and to fund the restructuring process. In the second part of the article, we looked at management and how by focusing on your management team, you can stabilize the overall situation of a distressed business.

Now in part three, we’ll outline how to ensure that assets are safeguarded and preserved to maximize resources available for turnaround.

Triage Actions to Prepare for a Turnaround

Part Three – To ensure that assets are safeguarded and preserved to maximize resources available for turnaround.

Identify & Safeguard Assets

From tangible assets such as inventory and machinery to intangible assets such as brand equity and intellectual property (patents, trademarks, etc), a company’s assets are important to the longevity and success of the business.

  • Prepare detailed list of assets and their location; confirm leased/owned assets; availability of recent appraisals; extent and validity of security held by debtor;
  • Identify any risk attached to each asset including seizure threats, physical security, environmental, safety, illegal acts, ongoing insurance, tax implications, impact of insolvency on contracts;
  • Ensure appropriate measures in place to manage risks, safeguard and preserve assets, including security, back up of electronic information off site, etc. – consult enterprise risk management services;
  • Assess customer base, work-in-process and key sales contracts for risks and issues;
  • Assess knowledge based assets and IP(and key employees), and if high value, develop strategy to preserve;
  • Complete high level evaluation of the expected restructuring environment (i.e. statutory vs. non-statutory restructuring); and,
  • Subject to severity of liquidity and financial position, complete high level Contingency Plan which could include exiting the business.

Part Four: Cash & Assets

When a business is in distress, it is imperative that a leader stabilize and get control of the situation to afford time to implement a turnaround plan. In effect, perform triage on the ailing company – prioritizing actions to gain control and stability.

In this last installment of a four-part article, we discussed suggestions to stabilize the overall situation of a distressed business. Namely, in order to preserve and maximize the resources needed to survive in the short term and be able to implement a successful turnaround, it is imperative to establish controls over all cash and assets.

We’ve discussed three triage actions to prepare for a turnaround:

  • Ensuring that sufficient cash is available to fund short-term needs and to fund the restructuring process.
  • Ensuring management buy-in and to establish a core team that is committed to the success of the project.
  • Ensuring that assets are safeguarded and preserved to maximize resources available for turnaround.

As we mentioned earlier, every situation is different and there isn’t a magic bullet. We recommended, begin by establishing a cash-conservation program, because in our belief, cash is king. Cash is the lifeblood of a company, and if it ceases, so does the business.

In the final part of our series, we will look to understand the key operating and financial issues as necessary step to rally short term support from stakeholders.

Understand Key Operating and Financial Issues – Rally Short Term Support

  • Revisit high level financial diagnostic including leverage of “quick hit” opportunities (See Part 1)
  • Complete assessment of liabilities and commitments
    • Review status of priority claims and Director and Officer liabilities;
    • Review secured creditor positions and current exposure including any loan covenant breaches and risks of realization;
    • Assess status of legal, regulatory and other formal reporting requirements, including any deficiencies, breaches or pending litigation;
    • Consult with the company’s legal counsel to assess ongoing reporting obligations, legal, regulatory and other issues or threats;
    • Identify and assess any impediments to restructuring and turnaround options; and,
    • Evaluate company’s legal counsel, ensure appropriate restructuring background in skill set, and assess need for independent counsel.
  • Determine support required from stakeholders and negotiate agreements to re-establish expectations and ground rules to move forward, such as:
    • Management/employees – retention plan
    • Secured creditors – temporary over-advance, waivers, forbearance agreements
    • Creditors – deferrals, COD, extended terms, volume rebates
    • Landlords – deferrals, abatements, waivers
    • Shareholders – dilution, equity infusion
    • Involve legal counsel in drafting agreements
    • Establish short-term communications plan for key stakeholders
    • Arrange short-term financing (leveraging free assets, or from postponements, etc.)

Organizations that are in distress are usually juggling many issues at once. Timely intervention can be key in righting the ship, stabilizing it and getting control in advance of a turnaround situation. Triage is abrupt and jarring – often it’s quite messy too. A change in mindset from denial to leadership can turn things around. It’s never too late to be a leader and do the right thing. If that means calling in an restructuring advisor to manage the triage, then do it. If it means, that you’ve got the ship stabilized but the company requires outside help, investigate turnaround specialists such as interim CEOs. Whatever you do, don’t wait for the walls to close in – gain control and begin on the road to recovery.


Paul Denton is a Managing Director with the Restructuring practice of Farber. His practice focuses on providing restructuring and advisory services to corporations, lenders, and under-performing companies. Paul can be reached at 416.496.3773 and pdenton@farbergroup.com.