10 critical success factors in a restructuring
 
  1. Define a quality business and transaction strategy.  A robust, stress-tested strategic and operating plan, that is well-articulated and documented, can be the centrepiece for aligning constituent interests around the current and long-term potential of the business.  Whether the context is a financial recapitalization, an administration, or proactive retrenchment by management—a solid strategy and implementation plan is often the basis for valuation and for effective capital structure design. Distinct business plans for the going concern and for each new strategic initiative allow for active monitoring of the improvements and change.
  2. Understand and actively manage the restructuring process. Although the context for a restructuring can vary by industry and for specific business conditions, there are a number of similar issues and steps that an experienced advisor knows how to manage and capitalize on. In a formal proceeding, a restructuring will involve a number of legal and procedural steps that must be adhered to—and prior expertise is essential.  In less formal proceedings or self-initiated restructuring, there are sets of “best practices” that can ensure that the process is smooth and effective. These include addressing and synchronizing such items as tax structuring, accounting treatment, due diligence/valuation for asset dispositions or M&A, negotiation with lenders and reporting frameworks and disclosures to banks, bondholders, capital markets and board members.
  3. Manage the expectations of investor and other constituent groups.  In order to effect a successful restructuring, management, employees, the board and the various investor groups should have a shared view of the plan, the value proposition for any change and the accompanying risks.  Expectations can be managed best through open, well-structured and well-supported communications that lay out the elements of the restructuring plan; provide a framework for identifying and assessing the impact on the various constituencies; and define how progress and results will be measured.
  1. Ensure a world-class approach to valuation. Understanding value creation will improve alignment among management, investors and other constituencies over the direction and agenda for the restructuring. All financial restructurings are ultimately credit decisions based on assessments and points of view of value and anticipated cash flow performance. In the process of developing and executing a restructuring program, the management/restructuring team must understand the sources and timing of sustainable—and one-time additions—to enterprise value. They must understand and pay close attention to the credit evaluation models used by the capital markets—and ensure that the design and implementation of a restructuring provides for adequate liquidity and capital structure flexibility to protect and grow value going forward. In addition, they must attend to the effect of tax structure on capital structure design, as well as the value of future growth options and the intangible assets (such as intellectual property) that the enterprise may possess.
  2. Build the defensible case(s) for restructuring—focused on the economics and the financial model of the business.  In the early days of a restructuring, a 13-week rolling cash flow projection is critical in situations of distress and liquidity crunch. Longer term, good capital management requires close stewardship over the economic and value-driver assumptions. A clear, credible, financial and economic model will help identify and display the impact of various strategies and transaction alternatives; it will help demonstrate the pro forma impact of transactional, operational and tax strategy alternatives; and it will enable speed and alignment through the restructuring process.
  3. Ensure liquidity and protect operations from the impact of financial distress using short-term operational and financial solutions. Generate cost savings through rapid and proactive closure of non-performing business units. Enhance cash flow through better cash flow management techniques and freeing up available liquidity within the existing organization. The restructuring team must understand short and longer-term sources of enterprise value, and protect on-going operations from the cost of financial distress.  It is critical that short-term solutions do not destroy or jeopardize the optionality and future growth value embedded in the business model.
  4. Use the “down economy” as a strategic tool to protect value and reposition for growth.  An economic downturn provides management, its board and investors the opportunity to assess strategic and financial direction—and to refocus on core, value-centric parts of the business.  A  “down economy” provides an opportunity to take advantage of M&A transactions that were not otherwise possible.  A workout is also an opportunity to re-set an inefficient or unwieldy capital structure through a programmatic approach to addressing the various creditor groups and improving overall pricing and cash flow flexibility going forward.
  5. Understand tax requirements and utilize tax-efficient strategies to protect and grow value. Tax strategy and structuring is an integral component of improving cash flow generation and value creation. Tax strategy should be developed in conjunction with overall enterprise strategy and organizational design—and not be an after-thought once a specific transaction has been agreed, or a specific deployment of assets defined.
  6. Understand the legal process and the role of legal advisors. Restructuring a business requires insight into potential issues in finance law, mergers & acquisitions law, insolvency law and related regulatory areas.  Cross-border matters may be subject to overlapping and possibly contradictory regulations.  Obtain advice from experts with extensive experience in the legal issues and jurisdictions involved in a given restructuring.
  7. Know what to look for in the capabilities and experience of your restructuring advisor. Restructurings are complex undertakings that involve the synchronization of a number of financial, strategic, operational and reporting issues. In many cases, a restructuring can involve analysis and negotiation on many fronts to achieve success.  It is critical that the restructuring advisor you retain has “been there before”—and not only understands the compliance-related aspects of a proceeding, but also knows how to determine, protect and grow value throughout the process.