How can boards help their companies navigate distress—before it’s too late?
Boards must be prepared to deal with rapidly deteriorating circumstances that could push a company into insolvency.
Businesses, industries and the economy as a whole run in cycles. Any company can become susceptible to financial distress at some point. Directors need to recognize that every company could at some point face financial losses, or even total dissolution. And so, directors and management must be prepared to deal with rapidly changing circumstances that could cause such distress. One of the ways companies may try to alleviate financial distress is through a financial or operational restructuring.
Common warning signs of potential distress in a company
- Activists or analysts repeatedly identifying weak points related to the company’s financial position, strategic plan or business model
- New regulations that affect multiple parts of company strategy and disrupt the business model
- Declining profits or recurring losses
- Repeated restatements
- Not recognizing or responding to technological innovation that fundamentally changes customer behavior and demand for products/services
- A particularly serious restatement or ongoing investigation that is costly and damages trust in the company—and may limit its ability to raise additional capital until the matter is resolved
- New market entrants that disrupt current business models
- Steep decline in stock price
- Downgrade in credit rating or heavy debt load
- Sudden departure of a key executive or multiple executives leaving within a short period of time
Important points for boards to remember about troubled companies
There are many reasons why businesses fail. It is important to act quickly on any signs of distress and develop a plan that assesses liquidity needs and strategic alternatives. If not addressed early, what may seem like an isolated problem could really be the tipping point that forces you into insolvency.
Get the complete picture when deciding whether to restructure, sell or liquidate. The board should be satisfied that management and advisors have assessed the full extent of the company’s problems and have selected the plan that will maximize return to shareholders and other stakeholders.
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