How To Restructure Your Company

Arturo Alvarez Demalde, managing partner of AD4, presents corporate restructuring as an ongoing concern, not just as a liquidation challenge. He offers checklists of steps to take and provides case studies of successful restructuring efforts across industries and geographies. His short manual provides a handy guide to restructuring for any stakeholder coping with a distressed company.

Restructuring

The most important factor in restructuring success, Demalde emphasizes, is that all stakeholders must recognize that they will be better off if the enterprise keeps functioning.

Often, corporate restructuring is associated with processes through which just a few win and a majority lose.Arturo Alvarez Demalde

Since companies fail when they run out of cash, Demalde cautions, the first step to take in restructuring is to end the outflow of cash. Creditors may take less payment than the company immediately owes if it assures them they will be paid in time. Improve your cash standing by abbreviating your payment and collection cycle and subjecting every expenditure to managerial approval.

Money-losing products and unproductive people have no place in your operation. Initiate human resource changes at the executive level first. Expect pushback. Communicate clearly, decide quickly and implement robustly. Even with these steps, Demalde explains, if your products are obsolete and your product development process is time-consuming, you won’t be able to deploy a quick fix. 

In any case, the executive team should discuss market circumstances. The financial head should present the firm’s financial history, current financial status and future expectations. The general manager should explain ongoing goals and identify impediments to reaching them. 

Set a Path

The immediate goal for the first two months is to define a direction forward. Determine the company’s viability by examining cash and liquid assets on hand, cash flows and impending needs. Scrutinize sales and marketing, starting with a competitive analysis of the market. Gauge sales trends and assess the firm’s competitive situation.

Demalde insists that you must cut costs by adjusting products, pricing and profit margins. You may have to lay people off, merge facilities and divest holdings.Define the actions you will take to achieve your restructuring’s most immediate goals, such as demonstrating progress to your creditors and investors. Meet with your creditors and provide details to get them to support your restructuring.

To keep your executives on message, define the company’s goals in terms of performance metrics, and hold regular management meetings to track each unit’s adherence to those metrics.Present a prospective asset liquidation tally, so you can compare liquidation to refinancing.

Within the first few months, assess your management team and managers. Implement necessary organizational changes.If you must trim your staff, says Demalde, cut deep and cut once. Give bonuses to the best people and fire the worst.

Avoid paralysis by analysis by taking concrete steps and making the necessary decisions.Be sure you need to restructure only once.

Prioritize Cash

Since insufficient cash causes bankruptcy, be careful to conserve and generate cash. Demalde repeats this simple but crucial formula often. He says you must pay attention to your real cash situation, not your projections.

Companies go bankrupt because they run out of money. Arturo Alvarez Demalde

To conserve cash, reduce inventory, shorten suppliers’ lead times and contract for less volume. To improve accounts receivable, send out invoices more frequently with shorter terms of payment and fewer grace days. For accounts payable, push for better conditions and use slower payment methods. Eliminate “strategic products” that lose money. 

Case Studies

Consider the position of an airline that never turned a profit due to management underperformance, a mixed fleet of planes, unreliable flight times and slow airplane turnarounds.

Restructuring updated the fleet with modern planes while disposing of old ones. Management introduced a standard, optimized flight process that dramatically improved turnaround time, established performance incentives, and increased staff productivity through training and workshops. It poached its competitors’ best talent and promoted its own highest-performing middle managers.

This restructuring effort enabled the airline to negotiate new labor agreements.The restructuring team instituted cash management, obtained better airport fees and garnered discounts from its suppliers. It eliminated money-losing routes and established new, exclusive destinations. 

From 2000 to 2007, the airline lost about $90 million. Restructuring brought it to break even by 2010. The company doubled its size without increasing its overhead.

Demalde also cites a wood-processing company that faced foreign exchange woes and rising costs. As it curtailed its output, the company experienced more losses and neglected the upkeep of its tools and equipment. These issues resulted in substantial chargebacks.

The company’s demise would have driven hundreds of its workers into unemployment, fueling a negative economic ripple effect in its community.

Instead, the firm declared bankruptcy and re-emerged with a restructuring plan.New shareholders stepped in, steadying the cash situation.

Some of its lumber products had a positive reputation, but the company faced high input costs, unavoidable logistical expenses and a lack of flexibility. Given those conditions, management opted to focus on and develop the firm’s well-regarded niche products and to shift its marketing attention to neighboring regions that were developing economically.

There are no magic formulas when confronted with a restructuring situation. Arturo Alvarez Demalde

The company identified a particular product with high growth potential and a sound profit margin that required no additional specialized equipment to manufacture. A new management team coalesced to lead the company out of bankruptcy expeditiously to the benefit of all of its stakeholders.

Condensed Advice

Arturo Alvarez Demalde’s guidance reflects his deep professional experience, despite his book’s uneven proofreading. His approach is simple: He moves from one arena of advice to the next, dispensing practical nuggets. He repeatedly advises staying on top of every detail. You may wonder whether he intends this basic, fundamental guidebook for businesspeople in the midst of real restructuring or for business students who have yet to face tough real-world practicalities. The latter seems more likely if only because few businesspeople in the throes of the kind of mess that Demalde evokes so richly would have the insight to pause amid the chaos to pick up his slim volume and heed his advice, even if it might help save their neck.