Entrepreneurial Scars

The 4 stages of business distress by Martin Katz

Stage One – Early Stage Distress
The business is under performing and has been trending down in revenue and margin for 90 days or more. The causes can vary including losing a key sales person or account, the end of a project that had been generating significant revenue or an increase in cost structure. But, too frequently, business owners explain away the downward trend with rationales like a hostile economy or a series of unfortunate and unforeseen events. The current economy is certainly challenging and there certainly can be unanticipated events. However, unless the owner is certain beyond a reasonable doubt that the next quarter will be at least break even, look at this as a “wake up call” and implement a business remediation plan. A good plan well executed has a high probability of not only restoring the company to profitability but will also drive a stronger, more capable enterprise better equipped to surmount future challenges.

Stage Two Mid Stage Distress
The business is seriously under performing. Sales hit rates are low, the pipeline is poor, employee morale is beginning to waiver and the initial signs of financial difficulties begin to emerge. These include the company’ s inability to pay down their lines of credit, late trade payables and, very significantly, a decided increase in overall stress, particularly of the owner. This is typically the stage at which the company makes personnel and expense reductions---too frequently in the wrong areas. Businesses in Stage 2 must implement an orderly business remediation plan immediately and bring the company to a break even plus condition within the next accounting period (normally the next month). Waiting to see what happens or to get that next big deal in will swiftly intensify the already deteriorating conditions which will lower the success probability of any remediation effort.

Stage Three – Late Stage Distress
The future of the business is imperiled. The company’s debt obligations are not being met, the lines of credit are exhausted, the bank is calling, the creditors have lost whatever sense of humor they might have had up to this point and the company is struggling to meet its payroll. With smaller companies, corporate debt is frequently secured with the owner’s personal guarantees which are now “in play.” Morale is low with employees speculating who will be the last to go and owner stress is at the breaking point. Businesses in stage three can be salvaged and revitalized but, unlike the orderly remediation activities of Stage One, Stage Three is more like a five alarm fire requiring professional assistance including legal and accounting working closely with a remediation expert. Stage three remediations can be successful and there are even sources of capital for businesses in this condition, but the odds are not good.

Stage Four – Liquidation
This is the “end game” for a distressed business that has been unsuccessful in remediation and cannot be sold. At this point, the company has neither the cash, credit or resources to sustain operations and must be closed, liquidated (normally for the benefit of creditors) or dissolved. Often, the implication to the owner is a personal bankruptcy unless the owner has the financial wherewithal to discharge the debt that they have personally guaranteed.

Too often stakeholders wait until the last minute or a crisis to begin remediation efforts making critical decisions in an emotionally charged, high stress environment. Predictably, many of those decisions can actually exacerbate an already serious situation and seriously impair the company’s ability to sustain itself. Waiting until the bank calls requesting to meet with you at 10:00 am Monday morning is too late....

Copyright © 2002, The Martin Group Ltd. All Rights Reserved.