Corporate Restructuring

• stakeholder, shareholder, works council

• Loan application, prolongation, covenant breach

• Public funding, support, guarantee request

• Safeguarding management options

• Exoneration of management

CR always has a trigger.

Driven by necessities and has a purpose.

Crisis is a situation what threatening the existence or continuation of the business model, structure and economic success

Real threat to the assets, liquidity,reputation,market position

Business as usual is not an option any longer

Mostly build up over time

Internally or externally induced

Root cause and symptoms not always obvious

Detection is live critical

hidden crisis phase

• not detected root causes, occasional disruptions, erratic failures

• Looming problems, unspecific signals, gut feeling (something isn’t quite right

• Explicit crisis detection systems might react weakly

Acute outright crisis phase

• continued distributions, liquidity shortage, resignations, customer churn, asset deterioration

• Problem clusters & concentrations, precise signals, objective indicators

• Crisis detection systems react sharply & loudly

External root causes

• No change to be directly influenced by the organisation, eg Marco environment, competition, regulations, natural desasters

• Require strategic conceptionally driven reaction by the management

Internal root causes

• weak leadership , flawed structures & processes, knowledge/competency gaps, outdated product, technologies, blindness

• Require fully fledged re-design of the organisation, trigger personal changes

crisis syphtoms

Sales & revenue decline, customer complains, order book erosion, liquidity shortfall, business partner withdrawal, poor press/media, increased attrition, internal complaints increase, asset base erosion

Recognising & uderstanding the symptoms of a crisis

• financial indicator/KPI monitoring

• Strong commercial finance / controlling function

• Internal audit/accounting

• Early warning system

• Active data gathering & analysing

1. Stakeholder crisis

2. Strategy crisis

3. Product and sales crisis

4. Corporate success crisis

5. Liquidity crisis

6. Insolvency

Order can be different, but will ultimately result at level 6.

causes

• lack of trust & communication between management & stakeholders

• Conflicts amongst shareholders, unclear strategic direction

• Conflicts amongst management team

• Relationship breakdown, no basis for constructive communication

Measures

• establish mutual trustee ship, independence

• Install chief restructuring officer

• Re-establish regular corporate communication to re-vitalise trust

• Workers council agreements to re-instate relationships with employees

• Human relationships are critical, trust is fuelling success, communication is life critical

Causes

• lack of clear vision

• Mature/ out of market products

• Missed technological developments

• Lack of customer focus

• Complexity (structure, processes)

• Location disadvantage

• Dependencies (people, suppliers, customers)

Measures

• define vision, mission, strategy

• Re-asses own product development

• Enhance in house technological competencies

• Refine market & customer segments, enhance marketing activities

• Revisit past footprint decisions

• Broaden supplier & customer base

Causes

• weak Produkt Portfolio

• Poor product & CS quality

• Flawed pricing

• Insufficient product offerings

• Poor marketing/advertising

• Weak social media communication

• Ineffective sales activities

• Overall front line weaknesses

Measures

• re-design based on market needs assessment

• Upgrade of CS by training & upscaling

• Competitive price adjustments

• Communication & campaign re-assessment & design

• Upgrade sales personnel, new hires, training

Causes

• decline in demand, in revenues, in gross profit, in profit

• Cost increases

• Profitability decline, margin decline, value decline

• Equity deterioration, indebtedness increase (risk of negative equity)

• Sales price dilution (competition)

Measures

• performance improvement program to include cost saving initiative (travel, training, office location reduction)

• Equity increase by new rights issuance

  • sales price assessment

  • Re-design pricing

Causes

• complex financing structure (Too many banks, loans, obligations)

• Clotted risks in timing, banking partners

• Asychrone due dates with receivables - payables

• Poor working capital management

• Lack of treasury transparency

Measures

• Simplify financing structure

• Optimise receivables & payables management (dunning process, payment terms)

• Factoring

• Asset sale ( non-critical items)

• Shareholder loan management

• Investment review

crisis detection methods

• there is no “one size fits for all” solution

• Big multiple indicators

• Alarm bells

• Warning signals

• Mostly across the entire organisation which points towards crisis

Informal and formally established methods complementing each other

• experience is the key

Ruled in Germany

Management of a corporation (KapG) is legally obliged to conduct risk analysis and crisis detection continuously regardless of size

In case of a crisis detection they must implement counter measures and report to shareholder immediately

§ 1 abs. 1 Satz 1 StaRUG

• basically all financial metrics can serve as crisis assessment criteria, definition is key but not all metrics deliver what they promise

• IDW distinguishs metrics betweeen liquidity, profit and asset

The IDW S6

• basic structure to understand logic and conceptual thinking

• High practical relevance for all restructuring related activities

• Guideline for practitioners even outside the audit profession

• Jurisdiction relies on S6

Managerial requirements

• factual situation, based on available company owned data, proper deep dive analysis

• Positive going concerns, objective survival fitness with objective, measure assessment

• CR measures already initiated and purposeful measures start to prove, profitability will most likely return

Economic requirements

• realistic chance to be successfully restructured, liquidity is given over the CR period

• Market position allows succesfull competition

• Internal structures continue to work

• Resonable profitability

• Otherwise insolvency

• positive going concern

• Corporate planning has to provide a sustainable and realistic aspiration of the business future

• Sufficient capital

• It is more likely than not that the business is going to be successful

• Ability t deliver sustainable profitability by being a successful competitor

• Sector specific assessment and comparison required

• Alternatively use rating assessments, balance sheet KPIs or objective benchmarks

1. Description of the S6 purpose

2. Basic information of the company’s situation (“as is” state)

3. Crisis assessment, stage, root cause, insolvency?

4. Draft target picture of future “should be” state and measures to get there

5. Intergrated corporate panning incl. summary of successful CR potential

• production & sales

• Marketing & procurment

• Research & development

• Finance, Legal & HR

• Leadership structure processes

• IT & system support

• Compliance, sustainability, regulatory

• understanding the business is critical to define measures and the landing point

• The business is a living organism which needs to be understood

• Nothing is cast in stone, all is fluent because man driven

• how should the future of the organisation look like

• Potentials, opportunities and strengths

• New business model, structure or processes

• How can potentials be activated

• has to be realistic

• Relative to starting point

• Relative to measures considered

• Relative to competitive situation

• Relative to internal abilities

Change of market

1. Defensive approach: Exit actual market place, entire redirection of resource allocation

2. Offensive approach: Diversify market by entering adjacent market segments

Strengthen actual market position

1. Defensive approach: Downsize/rightsize actual market by consolidation of Ressources and locations

2. Offensive approach: Go hard on competition aggressively strengthen market position

Stand alone approach

• Focus on own strength and abilities

• Leverage own potential

• Ringfence competencies and own capabilities

Cooperative approach

• open for collaboration & cooperation with competitors

• Up & down stream business partner

• The target is a sustainable,long therm, successful and resilient organisation

• Stable, holistic, realistic, assumption, assumption based CR concept, supported by all stakeholders

• Well balanced share and stakeholder management

• Bold & effective execution of agreed CR programme

Value dimensions

1. Corporate strengths to satisfy customers

2. Product Sortiment & service offering

3. Internal & extrnal resources (incl. marketing, services & sales)

4. Leadership competencies

Value based business model approach as framework

• corporate organisation is a system, element collaborating interactively

• Models can help to “simplify” understanding

• Enable value / unique selling proposition, framing actual business model

• USP allows the company to satisfy customer needs successfully

• Customer need satisfaction is ultimate beacon for measure assetsment

• focus on core product

• Avoid unconfused enlargement

• New product in triggers old product out

• Lean Sortiment to free up capacities

• Transparency is a must have to asses correctly and to decide

1. Creating transparency in products

   • product & customer profitability calculation is the key

   • Full cost approach on EBIT basis, or gross profit

   • Internal & external cost allocation tricky but necessary

   • Process cost allocation

   • Eliminate loss making products & customers

2. Managing product Sortiment complexity

   Optimize product offerings by

   • Eliminate loss making products

   • Downsize product portfolio

   • Lower complexity in production and in sales execution

   • Streamline inventory

   • Increase batch size

   • Reduction of complexity

3. Go to market with optimal product portfolio

   • target: best possible development by selling the right product

   • General approach: no differentiation

   • Focussed approach: few product to few specific customers

   • Differentiated: targeted approach with optimised portfolio

• assessment of value creation process by combining internal & external resources (optimise value chain)

  • product development

  • Production

  • Marketing/Sales/Service

• Supported by back office processes:

  • procurement

  • Finance & admin

  • HR

  • IT

Value creation process

• process maturity assessment

• Deconstruct value chain for detailed assessment of each process element

• Focus on core process chain links

• Focus on key personal responsibilities

• Joined assesment & review & agreement

• Elaborate measures to Re-structure

Analysis

Analysis of value creation process as starting point for CR measures “as is” assessment of elements;

• strengths / weaknesses

• Relevance for corporate success / value creation

• Definition of target efficiency / profitability contribution

• focus on market relevance

• Focus on selling price & production cost

• Involve all relevant functions

• Reduce product/ Sortiment complexity

• Reduce time to market by front loading

• Active project controlling

Target: improve production output

Assessment of;

• location: (local vs global, access to resources, talents

• Asset quality : age of technology, maintenance, customer needs

• Shop floor: daily workflows in factory, people involment

• MS&S functions must perform no matter what

• Identity “Hunters” & “farmers”

• Asses internal sales (support), online sales

• Optimisation of front line activities is critical for successful CR:

  • driving top line sales revenues

  • Retain customers

  • Gain new customers

• disciplined leadership by management team: structure, people, performance

• Reduced organisational complexity

• Lean processes within this structure

• Structure follows strategy

5 major KPIs

1. Return on equity

2. Profit margin

3. Net dept ratio

4. Debt equity ratio

5. Free cash flow

Performance does require;

• disciplined approach

• Clear focus on profitability before growth

• Consequence before artificial harmony

• Strategy before tactics

• avoid insolvency

• Avert liquidity shortfall

• Maintain payment fire power to fulfill legal obligation

• Secure positive going concern

• Secure liquidity to run business

• Operational CR complemented by financial CR to secure long term sustainable corporate success

1. Due date related FCR: (direct cash impact)

   • extending a term of payment

   • Moratorium, keeping still agreement, creditor does not exercise her rights

   • Eliminate termination rights

   • Bilateral agreements with suppliers & business partners

   • subordination: contractual agreement with debtor that rightful claim is served after all other creditors

2. Liquidity related FCR measures

   • free up existing liquidity reserves by monetarising financial assist

   • Sale of non-critical assets: liquidate all assets not relevant for business purpose

   • Working capital management: recent analysis: WC equals 2 times sales revenue, continue to increase

3. Capital structure related FCR measures

   • cancellation of debt: creditors deliberately write off receivables

   • Combination of cancellation with improvement earn out: repayment with future profits

   • Dept equity swap: dept creditor become a shareholder

4. Security related FCR measures - assed based

   • transfer by way of security: asset purchased by fund is owned by creditor

   • Reservation of title for suppliers

   • Assignment of claims

   • Mortgage & land charge: property related securities provided to creditor

   security related FCR measures - personal based

   • personal security/surety: unwriter securities fulfillment of obligation, legal variations foster flexibility (Bürgschaft)

   • Collateral promise: securer enters into fulfilment obligation with debtor (schuldbeitritt)

   • Guarantee: guaranteed fulfilment of obligation (Garantie)

   • Surety for payment (Aval): security provided by bank for company

1. Receivables management

   • guidelines of how to manage Rec

   • Prober customer assessment

   • Optimise invoicing, minimise complaints

   • Optimise collection process

   • Efficient master data management

2. Inventory management

   • re-focus stock procurement Just in time

   • Re-visit product portfolio: styles, options, colours, reduction is the key

   • Manage returns: reduction of items received

   • Stock accounting optimisation, valuation, physical count, transparency

3. Payables management

   • disciplined spending behaviours, spending guideline, tight controlling

   • Personal relationship management

   • Transparent open communication, balance clarity & dependency

   • Targeted planning of cash outflow obligations

4. Cash & liquidity management

   • transparency is key, understanding all bank accounts, daily status

   • Liquidity reporting daily, top down communication

   • Planning in- and outflow for 12 weeks minimum (6 months preferred)

   • Validate liquidity inflows & outflows

1. Working capital management

2. Leasing , sale & lease back, factoring

   • leasing: pay rent for asset

   • Rent & buy: fix rental period & pre determined purchase

   • Sale & lease back: selling assets thus create liquidity

   • Factoring: off load receivables with discount, cash in now

3. Shareholder loan

4. Managing actual banking credit relations

5. Equity injections