The document outlines an EMTE thematic outline for assessing businesses in distress. It provides a framework for gathering information, diagnosing problems, and evaluating options to improve cash flow and flexibility. The framework includes assessing industry dynamics, financial and operational performance, early warning signs of distress, predicting bankruptcy risk, and considering options to reduce costs, increase revenues, renegotiate debt, and improve working capital management. The overall goal is to identify flexibility and feasibility of options, model cash flows under different scenarios, and ensure requirements for bank financing can be met.

1. EMTE Thematic Outline
I. Assess the situation/diagnose the problem: Get information fast (& increase info flows):
a. How are they doing?
i. Strategy
ii. Business model
iii. Economics
iv. Key factors
b. Is this biz worth saving?
c. The Industry
i. 5 Forces Analysis:
1. New entrants & barriers
2. Suppliers
3. Customers
4. Substitutes
5. Rivalry
ii. Also:
1. country/global economics, that can yield stress and entrepreneurial
opportunity
2. materials prices shocks
d. The Opportunity: POCD (re any deals that are made/about to be)
e. The Company
i. Scrutinize performance
1. Question accuracy of accounting data: private co’s may obscure financials;
who’s the Controller?; how many accounting systems?; audited?  check
Brad Street Consumer Credit Rating Services (DUNS)
2. Assess performance: BUT beware unaudited accounting data.
a. COMPARISON
i. Diff. b/w actual vs. projected
ii. Recent years
iii. Comparables/indeces
B. FINANCIAL
i. Revenues - IS
ii. SG&A Expenses – IS
iii. Inventories – BS
iv. Cash - BS
v. WC – BS
vi. Cash conversion cycle (esp. inventory mgmt): ICP + RCP
– PCP (#days bw disbursing cash and collecting cash i/c/w
undertaking a discrete unit of operations)
1. ICP Inventory conversion period = (avg inventory) /
(COGS/365)
2. RCP Receivables conversion period = (avg AR) /
(Creditsales/365)
3. PCP Payables conversion period = (avg
AP)/(COGS/365)
vii. Leverage:
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2. 1. Debt / Value ratio: LBO? – low flexibility to react to
bad news
2. Creates hi CF need and time pressure
3. Evaluate lender types (big/small banks) and their
incentives
C. OPERATIONAL
i. Team [see trust framework & Explo Leisure Products]
1. Clear vision by owners?
2. Nepotism
3. Trust
4. Experience and abilities
ii. LBO – creates time and CF pressure
iii. Strategy: how does market look? Brand? Growth?
iv. Diligence issues?
v. Customers
vi. Personnel
vii. Pricing policies
viii. Quality declines
ix. Volume declines
x. Operating metrics: sales/sq-ft (eg)
xi. Growth strategy, esp. new products or new markets
d. Other
i. Legal (eg antitrust lawsuits)
ii. Family issues
3. Flexibility:
a. Fishbone analysis (below): rev, costs, others  fixed or variable?
b. Determine key drivers of business, and time it would take to
change them: How do you make money in this business?
4. Model Cash: model & what ifs (testing alternatives)
a. Breakeven analysis
b. 13-week CF Stmt: see sensitivity analysis impact on:
i. Revenue
ii. Profit
iii. Cash flow
c. What is the PEAK REQUIREMENT for financing? (eg from the
bank)
d. Adjust timing of cash flows (but managing these only works for so
long)
e. Opportunities for cost reductions (see fishbone)
f. Strategic impact of options [see Bonne Chance D2]
g. Goal: be in touch w bank, & meet collateral/covenant req’s
5. Bank collateral, terms and constraints
a. Collateral needs to be maintained
b. Terms must be met
c. Covenants must be met
d. Consider: whom are you dealing with at the bank? [see BCY matrix
below]
6. Early warning signs
a. LBO or heavy acquisition strategy to grow [guilds up debt too
quickly; see above]; also, PE-firm involvement may select CEOs,
etc, that reflect short-termness
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3. b. Inventory building up; cash conversion cycle
c. Poorly assumed synergies & bad accounting/forecasting, culture
clash [PRG]: SG&A ↑ despite roll-ups, projections, and
compensation to upper execs remaining high
d. Investing other people’s money (may cause poor or unformed
decisions)
e. Unusual complexity – around a process or decisionmaking (or
inefficiency, concealment of fraud)
f. Expensive [antitrust] lawsuits
g. Establishment-like culture [IBM]
h. Complacency about former successes
7. Predict Distress / Bankruptcy
a. Fleet’s Collateral/Viability Matrix
Prepacks/Firesale Gentle restructuring (event-
(liquidation) driven but $ & time to get
Collateral (-  +)
back online)
Bleeder (keep alive to Classic restructuring
improve collateral, before (competing claims, 1-2 yr
a firesale [but mgr wants resolution, soln: get more
gentle restructuring]) collateral)
Viability (-  +)
b. Z-score [see Fleet exh for formula]
i. Interpretation
1. <1.8 = bankrupt
2. 1.8-3.0 = gray area
3. 3.0 = healthy, ongoing concern
ii. Notes
1. X1 = WC/TA = ST liquidity
2. X3 = EBIT/TA = ST efficiency
3. X4 = MV/TL = market’s view
4. X5 = Sales/TA = ST efficiency
iii. Concerns
1. Market’s valuation, future looking (not fair value)
2. No accounting for how lenders would behave when
BCY risk high
3. Manipulable
ii. Ask tough questions of employees, forcing them to drill down (see strats)
1. I’ll wait right here.
II. Get cash: be sensitive to flexibility/feasibility and timeline of each option under the
circumstances. Also keep in mind: keep some CUSTOMER-FOCUS – do not completely
undermine your sales
a. Options
i. Reduce costs
ii. Shed assets
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4. iii. Increase price
iv. Raise equity
v. Renegotiate existing debt
vi. Negotiate with creditors for extended terms
b. Revenues: vol[fixed] x price [mgmt team takes a gulp]
i. Increase prices
ii. New orders multiple?
iii. Reorders multiple?
c. Costs: Fixed or variable?
i. COGS
1. Rationalize SKUs
ii. Sales
iii. Marketing & education
iv. Administrative (fixed?)
d. Other cash items: operations/balance sheet mgmt
i. Receivables: collect faster, early payment discounts
1. Which customers are paying and why
2. Speed collections
3. Fix shipping or billing errors, product quality problems, bad bureaucratic
rules
ii. Payables – issues: delay purchases/payments
1. Reputation: vendors talk
2. Competition gets favorable treatment
3. Banks may add guarantees
4. But vendors can negotiate interest
iii. Sell Inventory: or is it too specialized to liquidate easily?
iv. Financing - interest
1. Debt
a. New debt
b. Changes to existing debt:
i. relax covenants
ii. extend payback period
2. Equity: reduce/eliminate dividends (but only after benchmarking ag comps
[ee Dimon])
III. Deal with the Bank before BCY (but use BCY as leverage)
a. Concerned about accuracy of company’s forecasts
b. Opportunity cost of other investments
c. Threat of transfer to workout group
d. Negotiations
i. What the bank wants
1. Personal guarantee
2. Negative pledge clauses (cannot use current assets as collateral for other
loans)
3. More collateral
4. More interest in the company
5. Effective (but not too much – or else, equitable subordination) control &
installing turnaround consultant
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5. 6. Bring colleagues
7. Dividends
8. Owner’s investment
9. Milestones and plan
10. Speak with workers to understand business
ii. What you provide
1. Credible turnaround plan
2. Convince bank that they may have to extend credit to get money back
(liquidation value and BCY to frame negotiations—see below)
3. Other recommendations from Paul Kennedy
a. Communicate clearly
b. Deliver what you say you will (personal reliability)
c. Stay physically and emotionally healthy
IV. Consider Bankruptcy
a. Insolvency vs. Illiquidity:
i. Insolvency: A < L
ii. Illiquidity: Cash < ST L; unable to meet obligations as they come due
b. Calc Liquidation Value (as a BATNA for Ch 11 reorganization plan) [See Dragonfly slides]
i. Calc A value
1. WC:
a. Cash: 100%
b. A/R: 85%
c. Inventory: 50%
2. PPE: 25%
a. Note: exclude capital leases
ii. Then compare to L value: A(liquidated)/L = ¢/$
iii. IF YOU’RE NEGOTIATING WITH THE BANK to stay out of Ch 7: make
favorably LOW assumptions to convince lenders to help you thru
c. Determine Priority, and allocate ¢/$ to each [CFM BCY NOTE]
i. Secured
1. Senior
2. Junior
ii. Unsecured
1. Unsecured bonds
2. Trade payables
3. Leaseholders
iii. Equity (shareholders)
d. Develop a common understanding of the facts for all parties (not all creditors are same)
OPTIONS
e. A Negotiated position (always better than ch 11)
i. Negotiate with creditors w/r/t above (see ―Dealing with the Bank‖): use LV analysis
as leverage
1. Always go for the fulcrum security (the creditor whose payout is in
jeopardy  partial or no payment)
ii. Renegotiate contracts: lease, severances, banks
iii. Set a specific plan and develop trust (see below on ―Leadership‖)
iv. See below on action planning.
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6. f. Ch 11: Reorganization –
i. Plus/Minus:
1. Debtor: Debtor retains right to run biz, organize creditors and prevent
holdouts – also unions; BUT costly and time-consuming, requires reporting,
and suffers second guessing on ordinary course of business decisions from
(Creditor) Committees. ESP. DAMAGING TO A SERVICE CO.
2. Creditors: DIP has fiduciary responsibility to creditor, info flow overseen by
Court; but delays in recovering security, cost and time, possible equitable
subordination
ii. Rules [See Newport Creamery Wrap slide]
1. Who can file:
a. Voluntary: Debtor
b. Involuntary: 3 creditors with undisputed claims > $10k (debtor may
challenge)
2. Automatic Stay: creditors are enjoined from initiating or continuing
collection activities
3. Exclusive right to submit plan:
a. DIP has 120 days to plan and 60 days to get accepted
b. Can seek extensions from Court
c. Creditors can appeal to get Trustee or examiner or right to submit
their own plan
4. Creditors committee
a. Appointed by US Trustee’s office
b. Can hire professional at expense of estate; other committees may
also be appointed
5. DIP Financing
a. New unsecured D is Administrative Expense (priority over
unsecured pre-petition claims)
b. Court may grant SUPER-priority and liens on unencumbered assets
c. Court can grant security in encumbered assets
d. Secure DiP Financing [see Fleet] – why a bank would provide?
i. Strategic: makes rules—can negotiate line by line on budget
ii. Collateral control: collateral grows legs when people aren’t
paid
iii. Franchise protection: employees are also consumers of bank
(will get $ anyway); employees may target/harass branches
iv. Political: BCY judge is not resistant (vs Article 3 judge)
6. Can reclaim pre-petition Preferential or Fraudulent Transfers
7. Avoidance of Liabilities subject to Court Approval + interest on D; Leases;
Other Executory Contracts
iii. DIP submits Plan of Reorganization
1. Organizes creditors by classes
2. Disclosure statement to provide info for creditors to vote on distribution to
their class if impaired
iv. Ability to Bind dissenting Creditors
1. Within an impaired class: 2/3 of value and ½ of members in class can accept
for all
v. CRAM DOWN by Court on classes who reject plan if:
1. 1 class of impaired creditors accepts
2. Plan is fair and equitable to classes who reject (get as much as they would in
Ch 7; no junior class is treated better)
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7. 3. Note: hedge funds make a market for facilitating cram downs (see Irving
Tanning)
vi. Considerations
1. If you’re doing it, hire an expert with practical experience (large law firm)
2. Need a reliable turnaround plan
3. Consider employing a turnaround expert
a. But TA consultant frequently under pressure and lacking information
4. Keep collateral in ―reserve‖ for later negotiations
5. Creditors may have to extend credit to get their money back
6. Negotiate with banks (see above)
vii. Exceptions [see Chrysler Fiat]
1. Note: If there are unsecured creditors who are key and necessary to the
business’s potential ongoing concern (like suppliers, such as unionized
labor), then the BCY judge may award 100¢/$ to them before the secured
lenders
2. And of course, BCY law has wide latitude for interpretation [Chrysler]
3. Government involvement may lead to unintended consequences
4. Leadership style of turnaround mgr has a big impact on BCY outcome
viii. Evaluate outcome
Party Original Debt Resulting Paid ¢/$ Equity
g. §363 sale/auction
i. After notice and hearing before BCY court, debtor may use/sell/lease property of
debtor’s estate – per 4 part test
1. Sound business reason or emergency justifies a pre-confirmation sale
2. Sale proposed in good faith
3. Adequate and reasonable notice of sale provided
4. Purchase prive is fair and reasonable
ii. Advantages
1. Sale is effected free and clear of all liens, claims, and encumbrances
2. Court can approve breakup fees for Stalking Horse
3. Sale cannot be overturned on appeal if in good faith
4. Waiting period only 15 days
5. Debtor can assign contracts as part of sale
6. Court approval lessens chance of challenge as avoidable transfer
7. Sale may be done on short notice
iii. Disadvantage
1. Bidding process
2. May have to pay transfer taxes unlike sale under plan
h. Ch 7: liquidation – asset sale [liquidation value]
i. Trustee appointed with duty to creditors
ii. Orderly liquidation of A
iii. Distribution via rule of ―absolute priority‖
i. Other
i. ―No bankruptcy‖ terms are not enforceable [Dragonfly]
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8. V. Immediate response: first decisions / TRIAGE action plan
a. Set Priorities: based on urgency and importance (matrix)
i. NOTE: cash flow and culture are MORE IMPORTANT than strategy and
revenue growth
Importance
(-  +)
Urgency (-  +)
b. Set a turnaround plan  ascertain cash costs and inflows of plan  meet with the bank to
get financing necessary to live [see Dealing with Bank and BCY above]
c. Operations
i. Leadership Approach & Cultural Change
1. Communicate urgency & set example/signals, but don’t make any
promises
a. End the perqs (yours and others’)
b. Morale-improving actions/message that talent is already here and
will be rewarded, but that there is a cash-crisis and we’ll do what is
necessary to survive
2. Be in charge / decisive
3. Bias toward action; but detail-oriented  speed & conviction
4. SMALL EXPERIMENTS allow for testing and changing tactics
5. Buy time when possible
6. Manage / delegate
7. Listen/learn
a. Diligence:
i. Focus on the details – what’s really going on, and how do
the economics of your basic sell unit work?
ii. Use data for decisions
8. Become customer-focused [Gerstner, IBM] – helps with sales
9. Turnarounds take time: repetition, variety of techniques, and potential
for burn-out
10. Set the right image: stop the perqs
11. Remain calm
12. Recruit a “Dr. No” (Dan Connor; or Jerry York at IBM): strong
policeman, from outside, with independent reporting directly to CEO (e.g.,
re: reducing SG&A)
13. Don’t forget about the PiPs: previously important people—esp. if they are
still shareholders [keep them in the loop]
14. Gain trust through actions, not words: ability, benevolence, integrity
a. Decrease perceived risk
i. Shorten time before outcome
ii. Start small, then scale up
b. Perception is reality
i. Ability
1. Increase contact with trustor
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9. 2. Have good outcomes
3. Early successes
ii. Benevolence
1. Listen and understand trustor’s needs
2. Share gains as well as losses
iii. Integrity
1. Act with honesty, consistency, and dependability
2. Admit failures
iv. Opportunities to develop trust
1. Be predictable, consistent and distinctive
2. Be reasonable (can’t always be fair)
3. Be visible and admit when wrong
4. Work hard, get out and visit
5. Listen and be empathetic
6. Show emotion, learn the vocabulary
7. Be respectful – age, experience, skill
8. Celebrate failures
v. Obstacles to trust
1. Blaming others
2. Talk too long
3. Poor eye contact
4. Being offensive or derogatory
5. Over promising
6. Shooting the messenger
7. Starting, but not finishing
ii. Accountability and Controls:
1. Meet with key people regularly [see below on mtgs with mgmt team]
2. Maintain a follow-up list
3. Create Co-Heads where people hold each other accountable
4. Identify fraud in income statements – ask: what exactly is going on here?
5. Benchmark against competitors/cash needs
6. Share and pollinate best practices
7. Performance metrics are set and published: every day, week, month
8. Pay for performance / new ideas [IBM]
9. Regular meetings with key cluster leaders on cash position & progress
a. Regular staff reviews of company’s cash forecast
b. What-if scenario analyses
10. Every unit is responsible for its own P&L
iii. ∆ Mgmt Team [Explo, Chuck’s Wagon], HR & Organizational Structure
1. Key people: Change the people or change the people
a. But remember: you have to figure out: who will do their job?
b. Going forward, you need: operational expertise to match size of
business  find a team that can provide these (various) needs [see
ALL]
2. Flatten organizational structure, but advance those with fresh ideas
a. Understand your people:
i. 15-min screening/selection meeting – report on state and
opportunities for improvement in (i) their function and (ii)
the entire business [write up beforehand]
1. Dimon’s Qs:
a. What do you read
b. Who are your competitors
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10. c. Who do you respect in the company
d. Against whom do you benchmark your
performance
ii. Choose people open to ∆ and aligned with your culture; and
who know what you/they don’t know [you don’t always
need outsiders to bring in fresh perspective]
iii. Promote the young [Chrysler]
b. Remove 3-4 layers: to cut costs, streamline decision making, and
improve mobility. [see indirect labor below] – see Marchionne’s 100
direct reports) [see below on how to fire].
i. Centralize certain functions (globally common processes – to
avoid redundancy; BUT avoid overemphasis on centralized
DM’ing), and decentralize others (BUT avoid unclear lines
of accountability)
ii. Then clarify accountability lines
iii. Improve & quicken processes to make decisions
c. Incentivize the remainder to stay onboard: consider creating new
types of stock options to hold employees [but not senior employees –
they’re okay] [see Gerstner, IBM]
iv. Cost reduction: Reduce costs in operations (see fishbone above) [note: do
―credibility‖ cuts first – see above on ―developing trust‖; also keep in mind
customers]
1. Zero-based budgeting: justify budget annually (clusters report directly to
CEO)
a. Bottom-up budgeting
b. Stingy on assets; focus on bottlenecks
c. Benchmark: rich possibilities of techniques to use (you don’t have to
reinvent the wheel)  and benchmark without your own org and
share best practices
2. Labor: (maybe use your Dr. No here)
a. Non-Unions:
i. Direct labor will take care of itself (line managers see lower
production volumes, and will adjust appropriately)
ii. Indirect labor is more complicated:
1. To Fire
a. First – understanding your people [above]
b. [See Ranking Matrix (value to org,
commitment to org) in Note on Cost
Reduction]
c. Use involuntary layoffs with a plan, which
reflects the overall strategy of the
organization [NOT voluntary layoffs AND
NOT across-the-board pay cuts]
d. Set Aggressive cost-reduction benchmark,
and fire accordingly
e. Each unit/subunit leader rank employees
along: value to org (w/r/t future needs), and
commitment to org in future.
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11. f. Then force rank employees based upon
future needs (and get rid of the jerks first)
[Hexcel]
g. Develop plan that treats employees in
uniform and fair manner
h. Implement quickly, in a simultaneous
fashion across the org’n
b. Unions:
i. Usu need to wait for K to expire
ii. But when you can’t change the people, change their behavior
(note: ch 11)
1. keep experienced workers
2. profit-sharing
3. cross-training = sell as job security
4. copay for healthcare
5. outsource non-core jobs
iii. New mgmt can justify better rep for unions
3. SG&A: use your Dr. No here.
a. develop target $-value
b. assign to each group as appropriate (not across-the-board)
c. Give suggestions about how, but be open to creativity
d. Give timing deadline
e. Must be tough: force them to work on this
4. If still producing net income: take one-time write-offs – a reduction in
taxable income as recognition of certain expenses required to produce that
income.
v. Revenue
1. Pricing: Renegotiate customer pricing contracts if necessary
2. Get a selling animal; sell hard
vi. 6 Basics for GMs
1. Strategy: Data driven
2. Resource allocation: reallocate to best use
3. Day-to-Day: discussions (weekly) and visits
4. Organizational structure: end departmentalization
5. People: if can’t fire (unions), incent through reorganization; no missionaries;
hiring/selection; set the example, ask for input, and clarify expectations
6. Culture: individualteam orientation; communication opening; no excuses
& accountability
d. Financial
i. Renegotiate loans; pay off at less than value (use LV analysis as negotiation tool)
e. Political: union/gov’t can work in your favor, sometimes
VI. Send resources to cash-generating business units that can secure co’s immediate survival and
provide foundation for profitable growth. Pull drainers.
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12. VII. Long-term sustainability
a. Business plan
b. Build teams
i. Assemble a strong Board
1. membership – Paul Marshall on deciding whether to join a Bd:
a. Composition of other directors (your ability to add and receive
value)
b. State of affairs of company
c. Mgmt team’s skills and abilities
d. Relationship between mgmt and Bd (from existing Bd members)
e. Role of company in the community
2. Duties – evaluating mgmt’s forward-looking plan
a. Step-back strategy
b. Examine #s in statements – what’s going on?
c. Restructure debt
d. Copy shamelessly from others
e. Consolidate plants
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