2. FINANCIAL DISTRESS
A condition where a company cannot meet or has
difficulty paying-off its financial obligations to its creditors.
The chance of financial distress increases when a firm has
high fixed costs, illiquid assets, or revenues that are
sensitive to economic downturns.
3. FINANCIAL DISTRESS OUTCOMES
Financial distress
Private liquidation
Financial
restructuring
Operations
restructuring
Asset
restructuring
Permanent
problem
Turnaround
opportunity
File for legal
File for legal backraptcy
bankruptcy
Private
workout
4. OPERATIONS RESTRUCTURING
Operations restructuring involves growing revenues
and cutting costs. A financially distressed venture needs to
improve its operating cash flows to allow it to meet its debt
obligations.
ASSET RESTRUCTURING
Asset restructuring involves improving the working
capital to sales relationship and/or selling off fixed assets.
Many ventures get into financial distress because their working
capital is too large relative to revenues.
5. FINANCIAL RESTRUCTURING
It involves changing the contractual terms of the existing
debt obligations and/or the composition of the existing debt
claims against the venture.
Private workouts
Private workout or restructuring is a voluntary agreement
between a venture’s owners and its creditors that provides
for a financial restructuring of the venture’s outstanding debt.
6. File for legal bankruptcy reorganization (chapter 11)
A trustee will be appointed to take over the company if
the court deems current management incompetent or if fraud is
suspected.
PRIVATE LIQUIDATIONS
In instances when the venture’s financial distress
problem is viewed as permanent, the venture should be worth
more dead than alive i.e. continual operations of the venture
would result in the entrepreneur and creditors losing more of
their funds than if the venture were liquidated now.
7. FILE FOR LEGAL BANKRUPTCY
Chapter 7 of the Bankruptcy Act explains the liquidation
methods for bankruptcy firm. It occurs once the bankruptcy
court has determined that reorganization is not feasible. A
petition for reorganization must normally be filed by the
managers or creditors of the bankrupt firm. If no petition is filed
and denied or if the reorganization plan is denied, the firm must
be liquidated.
