Many small and mid-sized businesses are struggling as a result of the current economic downturn. A firm grounding in the basics of restructuring can help business leaders and their advisors navigate an optimal path for every company.

1. Restructuring for Small and
Mid-Sized Businesses
July 2020

2. TROUBLE AHEAD
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3. Overview
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Revenue Count Category
$0.5 - $1.0MM 830,000 Small Business
$1.0 - $5.0MM 820,000 Small Business
$5.0 - $10MM 160,000 Small Business
$10.0 - $100.0MM 190,000 Middle Market
$100.0 - $500.0MM 25,000 Middle Market
$500.0 - $1.0B 4,000 Middle Market
Total 2,029,000
The total universe of small and mid-sized companies in the United States is massive.
Of those companies, the smallest form an overwhelming majority.
89%
Small Business Middle Market
Source: NAICs Association. “Counts by Company Size”
https://www.naics.com/business-lists/counts-by-company-size/

4. Negative Business Sentiment
The above values represent the quarter
over quarter decline for that area.
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1) Are business leaders being too
optimistic about their business
outlook?
2) Does the disconnect between
revenue and profit expectations
signal future challenges?
3) Are businesses taking the steps
necessary to survive a long
downturn?
Sentiment Key Questions
The results of a recent survey by the Association of International Certified Public
Accountants highlight a stunning erosion in sentiment vs. Q1.
Source: AICPA. “AICPA Business and Industry Economic Outlook Survey Q2 2020”
https://www.aicpa.org/content/dam/aicpa/interestareas/businessindustryandgovernment/newsandpublications/downloa
dabledocuments/2q-2020-eos-slides.pdf

5. Global Downturn
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With global GDP expected to decline by 10%, the current downturn is on track to be
three times worse than the global financial crisis of 2008-9.
According to a recent report by
Moody’s Analytics: “Of the 8
million business establishments
operating prior to the crisis in the
U.S., it would not be surprising if
close to a million do not make it.”
Source: Moody’s Analytics. “Handicapping the Paths for the Pandemic Economy”
https://www.moodysanalytics.com/-/media/article/2020/Handicapping-the-Paths-for-the-Pandemic-Economy.pdf

6. A Land of Giants
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The trend toward an increasing gap between large and small companies suggests that
effective restructuring strategies will continue to diverge by firm size and complexity.
Source: Harvard Business Review. “The Gap Between Large and Small Companies is Growing. Why?”, August 2019.

7. RESTRUCTURING
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8. What is Restructuring
• A means to give time, and perhaps
additional liquidity, to a company
undergoing challenges
• A method of reallocating creditor claims
to more closely align with creditor risk
tolerances
• Generally associated with the
acknowledgment of prior missteps
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• An operational fix:
In the industry, “restructuring” generally refers
to transactions that alter the balance sheet (a
refinancing or debt for equity swap, etc.),
whereas “turnaround” implies a change in
business operations (increased gross margins,
improved working capital ratios, etc.)
Restructuring Is Restructuring Is Not
“Corporate restructuring entails any fundamental change in a company's business or
financial structure, designed to increase the company's value”
Source: NYU. “Corporate Financial Restructuring, Professor Ian H. Giddy”
http://people.stern.nyu.edu/igiddy/restructuring.htm

9. Cost of Capital
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The challenge in the current downturn is ensure that capital structures can withstand
an uptick in cost of capital after nearly forty years of a general downward trend.
Source: Harvard Business Review. “Strategy in the Age of Superabundant Capital”, March 2017.

10. Capital Structure Pecking Order
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The risk tolerance of parties to a restructuring can often be discerned by referring to
their position in the capital structure.
Equity
Trade Debt
Unsecured Debt
Subordinated
Debt
Secured Debt
Category Example
Secured Debt Any lender with a secured
position relative to collateral,
but generally a bank or
commercial lending company
Subordinated Debt Friends and family for
convertible VC financing
Unsecured Debt Private credit or mezzanine
debt facility
Trade Debt Accounts payable with
suppliers
Equity Owner(s)

11. The Lender Perspective
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In order to successfully plan and execute a restructuring, it is necessary to understand
the perspective of lenders in general and your lender in particular.
Risk Tolerance
• Lenders generally operate on a risk
tolerance spectrum, with those
lenders providing the lowest cost
funding being the most conservative
lenders, and lender risk tolerance
steadily increasing as the cost of
funding increases.
• Seeking to persuade a risk-adverse
lender to support a restructuring plan
through reference to upside potential
is a common, and extremely counter-
productive, mistake.

12. The Supplier Perspective
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Suppliers can be an invaluable help, or a severe impediment, in implementing a
restructuring plan.
• Often, suppliers are torn between a
desire to resume normal business
operations with a troubled customer
and the fear of increasing their
exposure.
• Successful restructurings are often
predicated on securing some level of
explicit or implicit support from
suppliers, generally in the form of
extended payment terms.

13. In some cases a restructuring can
consummated that provides additional
liquidity (cash and untapped borrowing
availability) to a company. This is most often
the case when there is unencumbered
collateral or when switching to a more risk
tolerant class of lender.
Funding a Restructuring Plan
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An equity infusion is a common means of
funding a restructuring plan and is often a
requirement of securing concessions with
more conservative lenders.
Financing
Asset Divestitures
Owners
Operational Improvement
The sale of excess assets if a proven means of
generating funds to support a restructuring
plan.
When a restructuring is paired with an
operational component (a turnaround), the
cash generated from the turnaround can serve
as funding for the restructuring plan. This does
necessitate careful coordination, and a high
level of confidence in the operational
improvement.

14. Chapter 11 Bankruptcy
“This chapter of the Bankruptcy Code
generally provides for reorganization, usually
involving a corporation or partnership. A
chapter 11 debtor usually proposes a plan of
reorganization to keep its business alive and
pay creditors over time. People in business or
individuals can also seek relief in chapter 11.”
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Pros
• Automatic stay from creditors
• Clearly defined rights and protections
• Increased availability of financing
Cons
• Very expensive
• Extremely transparent process
• Can extend the time to resolution
Definition Pros & Cons
Chapter 11 bankruptcy is the means of restructuring in the United States which offers
debtors maximum protection.
Source: United States Courts. “Chapter 11 – Bankruptcy Basics”
https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics

15. Assignment for the Benefit of Creditors
“ABCs provide a state-law alternative to the
filing of a federal bankruptcy case. Aptly
named, they involve the assignment of an
insolvent company’s assets to a third-party
assignee, who is selected by the company and
charged with the duty of liquidating the
company’s assets to satisfy creditors’ claims
against the company.”
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Pros
• Cheaper than chapter 11 bankruptcy
• Faster than chapter 11 bankruptcy
• Offers buyers protection from legacy
issues
Cons
• Most effective in supporting the sale or
liquidation of a business
• Based on state, not federal, law
• Not feasible for companies with broad
operations
Definition Pros & Cons
State law alternatives to bankruptcy that are generally faster and cheaper while
providing some level of protection to the debtor.
Source: “Making Assignments for the Benefit of Creditors as Easy as A-B-C”
https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2542&context=ulj

16. Out of Court Restructuring
“An out-of-court restructuring or "workout" is
a nonjudicial process through which a
financially troubled company and its
significant creditors reach an agreement for
adjusting the company's obligations. A
successful workout generally requires the
participation of the company's lenders, major
suppliers, and depending on the
circumstances, other organizations or entities
such as unions or governmental agencies.”
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Pros
• Ability to craft a bespoke solution
• Potential for a rapid close
• Key parties are able to control the process
Cons
• No easy means of forcing a resolution
• Potentially expensive
• No legal protections from other creditors
Definition Pros & Cons
The approach that offers maximum flexibility, both for good and for ill, is the out-of-
court restructuring.
Source: “United States: Restructuring Debts in and Out of Court”
https://www.mondaq.com/unitedstates/insolvencybankruptcy/105646/restructuring-debts-in-and-out-of-
court#:~:text=An%20out%2Dof%2Dcourt%20restructuring,for%20adjusting%20the%20company's%20obligations.&text=Id
entifying%20and%20agreeing%20on%20the,potential%20solutions%20may%20take%20time.

17. CONCLUSION
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18. KeyTakeaways
Severe
Downturn
With a downturn 3X the severity of the global financial crisis of 2008-9 and the
prospect of mass small businesses failures, challenges abound for small and mid-sized
businesses.
Business
Sentiment
Despite the considerable decline in sentiment among business leaders, there is some
reason to believe that many decision makers remain unjustifiably optimistic, which
may cause them to delay necessary changes to their business operations.
Restructuring
Restructuring is a means of buying time for a company and creating alignment among
creditors. A restructuring alone does not strengthen a company.
Stakeholder
Perspectives
The reaction of various stakeholders to a prospective restructuring is often best
understood through reference to that creditor’s position in the capital structure.
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Funding a Plan There are multiple viable sources of funding for a restructuring plan.
Many small and mid-sized businesses will face challenges in the current downturn.
Understanding restructuring offers consultants a tool to help these businesses reset.

19. David Johnson
Email: david@abraxasgp.com
Ph: 312-505-7238
Twitter: @TurnaroundDavid
David Johnson, founder and managing partner of Abraxas
Group, has a 20-year track record of driving organizational
change. David has served as interim executive or financial
advisor to dozens of middle market companies in transition.
Throughout his career, David has demonstrated a
commitment to thought leadership, with numerous speaking
engagements and articles on the topics of business
transformation, change management, performance
improvement, restructuring, turnaround and value creation
to his credit.
David received his MBA from the University of Chicago and
completed his undergraduate studies at Fairleigh Dickinson
University.
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