​A significant aspect of my work is advising small and mid-sized companies coping with financial distress.  This is Part Two of a three-part series that describes some of the principles I have learned about the challenges faced by the decision-makers when their company is suddenly faced with financial distress.  Of utmost importance is that the decision makers make the paradigm shift from focusing on profitability to survival mode, and if they do not know the company’s financials, they must learn them fast.  This section provides a discussion of some of the factors that decision makers may wish to consider when considering whether (and when) to sell assets to generate cash as part of a company’s financial survival plan.

Cash is King & Know the Numbers

Cash is king requires decision makers to undertake a thorough, line by line, highly skeptical and dispassionate examination of every items that appears in the company’s financials. The financials must be complete and accurate, and the decision makers must know the numbers, or any survival plan they formulate will have built-in flaws.  At the core of a financial survival plan is the edict, cash is king, which requires a close scrutiny of all possible ways to generate cash, including liquidating assets, even if some of those assets are considered crucial to operations. How do decision makers determine whether an asset is “saleable?”
 
While there is no one formula for all purposes, a starting point might be:  An asset is “saleable” if it can be sold promptly at a reasonable price (allowing for a liquidation discount) and the net cash proceeds will provide a significant or necessary contribution to the company’s survival plan.  
 
Decision makers should review all of the assets on the company’s balance sheet and identify every asset (or category of asset) that could be liquidated and turned into cash, and whether the anticipated net proceeds would make a significant or necessary contribution to the company’s survival plan. Keep in mind, at this stage, the decision makers are only identifying the assets that could be turned into cash resulting in net proceeds that would make a significant or necessary contribution to the company’s survival plan.  Identifying an asset as “saleable” does not necessarily mean the asset will be immediately liquidated – it permits decision makers to have in mind what assets might be sold at a reasonable liquidation value as may be needed for the company to survive. However, the decision makers are likely to find low hanging fruit in the initial review of what assets can be liquidated for cash.      
  
Current Assets:  Converting current assets into cash is often an effective way to generate cash outside the ordinary course of business. For example:

• All excess, surplus, defective, or obsolete raw materials, work in process, and inventory (including returns) might be sold to raise cash quickly.  Even if the sale price is less than the company’s cost, it is an effective way to turn useless product into cash. 
• Identify and contact slow pay accounts receivable customers in order to collect as much as possible as soon as possible.  Consider negotiating discounts for prompt payment of the discounted amount.

 
Operating assets:  Selling operating assets such as vehicles, equipment, or machinery (this article refers to them as “assets”) is a more cumbersome process but selling assets to raise cash must be included in the decision making. 
                  
Decision makers should identify all of the assets on the company’s balance sheet that meet at least these three conditions:  (i)  the asset is not indispensable; the company could survive without the asset (or if there are several units of a type of asset, the company could survive with a fewer number of the asset); (ii) the asset (or some portion of a type of asset) could  be sold for a reasonable price (allowing for a significant liquidation sale discount); and (iii) the net cash proceeds the company would receive would make a significant or necessary contribution to the company’s survival plan. In addition, no decision is a bad decision for long, provided that the decision makers go back and review their prior decisions as often as practicable, and no less often than the start of each 30-day survival plan cycle. 
 
Once all the saleable assets are identified, the next question is which assets (or categories of assets) should be sold now.  It may not make sense for a company to sell an asset if all or most of the following are true:  (i) the expected or offered sale price for the asset (even after allowing for a liquidation sale discount) is unreasonably low based on an objective valuation model; (ii) the cash proceeds would not provide a meaningful contribution to the company’s ability to pay expenses; (iii) conducting the sale of the asset requires a significant investment of time; or (iv) the cost to replace the asset when the company needs to replace the asset is substantially higher than the proceeds received by the company.  
 
Conversely, survival of a company may require the immediate liquidation of assets, even at an unreasonably low prices, in order to meet pay payroll, pay debt service or operating expenses, and to avoid a shut-down.     
 
Decision makers should not consider any decision final.  Review and reconsider every decision previously made, and question their own assumptions as often as possible, and no less often than the start of each survival plan cycle.
 
The final Part Three of this series will cover what expenses might be deferred, discounted, or eliminated.
 
If you need legal assistance, including bankruptcy advice for you, your business, or both,  please email us at [email protected] or call us at (410) 598-0582.  

​This is not intended as legal advice and readers are admonished not to consider the content as legal advice or as recommendations they should follow.

A significant aspect of my work is advising small and mid-sized companies coping with financial distress.  This is part one of a three-part series that describes the principles I have learned about the challenges faced by the decision-makers when their company is suddenly faced with financial distress.  Of utmost importance is that the decision makers can make the paradigm shift from focusing on profitability to survival mode.  Even after recognizing that their company must shift to survival mode, decision makers may not know how to approach the questions that arise because survival mode is very different than focusing on profitability.  Hopefully, this three-part series will be helpful to decision-makers who must shift their thinking to survival mode for their business to survive this near complete shut-down of the economy due to this global health crisis.  
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The key to a company’s survival is for its decision makers to shift focus from profitability to survival mode.  
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The COVID-19 pandemic has caused a sudden trauma to the financial condition of the markets and most businesses.  Survival for those businesses hard-hit by this pandemic depend on the ability of the decision-makers to make the paradigm shift from profitability to survival mode.  Decisions that will determine a company’s survival must be made now –they cannot be put off until we have credible information regarding the magnitude or duration of this pandemic. Survival-based decisions must be made now -before decision makers know whether their company is eligible for any state or federal financial relief, or the amount or duration of any such relief, or when or how any such financial relief will be infused into the markets.   
 
Develop a short-term financial survival plan, share at least the main points the plan with the company’s workforce, and focus on implementing the plan for survival.   
 
Financial distress can challenge anyone’s fortitude.  The best antidote to the stress and distraction it causes is to develop a plan of action and focus on implementing the plan.  After I help clients hammer out a survival plan, it is apparent that a tremendous weight has been lifted.  While they may say that developing the survival plan was a miserable exercise, they are relieved to have a plan, “Now I know what to do.”  There is tremendous value in that mindset.
 
A company’s survival plan should be focused on the short term.  The measurement of “short term” is often dictated by circumstance.   I have had new clients whose immediate focus was, “How do we fund a payroll at the end of the week?”  While there may be some very short terms needs to plan for and manage, in general, companies tend to operate on a monthly basis, and a 30-day (monthly) short-term plan often works well.  While less vital than the short-term plan, develop a longer term 60 to 90-day plan for the company.  In this time of uncertainty, there is little utility in forecasting or planning beyond the next 60 to 90 days for most companies.
 
Any financial survival plan is based on complete and accurate financials, especially an income statement and a balance sheet. To the extent possible, develop a survival plan on a cash basis and for each 30-day cycle of the survival plan the two most fundamental questions are:  

1. What revenues are projected for collection during the cycle, on what dates, and how much? 
2.  Will the revenues projected for collection in this cycle pay the actual and necessary expenses that will come due during this cycle?

 
The greater the cash deficiency that results from answering these two questions, the more important it is to re-examine every aspect of a company’s operations and processes.  What adjustments can be made to get the cash deficiency at or near zero so that the company is at least meeting its expenses- surviving?  For example, restaurants are implementing survival plans intended to keep all or most of their employees on the payroll relying solely on take-out/delivery. This is by no means an ideal lifestyle choice, but it is a sound survival tactic many restaurants are implementing to survive and keep their staff employed.  Fundamental to the survival plan is whether the company and its workforce can be sustained in this crisis, or does the company’s business model require an overhaul for all or some portion of the business to survive? 
 
 
If you need legal assistance, please email us at [email protected] or call us at (410) 598-0582.  At Bellinger Legal Services, we take ownership of your business challenges and alleviate the pressure involved with legal distress.  Our team is here to help.
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