TIPS FOR DECISION MAKERS: SHIFTING THE FOCUS FROM PROFITABILITY TO SURVIVAL MODE DURING THE COVID-19 PANDEMIC (PART TWO)
WRITTEN BY JOSEPH J. BELLINGER
Joseph Bellinger has thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts.
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:
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.
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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.