This post is part of a series of posts entitled First Considerations for the Financially Distressed Business. For a comprehensive list of articles contained in this series, click here.

When a business is facing financial difficulties, it must decide whether or not it should engage in discussions with its creditors to try to work out a consensual repayment plan or if it would be better to seek the protection of the bankruptcy court. As with any decision, both alternatives present various advantages and disadvantages.

If a company is facing insolvency, it may be able to quickly reorganize its debt through an out-of-court workout or restructuring. A “workout” or “out-of-court” restructuring is a process in which a financially troubled company and its creditors reach an agreement to adjust the amount and/or the timing of payment of the company’s financial obligations. An out-of-court workout is almost always more cost-efficient than a formal, court-supervised bankruptcy proceeding for both the debtor and creditors. This is because it has the potential to achieve higher returns at a lower cost for all stakeholders. Within this context, debtors and creditors are generally free to modify their debt terms by agreement.

1. Signs that Company Needs Restructuring

Nearly every business, from inception to growth, will experience financial challenges throughout its development. These challenges are oftentimes unexpected – especially in today’s climate with the COVID-19 pandemic affecting every facet of our lives – and sometimes require financial restructuring from seasoned professionals. Although acknowledging financial difficulties is often difficult for businesses, identifying the signs early may help to provide the longevity a business needs to remain successful. While this list is not exhaustive, here are several signs a business may need restructuring:

A. Runaway Expenses

One major concern a business may have is increasing runaway costs. If a business is spending more than it’s bringing in, the business may need restructuring of its financial obligations. Restructuring can help identify those unnecessary expenses, expenses which may be deferred, and provide a healthy pathway to profitable cashflow. In addition, reducing costs may open better credit opportunities and provide a business with consistent supply chains.

B. Lack of Efficiency

A business with poor efficiency may call for financial restructuring. A business that lacks efficiency is typically disorganized, poorly designed, and lacking smooth operations. Inefficiency can be procedural (business operations) or in human resources, or both. However, a restructuring professional can identify these operational defects and minimize their financial impact.

C. Overextended Debt

A business with poor efficiency may call for financial restructuring. A business that lacks efficiency is typically disorganized, poorly designed, and lacking smooth operations. Inefficiency can be procedural (business operations) or in human resources, or both. However, a restructuring professional can identify these operational defects and minimize their financial impact.

D. Market Share Erosion

An obvious sign that a company is in need of restructuring is the loss of market share. Losing industry market share is the result of being uncompetitive. If a company is being outperformed on price, service, or product quality, a restructuring professional may provide the necessary opportunity to restore a company’s competitive edge. Here, a restructuring process can provide a company with new organizational structure and enhance productivity. Additionally, restructuring can help a company find alternative revenue streams and reduce costs.

E. Rapid Business Expansion (Burn Rate)

Finally, a business may need restructuring despite experiencing high-growth. In certain industries, a business can expand so quickly, the rate of growth creates disorganization and decentralization at all levels, including financial. A business experiencing accelerating growth may also burn through funds at unsustainable levels, making restructuring services doubly important. Restructuring those high-growth expenses can provide better sustainability and financial health.