Distressed Companies Need a Skilled CFO Consultant

Many entrepreneurs spend their entire lives creating a company and then watch their life’s work slip away in a downturn. Few realize it at the time, but the single most important decision of their career may be whether to engage a CFO Consultant as a “turn around advisor” to help when their company falls on hard times.  The traits the CFO Consultant must bring to the table include significant financial and operational expertise as well as experience in handling restructuring or crisis situations.

Too often, CEOs/management of distressed companies view engaging a CFO Consultant as a turnaround advisor as an admission of defeat or failure, and for the entrepreneur, it is hard to cede even partial control of the sum total of a life’s work. However engaging the right CFO Consultant maximizes the chance that the company will survive and avoid bankruptcy. If bankruptcy becomes necessary, a skilled CFO Consultant maximizes the chance that the company will survive Chapter 11 intact and avoid liquidation. Instead of defeat, engaging a skilled CFO Consultant is usually the first step in returning to profitability and success.

A skilled CFO Consultant is vital to preserve the future of a distressed company and the following are 6 reasons every struggling company needs a skilled CFO Consultant:

1. Accurate financials, projections. A company in distress must monitor its financial situation constantly to avoid disaster. There are two types of insolvency: a cash crunch, which occurs when a company cannot pay its debts as they come due, and balance sheet insolvency, which occurs when a company’s assets are worth less than its debts. Many companies fail simply because they are unable to foresee a cash crunch; they may be balance sheet solvent, but the cash shortfall prematurely ends their life before they can reach their upside potential.

Companies in distress need to have especially accurate financials, cash projections, and performance projections, as well as tight cash controls. This is almost never the case, and unpleasant surprises bring unpleasant endings. A skilled CFO Consultant enters the crisis and immediately assesses the financial situation. A substantial part of their focus is to create accurate financials and projections, including 13-week cash-flow analyses, so that a company can determine its position and react accordingly.

2. Developing an exit strategy. For a distressed company to survive, the key is to act quickly to develop an exit strategy, whether this involves recapitalizing the business, restructuring debts, filing Chapter 11, or selling the company or certain nonperforming divisions. A quick strategy creates momentum, allows a company to seize opportunities that arise, and creates buy-in with creditor constituencies.

Developing an exit strategy to return a struggling company to profitability is a complex task and involves intensive financial analysis. Unless the CEO/management team has been through it before, it can be difficult to understand the options and then develop a strategy. It is almost impossible for the uninitiated to do so in the limited window of time that most distressed companies have. Skilled CFO Consultants are experienced in triaging the immediate situation and then working quickly to develop a practical exit strategy for the company. This same work product can also be used later to help in finding buyers for any nonperforming assets that the company decides to sell.

3. Professional testimony. Among the most unpleasant experiences associated with financial distress is being forced to testify, whether at collection hearings, in litigation, or in bankruptcy proceedings. One of the best ways to avoid, or limit, testimony by officers and directors at these proceedings is with the appropriate CFO Consultant, who is often designated to act as the chief restructuring officer (CRO) of the company.

CFO Consultants skilled as turnaround advisors are experienced at testifying and are considered experts on financial issues, so as CRO, they can usually take the witness stand on behalf of the company. This puts a professional in place for courtroom matters and allows CEOs/management to focus on what they do best — running the company day-to-day. They can then focus on selling products, building the company’s business, and managing customer relationships, rather than the stressful task of preparing to testify on a regular basis.

4. The forbearance chit. One of the best ways for a distressed borrower to obtain forbearance from a lender is to agree to engage a skilled CFO Consultant. Lenders are no strangers to workout situations, and they often want a turnaround advisor involved to assess the situation much earlier than the company does. Options erode swiftly as a company’s position worsens, and its leverage with the lender erodes as well.

The lender will often give forbearance in response to a company’s engaging of a skilled CFO Consultant. As for the cost of retaining a skilled CFO Consultant, banks sometimes will forego some debt service or interest payments to free up cash to pay for the advisor. Also a skilled CFO Consultant will quickly make enough adjustments to a company’s cash flow to immediately justify their own value.

5. Negotiations with creditors. To stay in business through a difficult time, a company needs the trust of its vendors (so that they will ship), its customers (so that they will buy), and its lenders (so that they will continue to lend and allow use of cash in bank accounts). Credibility is usually a significant problem for the existing management team of the distressed company because of missed payments or shipments in the past and the fact that the company has gone from health to distress. These problems are the source of constant complaints from creditors.

Not only is this a problem for the company, but it also makes for very uncomfortable situations for the management team who must continue to field angry phone calls from creditors. A CFO Consultant can shift the focus immediately because he or she has the benefit of being independent and new to the situation. A skilled CFO Consultant is experienced at building rapport with angry creditors to help the company get credit terms and move back toward profitability.

6. Outside Perspective. As mentioned earlier, denial is the most common reason that companies that should succeed instead fail. Too often, managment declines outside help until most good options have already evaporated, and they fail to recognize opportunities when they arise.

Having a skilled CFO Consultant on hand to make an independent evaluation when options still exist is critical. Entrepreneurs who remain in denial usually get marginalized by creditors and ousted before the end of the restructuring process. On the other hand, those who accept the reality of the workout and move proactively to return the company to profitability are seen as part of the solution and are welcomed at the table. The willingness to accept the help of a skilled CFO Consultant is usually a strong indication that the management team is proactively looking for solutions.

Engaging a Harvest CFO Consultant may be the single most important decision of an entrepreneur’s career. Recognizing that the right CFO Consultant is an irreplaceable asset in a company’s time of greatest need is crucial to the survival of a struggling company and crucial to making sure that a company that can succeed does. 

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