October 2018 Vol. 7 No. 10
charlie goodrich

No owner or investor goes into business in the hope of finding themselves in financial distress down the road. Unfortunately, it happens every day. 

Should that occur, there are many things you can do to minimize loss and maximize results. Today's newsletter offers some guidelines and suggestions.
All the best,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue…
How to Minimize Loss When in Financial Distress
Heard On The Street
About Us
How to Minimize Loss When in Financial Distress
When I start an engagement to assist a company in financial distress, I work to minimize the loss to the owner or investor.  That loss comes in two forms. 

First, a loss of equity in the business, either partial or complete. Worse, losing more money than is already invested in the business. The challenge — in both scenarios — is that the creditor’s interests and owner/investor behavior often get in the way.

Minimizing equity loss

Equity loss happens when, given what could be done, enterprise value is not maximized, so there is a bigger shortfall, for unpaid liabilities and equity. Restructuring is sort of like musical chairs with the liability side of the balance sheet. Bu t unlike musical chairs, when the music stops, equity is always the loser, followed closely by junior creditors. The more value in the company, the more room for equity’s chair and for junior creditors.

In a distressed setting, enterprise value can be destroyed in many ways. The more common are:

  • Doing things that lose customers: out of stocks, late shipments, etc.

  • Doing things that lower gross margins. For example, a group of lumber yards that were in trouble with the bank focused their scant resources on buying commodity framing lumber, as a way to keep customers. They kept the customers, but couldn’t stock the higher margin items such as doors, windows, trim, etc., that are needed to make the account profitable. Margins and EBITDA dropped and the business was worth less as a result.

  • Foregoing repairs and maintenance, resulting in higher labor expense from workarounds.

Worse than all of these is walking away — or being pushed away — from enterprise value that is on the table.  That happens in several ways:

  • Short term operational changes that could improve enterprise value aren’t given time to happen.

  • Senior creditors decide to liquidate. For them, better safe than sorry. For junior creditors and equity, too bad.

  • Plans to sell the company are botched. The most common reason is lenders don’t allow enough time to sell the company, so it is liquidated or sold for less. Another reason is a “healthy” business investment banker is hired instead of one versed in distressed sales. And, of course, if the company is burning too much cash, no miracle can provide the time for a proper sale.

Losing more money than is already invested

Losing more than is invested happens when creditors take owners’ assets.  This can happen in numerous ways:

  • Owner/investors put more money in the company, either to keep a creditor happy or to just keep the enterprise a float — and then lose it.

  • Creditors foreclose on assets already pledged in some form by way of a guarantee. For individuals, it is not unusual for a lender to have a mortgage on the owner’s house or perhaps toys outside of the business, such as planes, boats, vacation homes and other investments. For investors that own a predominance of the company, such as a fund, other assets may have been pledged. Owner/investors may have been induced to put up more types of collateral so the company could kick the can down the road.

  • Creditors can pursue personal or corporate guarantees and then seize assets of the individual or guaranteeing entity.

  • Creditors, and even the company itself, can try and claw back payments from the company to the owner, using various legal theories and remedies. At risk are payments for dividends, salaries (sometimes), owner’s personal expenses, management fees and so forth.

  • If the company ultimately winds down, there can be all sorts of liabilities that transfer to owners. (See my previous post on the topic, here.)

How things can get worse

Often, when enterprise value is not maximized, there can be a “pile on” effect. The remaining creditors on the short end of the stick now have reason and incentive to go after the owner/investor’s assets outside of the business, in the ways noted above.

Why do creditors maximize their recovery at the expense of others? Simple, risk minimization. If you can liquidate and get surely paid, why not? Often, this happens because the company has been headed the wrong way for a long time and creditors don’t trust management to execute the process needed to maximize recovery through a sale or restructuring.

Sometimes, things can worsen when there is bickering among creditors that are junior to the senior lender.  In these situations, the senior lender is more likely to go along if it is paid more, such as through higher default interest, forbearance fees and so forth. Or, the senior lender may be replaced by a lender that is willing to take on the risk (for a price, of course).

How do debtors make things worse?  Lots of ways, but first and foremost, by not seeking expert advice and not changing what they are doing in favor of what’s necessary. Because they have both a financial and emotional investment in the business, and because they may not have an accurate/realistic assessment of the situation, they are easily goaded into putting more money in the business or providing assets outside of the business as collateral that they will ultimately lose.

What to do as a business owner or investor with a financially distressed business

  • Get in front of the problem and address it; doing so creates time to maximize value. For example, a CFO friend of mine was hired by an investor with a portfolio company headed south. The investor could see the company’s performance declining and loan covenant problems on the horizon. Because my friend had time, he was able to quickly sell one division and create more liquidity by borrowing in-Country for a foreign operation. The investor replaced the CEO and worked on improving market and financial performance. My CFO friend sold the remaining business over time, through an ordinary sale process. Everyone got paid, and the investor got its investment back with a small return. (A small return on capital beats no return of capital, any day!)

  • Develop reliable, objective projections that allow you to see trends and understand what they mean. An accurate, 13-week cash flow is essential in anticipating problems, prioritizing payments, and avoiding commitments to creditors that you can’t meet. A realistic, complete, one to three year financial projection is needed to spot and then head off problems before they become a crisis.

  • Bring in outside expertise early on… and follow their advice. Outsiders can offer objectivity that is hard to develop when you are close to your business or investment. Is the business truly worth as much as you think? Will those long time, but financially struggling customers really pay? Will secured lenders continue to be patient when they don’t see positive change? In addition to expert financial advice, make sure you have strong legal advice from counsel that specializes in your situation.

  • Consider hiring an investment banker. If a sale of the business or of one of the businesses is needed, and the situation won’t allow sufficient time for an ordinary course sale or not all creditors will paid upon completion of the sale, an investment banker with a specialization in this situation can help.

  • Don’t leave funds available that creditors can use to fund suing you. Recently, I have been doing out of court liquidations. The key to success here is to be both quiet and fast, disposing of all assets before notifying creditors. That way, if they don’t like the outcome they have to use their own money to fight instead of yours. It is one thing for a creditors committee to use the company’s money to fight to claw back dividends to an investor. It is an entirely different matter for an individual creditor to spend its own money to legally get access to the company’s records, hire a forensic accountant to find your dividends and then litigate to recover. This is also true if a bankruptcy trustee gets appointed in the event of an involuntary chapter 11 filing after the liquidation. The Trustee is likely to declare the case a “no asset” case and walk away.

  • Choose your legal forums carefully. In bankruptcy, unsecured creditors can use company money to fight to get paid. If everything is out of court, however, they have to use their own money. If the secured lender puts a receiver in, his mission is to pay the secured lender and he has less concern for the other creditors.


No owner or investor goes into business in the hope of finding themselves in financial distress down the road. Unfortunately, it happens every day. Should that occur, and while the outcome is rarely a happy one, there are many things you can and should do to minimize loss and maximize results.
Heard on the Street
“In my view, market conditions make this a time for caution,” says Howard Marks , Co-Chairman of Oaktree Capital Management, an investment firm that focuses on credit strategies. (Oaktree made a killing in the last crash.)

Read Howard's assessment of today’s financial markets, here .
About Us
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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