Restructuring of small to medium-sized businesses comes in many shapes and sizes, depending upon the challenges faced by the company and the vision for the ultimate outcome/objective. To start, business owners should consider whether they aim to revitalize the business and continue to operate it - or sell to a third party (e.g. strategic, private equity, other). In general, the ultimate objective is to finish up with a healthier company that is profitable, cash flow generative, and positioned for future growth organically and/or by acquisition(s).
There is a tendency to think of restructurings as being focused on reducing headcounts and implementing severe cost-cutting initiatives. However, while these are obvious areas of focus, they are by no means the only avenues that should be explored.
The initial task is to develop a comprehensive strategic turnaround plan with input from the Board or owners, the senior management team, other key employees, and, if needed, relevant outside advisors. Some of the more common areas for review and action, as appropriate, are noted below:
[Note: this list is not exhaustive, and will clearly vary based on the type of business being restructured]
- Optimizing supply chain vendors in terms of their reliability, quality, substitution options, pricing, geography, and lead times, and making any needed changes to improve efficiency and gross profits.
- Improving product costing techniques, leading to better management decision-making and providing the opportunity to increase prices and enhance profitability.
- Exiting unprofitable product lines and/or customers, thereby increasing average gross margins.
- Reducing working capital by lowering Inventory levels and overdue Accounts Receivable balances, and extending Accounts Payable terms wherever possible without compromising key supplies/services.
- Paying down any outstanding debt (e.g. Credit Lines, Term Loans, Other) using some or all of the cash generated from the above Working Capital reductions, with the aim of creating a cash surplus/buffer.
- Reducing headcount via streamlining activities and the further automation of processes and procedures, including evaluating the outsourcing of back-office and other administrative services to third-party providers/virtual assistants.
- Improving employee quality and skills by removing poor performers, hiring where necessary, improving training programs, and ensuring open communication with staff on the company’s progress.
- Reviewing facility costs: is space appropriate for current and future operations? Depending upon building ownership consider, if leased (i) renegotiating the lease; (ii) outsourcing manufacturing and/or processing and subletting any surplus space; If owned, consider (i) a sale, and the purchase or lease of an optimum sized facility; (ii) sale and leaseback.
- Reducing/stabilizing SG&A spending by requiring senior management to propose cost reductions in their departments/functions by a specific % before mandating additional reductions and setting timetables. This should include the elimination of unnecessary and duplicated items, as well as smaller hidden legacy costs (subscriptions, donations, periodicals, etc.). HR and Finance should be tasked with reviewing medical and other benefit costs with an independent broker and utilizing the latest plan options available (see separate blog) to minimize costs while retaining market-level benefits.
The overall objective is to leave no area of the company’s operations unreviewed – even if they are thought to be operating efficiently and effectively. The implementation of any or all of the above initiatives will result in tangible improvements to the bottom-line EBITDA/profitability of the company and provide it with a stronger Balance Sheet as it moves forward.
If the company is preparing for a sale/exit management should consider obtaining a Quality of Earnings Report and, if appropriate, Environmental Reports (e.g. Phase 1, Phase 2) from relevant third parties at their own cost for inclusion in the virtual Data Room.
For more guidance on achieving the best outcomes during restructuring, contact Florida CFO Partner, John Cruickshank.