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How a workout specialist operates.

A company on the brink of bankruptcy generally has three options: file for formal reorganization under chapter 11 of the Bankruptcy Act, file for liquidation under chapter 7 or seek an informal reorganization.

In many cases, informal reorganization is more attractive to management, stockholders and creditors because there is a better chance the company will recover; also, the informal procedure generally is less expensive.

In an informal reorganization, management often turns for help to an outside consultant, called a workout specialist, whose initial goal is to try to turn the business around. Failing that, the consultant helps the business through either the chapter 11 reorganization or liquidation.

THE PRICE TAG

Workout consultants come with different experience and fee schedules. Some specialize in large companies, charging six- or even seven-figure retainers. Others focus only on small companies and charges as little as $125 per hour.

In some cases the company in crisis hires the workout consultant; other times creditors form a committee to retain one.

While some workout consultants specialize in a specific industry, most are generalists. Many accounting firms have workout divisions, and in recent years the field has become quite lucrative.

Industry CPAs should know how workout consultants operate because professional accounting help always is required as the company crisis unfolds.

A workout's success often depends on convincing the company's creditors to cooperate by not forcing the company into bankruptcy immediately. They generally are told bankruptcy could mean they'll receive little or nothing on their claims. The aim, of course, is to buy time--to give the business an opportunity to raise some cash and get its operations on a better financial footing.

TURNAROUND STEPS

Workout specialists usually take the following steps when they are called in a crisis:

1. The workout consultant conducts a fast study of the client. Since creditors are anxiously demanding their money, the consultant must devise remedial action quickly. Part of the strategy includes an assessment of the business's viability. The critical questions are: Can the company succeed in its present business if it is turned around? If not, is management capable of running another company that could be acquired if cash is located?

2. In the meantime, the consultant tries to negotiate "stand-still agreements" with principal lenders and suppliers. Such agreements usually last for up to 90 days. The parties agree to allow the company that time to begin solving its problems and find cash to pay some immediate debts. Also, vendors are encouraged to continue to provide necessary services or supplies.

The consultant keeps key customers and employees abreas of the negotiations, for without their support there is little hope of success.

3. The next priority is saving and raising cash. This is done by slashing expenses, selling off unused assets, changing production schedules, adding new distribution channels, changing the terms by which customers pay and possibly raising bridge loans.

It is practically impossible to rehabilitate a company without building cash. Fortunately, many lenders specialize in such financing.

4. With stand-still agreements and some extra cash, the workout consultant focuses on developing a rehabilitation plan. The plan often includes two options: return the company to normal operations or make it attractive for acquisition.

The plan could include restructuring debt, negotiating permanent new terms with suppliers, redeploying assets and personnel and raising capital if the cash on ahdn is inadequate. Creditors usually are offered a stretch-out payment plan or an installment note plus equity. Some are offered a cash or equity bonus in the event of a merger or refinancing; that's called an upside kicker.

5. The workout consultant presents the plan to the largest and most important creditors first. They likely will request modifications; however, they may reject it. In that case, two options are possible: develop a new rehabilitation plan (step 4) or, if it looks as if some psychological pressure on creditors would work best, prepare a bankruptcy filing.

Secured creditors usually are asked to take payments 20% to 40% less than they are owed. Although they frequently receive about as good a deal in a workout as they would in a chapter 11 filing, they often go along with a workout in the hope that they will do better.

6. Once creditors accept the plan, the workout consultant and management usually monitor it for two to three months. This is a critical period: It tests the effectiveness of the plan. A drop in sales or cash receipts could seriously upset the company's ability to meet installment payments and cause the creditors to lose faith in the plan. In that case, the consultant may have to return to step 4 to correct some financial assumptions and try to renegotiate a new plan.

THE CPA's ROLE

Industry accountants can play a major role in advising a company that is in crisis to consider an informal workout before taking the chapter 11 step. The choice may spell the difference between life and death for a business.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Management Accounting
Author:Silver, A. David
Publication:Journal of Accountancy
Article Type:Column
Date:Jan 1, 1992
Words:823
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