The Stress Test Every Business Needs

14How should you restore a distressed company to health?

Andrew Wollaston and Donald Featherstone

When economic waters are calm, it is hard to imagine the effect that financial disruption can have on an enterprise. A CEO and owner of a company borrowed to expand his business during profitable times. He believed that taking on debt had relatively low risk when compared to the equity returns that profits from expansion would deliver. Unfortunately, 12 months later a major annuity customer switched to a competitor and the company couldn’t recover the lost revenue elsewhere. The CEO told us:

On reflection, I should have taken immediate steps to cut costs and reshape the business for lower volumes, but I thought another major contract win was just around the corner. Anyway, the debt was three-year money, and I assumed the business was still making a profit.

After six months of negative cash flow, the business breached the terms of its lending agreement and had insufficient cash to make a debt payment. The lenders urgently requested a meeting and a proposal from the company on how to handle the situation. The business had developed a new product line, and the CEO was confident that market appetite was strong, although there were no actual sales in the pipeline. He asked the banks to increase their exposure to fund the company’s future.

I see now that I was overly optimistic. The lenders asked all the right questions; unfortunately, I was not well prepared and did not have proper ...