Situational Overview : An industrial company was beginning to experience declining sales and cash flow. The company consisted of three separate businesses, and these operations were never consolidated. As the company’s financial position worsened, it became evident the new owner could not provide critical financial analysis across the businesses to satisfy the needs of the lenders or even the management operators.
Resolution : During the nearly nine-month period the lenders knew the company would violate the financial covenants of the loan agreement and run out of cash, the owner resisted a transparent discussion of the situation. Consequently, valuable time was lost that could have provided much needed relief to the company and its equity owner. Only at the last stage of the company’s desperate need for cash did the owner finally consent to the remedial action the lenders were seeking.
Results : Unfortunately, too much time had been lost. By the time the equity holder finally agreed to put in additional capital to the time the money actually entered the company, it was too late. The capital contribution literally vaporized the day it was invested, and the lenders ultimately took control of the company. Sadly, if a more forthright and transparent engagement with the creditors had occurred a year before, the equity holders would have received limited recovery, with the potential to earn back a full recovery.