Financial Restructure
Rapid growth, competitive pressures, brand malaise, excess leverage...the factors causing a slow down or cash flow crunch are numerous.
Sometimes, a bankruptcy filing may be appropriate. In most cases, however, a restructure may better serve the interests of the various stakeholders in your business. While a restructure may not "extinguish" obligations, it does offer a franchisee/business owner an opportunity to preserve "going concern" value and to once again move forward to build future value and opportunities.
A successful restructure requires an upfront risk and reward assessment by and for the various stakeholders in the business including but not necessarily limited to the franchisee/operator, franchisor, secured debt provider(s), landlords, trade and unsecured creditors and investors.
Key milestones in a re-structure include:
- Stabilize the current operating situation by calibrating obligations to existing cash flows. This typically involves negotiating standstill and forbearance agreements with key stakeholders.
- A store by store and market by market review. Explore and evaluate operating and financial options.
- Financially engineer the business to improve future prospects. This may include a blend of options including asset dispositions, closures, overhead consolidations and sale of real estate to reduce debt and or fund brand mandated capital investments.
- Define operating and financial targets and expectations for the re-engineered business that will allow access to the capital markets over a 12 -18 month horizon.
- Manage to, report on and monitor to benchmarks that will allow for future access to the capital markets.
- A re-finance of all or a portion of the re-structured company's obligations at market rates is a good indicator of a successfully completed re-structure.
- Do not hold your breath, a well executed re-structure that travels through the above milestones and preserves on-going concern value for owners and investors typically takes 24-36 months.
Some elements explored in the re-structure process include:
- Asset base rationalization. This is the time to take a serious look at each location from a cash flow and collateral vantage point and make the hard decisions on marginal contributors. Which locations do not generate a 15% cash operating profit (after royalties, advertising and marketing costs) before occupancy and overhead expenses? Which locations do not absorb allocated overhead? Which ones do not contribute to debt service? Are cash flows sufficient to source and fund required capital expenditures? What are the remaining terms of franchise agreements and leases? What capital requirements are required today and the next 3-5 years in terms of successors, image upgrades, required brand mandates and scrape and re-builds?
- Calibrate debt service to existing cash flows. What are solid, sustainable cash flows after segregating out marginal assets? What are the direct and indirect costs of closing marginal locations?
- Capital expenditure plan. Develop a capital expenditure plan that maintains the integrity of remaining assets and effectively leverages the brand at street level. Negotiate extensions with the franchiser of major capital expenditures as appropriate.
- Working capital plan. Agree on a plan to strengthen working capital position and re-build liquidity. Define a normalized working capital position and design a plan to systematically reduce current liabilities.
- Review economics of leased locations. If a number of years remain on a franchise agreement or an onerous/above market lease this may be the time to re-negotiate or structure a buy-out of the lease.
Each business and each restructure has its own challenges and opportunities. A well structured and thoughtfully designed plan that treats various stakeholders fairly while demonstrating general awareness for the seams and tolerances of the restructure market has the best opportunity of being successfully accepted, documented and closed.
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