Services
Contract Administration - Turnaround, Refinancing
Situation
- Rapidly growing service provider acquired its largest contract to provide services.
- During the implementation period the company incurred transitioning costs that were significantly higher than planned. Multiple extensions delayed the start of services, resulting in unabsorbed overhead costs for labor and rent, as well as inefficient costs for underutilized labor that were hired for an earlier start date.
- The negative financial impact of extra costs and delayed start deteriorated the financial performance to a default with financial covenants of its credit facility.
- Further, the projected cash requirements for start-up losses and working capital indicated the company would exceed its borrowing capacity.
- The company’s management had no plan of substance that assured its lenders that the company would not exhaust its cash.
- The lenders stipulated the company to engage a financial consultant.
Consultant's Actions
- Negotiated terms for a forbearance that provided sufficient time for an assessment and deliver a plan that addressed the lender’s concerns.
- Reviewed the organic business operations including financial performance of each contract, identified assumptions and risks for baseline forecasting.
- Reviewed and assessed labor efficiencies and existing performance data.
- Analyzed the capital required to support start-up costs and integration of new contracts.
- Discussed with management the existing efforts regarding obtaining incremental capital.
- Developed enhanced cash flow forecasting and reporting that was integrated with the company’s ERP system.
Outcome
- Improved organic financial performance primarily by terminating two contracts and by increasing labor productivity with all contracts.
- Improved cash flow by implementing procedures to reduce the billing cycle and reduced DSO, and by realigning capex to more closely match priority and timing of use as well as availability of funds.
- The improved financial performance combined with the more detailed business plan attracted new lenders that provided a credit facility that refinanced the existing lenders in full.
Customer Support - Debt Restructuring
Situation
- A slow decline in financial performance accelerated further unfavorable with the loss of customers that accounted for approximately 25% of the company’s revenue. The company attempted to respond by acquiring new accounts.
- The credit facility was strained, and maturities for term debts were due within six months.
- The company’s owners would not agree to provide additional capital, the prospects to refinance the lender were unrealistic.
- The lender offered to forbear on loan defaults, conditioning the company to engage a financial advisor to develop a plan.
Consultant's Actions
- Assessed the business and developed a sensitivity analysis for forecasting cash liquidity.
- Identified operational and financial improvements.
- Assessed options for the company and its lenders, including alternative sources of capital.
- In conjunction with management, compiled a detailed feasibility plan to present to owners and lenders.
Outcome
- The implemented operational changes improved cash flow and liquidity.
- The feasibility report, generated independently, illustrated the reality of the situation and its options.
- Ultimately the owners and lenders agreed to a debt restructuring and recapitalization.