Whether a company is in a bit over its head or in crisis can determine the need for an Interim Chief Restructuring Officer (“CRO”). Legacy executives too accustomed to standard operating procedures sometimes do not fully appreciate the immediate needs of lenders and other constituents and the necessary steps to navigate a liquidity crisis. A temporary professional addition to the C-suite can provide clear guidance on the path forward, as well as calm anxious and fatigued lenders, sponsors, suppliers and employees.
After all, when “business as usual” is no longer working, it pays to stop doing usual business.
Any interim CRO stepping in to help a company in crisis will do one thing first — immediately determine near-term liquidity, said Laurence Sax, managing director of Getzler Henrich. “We call this the ‘cash or liquidity runway.’ To make a medical analogy, when someone is wheeled into the ER, a doctor must determine the urgency of the situation. How serious are the issues and how long do they have to create a treatment plan? What is the timeframe to run tests and establish a path forward?”
Stabilizing a distressed business should always be the top priority, so what levers can be pulled to stop the bleeding or add necessary fuel to the tank? Is it a headcount reduction? Closing a facility? Liquidating some inventory?
During the business analysis, it’s also vital to stabilize supply chain relationships in an open and honest way. “Everyone will be pretty on edge and agitated by this point,” said Sax. “It’s important for the interim CRO to reach out to employees, lenders and vendors and explain that there’s a steady hand on the wheel, and that he/she will be highly communicative and transparent going forward, whether that news is good, bad or ugly. You must be willing to work together because a business cannot survive without its employees, service suppliers, vendors and other key constituents.”
Next is to identify possible external sources of liquidity, or those that surprisingly come from within. “I had a client with $100 million of real estate securing only $40 million of debt, so there was an opportunity to generate liquidity from an under-levered asset.” Borrowing against intellectual property is another opportunity companies don’t always consider that can provide additional runway, said Sax.
Suffice it to say, when bringing in a CRO from the outside, there might be some differences of opinion.
Company CEOs or CFOs “are often not accustomed to leading in crisis and it can therefore be difficult to transition from thinking in terms of accrual accounting (e.g. recording revenues when items are sold versus when the cash is received) or profits that can be reported to owners and shareholders. “Profits are great, but for a CRO managing a crisis, it’s all about cash.”
For example, a company might think they need to hold onto certain inventory to achieve a future quarter’s budget, or maybe they have a great plan to branch into a new area that won’t turn a profit for several years. “A CRO will think, ‘That’s great, but you might not make it that long,’” said Sax. “CROs know how to manage for real-time cash-basis needs like payroll, suppliers and debt service.”
“PROFITS ARE GREAT, BUT FOR A CRO MANAGING A CRISIS, IT’S ALL ABOUT CASH.”
Whether that interim CRO should come from the same industry or a different one also has its pros and cons.
Extensive industry knowledge certainly enables an interim leader to “speak the same language” as the current C-suite, and “hitting the ground running” can be valuable when communicating with stakeholders. On the other hand, being less familiar with an industry can also be a powerful tool.
“Sometimes it’s helpful to ask the ‘dumb’ questions and explore whether standard/historical practices are appropriate for the current business conditions,” said Sax. “The CRO can help management consider perspectives that may be considerably different from the approach they would have pursued in a more stable operating environment.”
Sax cites two companies who came out ahead after using an interim CRO. One used a consensual out-of-court restructuring to avoid bankruptcy and maintain vendor and customer relationships. “Bankruptcy offered no meaningful benefit and presented numerous risks, so we avoided it with a consensual deal.” Second, was a 250-store retailer “where we developed a daily opportunistic buying program to take advantage of device pricing arbitrage” and other strategies to drive down the cost of goods and maximize gross margins.
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