Five Bankruptcy Myths That Stifle Success for Emergent Companies
February 23, 2022
An FTI Consulting study shows that focusing on more than capital during bankruptcy proceedings can help companies emerge stronger and transformed for growth.
Companies in bankruptcy proceedings are under enormous pressure. Pressure to maximize value for all stakeholders. Pressure to move quickly and meet deadlines. Pressure to contain expenses. It’s not surprising, then, that bankrupt companies often set their sights on getting the job done rather than on preparing for transformational growth once they emerge.
They may be missing out on a unique opportunity. By taking certain steps toward transformation during bankruptcy proceedings, a firm can better position itself for profitable growth upon emerging. The key is to address the five core performance areas of capital, cost, growth, technology and talent in specific ways they relate to the bankruptcy.
Of course, legal and practical considerations play a role in any bankruptcy. But the benefits of planning for transformation post-bankruptcy are apparent in the findings of an FTI Consulting study titled “Emerge to Grow: An FTI Consulting Report.”
The study’s authors analyzed the bankruptcy landscape from January 2019 through May 2021. Research showed 665 Chapter 11 filings during that time. Focusing on the 358 companies with liabilities of over $50 million provided insights into larger companies, which have more complex businesses, capital structures and scale (see sidebar, “The Bankruptcy Landscape”).
The authors followed with a market survey of 50 business leaders from large companies who are going through Chapter 11 or have recently emerged. The goal was to gather real-world quantifiable insights. Most of the survey questions focused on the core performance factors mentioned above.
The authors uncovered several assumptions that relate to the core performance factors during bankruptcy — assumptions that may be so ingrained they’ve practically become myths. These myths (there are five) can in fact stifle success for emerging companies.
Here, the study’s authors dispel the five myths and offer fresh thinking that bankruptcy stakeholders can consider for better results on the path toward transformation.
The Capital Myth: We can optimize and fix all our capital issues during bankruptcy.
During proceedings, companies work toward a negotiated capital structure as opposed to an optimal or ideal one. Unfortunately, this may leave some companies without sufficient capital to pursue growth upon emergence. In fact, more than 7 of 10 respondents (72%) felt their post-capital structure was at least somewhat burdensome. When you consider that 90% of respondents stated the need for credit after proceedings, raising “emergence capital” is a wise decision.
The Cost Myth: Making cost reductions before or during bankruptcy means that we don’t have to review costs after emerging.
The study showed that 24% of companies rewrote, revamped, updated or revised cost, efficiency and demand management during bankruptcy. That’s all well and good, but better to aggressively address cost management issues that set up sustainability and scalability, such as defining a new operating model or addressing structural cost reduction issues. Only 12% of companies took this step. Companies that cut costs with the future in mind can also improve self-funding, which is less costly than raising emergence capital.
The Growth Myth: The immediate focus following emergence should be on growth.
How can you grow a company in a sustainable or transformational way without first determining profitability? For instance, have you reviewed your most and least profitable customers? Most respondents (56%) in the survey did not make substantial progress in this area, leaving the business challenged for post-emergence success. Other growth actions received even less attention, including marketing and advertising (16%) and sales force incentives (8%).
The Tech Myth: We have the technology we need to transform.
The majority of respondents (56%) reported investing in technology during bankruptcy for financial reporting and analytics. Even so, they may need to invest in their technology infrastructure to function more fully after emerging. For those companies that are transforming digitally to enable new services, products and business operating models, addressing tech strategically during or following proceedings is imperative.
The Talent Myth: We have to wait to address talent issues.
The study showed that talent issues were the most ignored aspect of the bankruptcy process. For example, only 16% of respondents felt they did very well at putting together an effective executive team and only 24% identified strategic capabilities to succeed as a viable enterprise. That is not unexpected given the uncertainties surrounding a company in Chapter 11. Nevertheless, you want to look at human capital needs as early as possible, not only to address change and cultural issues, but to focus on strategic capabilities for future success.
Business leaders involved in bankruptcy know all too well the pressures to get the job done quickly. Perhaps that’s why most survey respondents reported they did not feel ready for a successful emergence. Almost half (44%) added they could not meaningfully address issues beyond the five core performance factors during bankruptcy.
But leaders also know that there’s light at the end of the tunnel. As such, seizing the unique opportunity to transform for growth while in the heat of proceedings can make emergence that much sweeter. And successful.
Elements of this article were adapted from “Emerge to Grow: An FTI Consulting Report.”
© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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