At a time when companies are faced with an unprecedented range of conditions – from a global health pandemic to a global economic contraction – it is difficult to think beyond the immediate crises of the day. In fact, many companies become completely reactive during recessions, scrambling from one problem to another and losing sight of their long-term goals. When it comes to your lenders and your liquidity, this approach can quickly lead to major, even irreversible problems.
Therefore, in difficult times, companies must proactively reach out to their lenders and other trusted partners to enable them to be part of the solution. In my previous experience as a private equity (PE) partner, I found that companies often waited until it was too late to contact their banks and others who could help. Their earnings had already been withdrawn, their money was exhausted, and their options were irretrievably limited. By the time they got in touch, their lenders were often caught off guard and felt they had no choice but to go into crisis mode and do everything they could to protect their loans. When this happens, business owners are often left behind.
Companies must play ahead and take action in times of crisis. If you don't get ahead of events, they run ahead of you. This mindset is crucial not only to your internal operations, but also to your external partners, especially your lenders. Get your relationship bankers into the discussion early so they can help you. The sooner you involve your relationship bankers, the more options they will have for preserving your equity, which is in the best interest of all parties.
Develop a proactive versus reactive mindset
After nearly 20 years in private equity, one of the most essential things I've learned in a crisis is that cash is king. If you don't actively think ahead about your liquidity, it can evaporate in an instant and your game is over. Your lenders are one of your most critical sources of liquidity during troubled times. If they feel like they are part of the solution, they will act with your (and their) interests in mind and help you fund your operations. If they feel like you're constantly surprising or misleading them, they'll limit themselves and do whatever they can to save their loan with relatively little regard for your equity.
While in private equity, I developed a litmus test called the "Three Board Meeting Rule." In the first meeting someone says, "I think there is a problem" and the management team vows to fix it. At the second meeting, little action is taken and someone says louder, "Okay, now there's a real problem." During the third meeting, everyone looks at each other because it has gotten worse and drastic measures have to be taken. It pains me to admit that earlier in my career, I was often the man who waited until the third meeting. In hindsight I have never looked back on a decision and wish I had taken more time to meet a critical need. We have to act between the first and second board meeting. Hope is not a strategy. The longer we wait, the fewer options we have.
According to a McKinsey report from 2019 companies that were more resilient during the Great Recession & # 39; prepared earlier, moved faster, and plunged deeper when there were signs of recession. emerging. “In the first quarter of 2008, these companies became agile, while their underperforming competitors still added costs. Ultimately, crisis management is not all about cost savings. It's about maximizing cash. Cash is the fuel you run on. allows you to stay afloat, recover your business and correct your course until the storm passes and calmer times return Your relationship with your lender will play a meaningful role in your ability to maximize your cash resources.  Removing prejudice against perceived failure
Businesses in crisis often have unhealthy internal dynamics that can prevent difficult but necessary decisions from being made. First, there can be a bias against taking action because it requires recognition of shortcomings, which leads to the spreading ng of responsibility, allowing a company to delay until it runs out of time and options. Second, corporate leaders often convince themselves that they don't need outside help – there's a culture of autonomy that can develop in good times, so these leaders insist that 'we can do it ourselves. solve & # 39 ;. And third, even when companies recognize that they have a serious problem, they have consecutive meetings about it without taking concrete action.
Collaborate and Build Relationships Across the Board
] In addition to maintaining strong relationships with lenders, do the same with other partners, such as private equity investors and external turnaround consultants.
Third-party turnaround advisers have learned each lesson at least twice and can assist you in your recovery with a much greater chance of success. Reliable outside advisers will cost you money, but they also bring a more objective perspective and institutional knowledge, which can lead to more unbiased and informed assessments of a company's situation and how to maneuver through challenges with skill. Your lenders will also be comforted by outside help. If you don't engage your own advisor, he will likely eventually require you to use one of theirs.
Private equity investors are also a huge asset in troubled times. They bring capital, experience and networks that allow you to be more flexible than your competition. Their portfolio companies generally view times of crisis through the lens of opportunity. PE investors have a powerful incentive to ensure that their portfolio companies do everything they can to make the company as resilient as possible, especially in a crisis. Lenders see this alignment and mindset positively and are therefore more likely to act for companies that are backed by PE investors than those that are not. This is why it is no surprise that one of the reasons why companies with PE support outperform their peers without PE support during economic downturn is their ability to take advantage of these relationships. and make capital easier and more affordable.
Whatever a company's financial situation, the first step in determining what needs to be done is an honest assessment of the challenges it faces. Then it's critical to take informed action while working with your trusted partners to give you the greatest chance to survive and thrive.
Commentary by Sean Mooney . This is what you have been missing?
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