• Doing things that lose customers: out of stocks, late shipments, etc.

• Doing things that lower gross margins. For example, a group of lumber yards that were in trouble with the bank focused their scant resources on buying commodity framing lumber, as a way to keep customers. They kept the customers, but couldn’t stock the higher margin items such as doors, windows, trim, etc., that are needed to make the account profitable. Margins and EBITDA dropped and the business was worth less as a result.

• Foregoing repairs and maintenance, resulting in higher labor expense from workarounds.

• Short term operational changes that could improve enterprise value aren’t given time to happen.

• Senior creditors decide to liquidate. For them, better safe than sorry. For junior creditors and equity, too bad.

• Plans to sell the company are botched. The most common reason is lenders don’t allow enough time to sell the company, so it is liquidated or sold for less. Another reason is a “healthy” business investment banker is hired instead of one versed in distressed sales. And, of course, if the company is burning too much cash, no miracle can provide the time for a proper sale.

• Owner/investors put more money in the company, either to keep a creditor happy or to just keep the enterprise a float — and then lose it.

• Creditors foreclose on assets already pledged in some form by way of a guarantee. For individuals, it is not unusual for a lender to have a mortgage on the owner’s house or perhaps toys outside of the business, such as planes, boats, vacation homes and other investments. For investors that own a predominance of the company, such as a fund, other assets may have been pledged. Owner/investors may have been induced to put up more types of collateral so the company could kick the can down the road.

• Creditors can pursue personal or corporate guarantees and then seize assets of the individual or guaranteeing entity.

• Creditors, and even the company itself, can try and claw back payments from the company to the owner, using various legal theories and remedies. At risk are payments for dividends, salaries (sometimes), owner’s personal expenses, management fees and so forth.

• If the company ultimately winds down, there can be all sorts of liabilities that transfer to owners. (See my previous post on the topic, here.)

• Get in front of the problem and address it; doing so creates time to maximize value. For example, a CFO friend of mine was hired by an investor with a portfolio company headed south. The investor could see the company’s performance declining and loan covenant problems on the horizon. Because my friend had time, he was able to quickly sell one division and create more liquidity by borrowing in-Country for a foreign operation. The investor replaced the CEO and worked on improving market and financial performance. My CFO friend sold the remaining business over time, through an ordinary sale process. Everyone got paid, and the investor got its investment back with a small return. (A small return on capital beats no return of capital, any day!)

• Develop reliable, objective projections that allow you to see trends and understand what they mean. An accurate, 13-week cash flow is essential in anticipating problems, prioritizing payments, and avoiding commitments to creditors that you can’t meet. A realistic, complete, one to three year financial projection is needed to spot and then head off problems before they become a crisis.

• Bring in outside expertise early on… and follow their advice. Outsiders can offer objectivity that is hard to develop when you are close to your business or investment. Is the business truly worth as much as you think? Will those long time, but financially struggling customers really pay? Will secured lenders continue to be patient when they don’t see positive change? In addition to expert financial advice, make sure you have strong legal advice from counsel that specializes in your situation.

• Consider hiring an investment banker. If a sale of the business or of one of the businesses is needed, and the situation won’t allow sufficient time for an ordinary course sale or not all creditors will paid upon completion of the sale, an investment banker with a specialization in this situation can help.

• Don’t leave funds available that creditors can use to fund suing you. Recently, I have been doing out of court liquidations. The key to success here is to be both quiet and fast, disposing of all assets before notifying creditors. That way, if they don’t like the outcome they have to use their own money to fight instead of yours. It is one thing for a creditors committee to use the company’s money to fight to claw back dividends to an investor. It is an entirely different matter for an individual creditor to spend its own money to legally get access to the company’s records, hire a forensic accountant to find your dividends and then litigate to recover. This is also true if a bankruptcy trustee gets appointed in the event of an involuntary chapter 11 filing after the liquidation. The Trustee is likely to declare the case a “no asset” case and walk away.

• Choose your legal forums carefully. In bankruptcy, unsecured creditors can use company money to fight to get paid. If everything is out of court, however, they have to use their own money. If the secured lender puts a receiver in, his mission is to pay the secured lender and he has less concern for the other creditors.