Get Ready to Restructure

BY STEVEN L. MINTZ

Coping with a downturn often means restructuring for companies. Every restructuring has many moving parts—including layoffs, impairments, asset revaluations and debt relief. To engineer a favorable outcome, stay ahead of events, says Scott Davis, a partner in the Corporate Advisory and Restructuring Services practice at Grant Thornton. He offers these tips:

 

  Conserve cash. Accelerate collections, minimize inventory and manage payables mercilessly. No matter how well-planned, businesses that are restructuring encounter unexpected hurdles. Without ample working capital, even sound companies can slip toward bankruptcy. Only three companies in 10 emerge from Chapter 11 bankruptcy. The rest liquidate.

 

  Reinforce credibility with stakeholders. Lose your lenders’ confidence and restructuring gets much harder. If bankers or bondholders think they’ve been led astray, or feel in the dark at a pivotal moment, they may never return to the fold. The best way to keep them satisfied is frequent, direct and candid communication, especially when news falls short of expectations.

 

  Learn the constituents’ agendas. What lenders and others say when businesses are under duress may not match underlying motives. Some lenders and bondholders may share a borrower’s interest in restructuring aimed at long-term solutions. Others may not. Workout bankers nearly always arrive to solve a bank’s problem, not to help a borrower.

 

  Anticipate tax consequences. Restructuring often spawns two kinds of opportunities for federal tax refunds, with related implications that differ from state to state. Companies that have paid estimated taxes based on expectations that do not materialize can file for so-called “quickie” refunds using Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. Companies also can accelerate adjustments due to anticipated tax loss carrybacks. Form 1139, Corporation Application for Tentative Refund, can be used to carry back net operating losses to prior periods and can be a faster way for companies to get refunds based on their NOLs.

 

  Review asset valuations. Assets that remain on the books may warrant new tax profiles. One opportunity that often emerges in a restructuring, Davis says, relates to property tax valuations. Consider, for instance, a warehouse left empty in the wake of restructuring. Local jurisdictions should understand that the property is worth less vacant than as an ongoing business.

 

  Brace for debt relief. Tax authorities can treat debt that is canceled or forgiven as income. But short of canceling debt, modifications considered tantamount to cancellation also can generate surprise tax burdens on unprepared companies. Modification of debt, such as a significant deferral of scheduled payments, regardless of whether it alters face amounts, may be treated as a taxable event.

 

  Stick to facts. Pressure to restructure balance sheets may have a side benefit, namely opportunities to improve the underlying business. There is no better time to grapple with thorny issues ignored in better times. But remember that decisions made under duress are more susceptible to emotions. Make sure that sound analysis prevails.

 

  Don’t spare sacred cows. No matter what a piece of business used to mean, Davis says, if the numbers don’t support keeping it, and the trend is bad, don’t try to rescue it. Take your lumps and move on to focus on the more lucrative parts of your business or risk draining time and throwing good money after bad.

 

  Act early. Make timely decisions on the best available data, even if all facts are not in. If indecision about restructuring leaks into the marketplace, it can injure workers’ morale, blunt a competitive edge or alarm capital providers.

 

—By Steven L. Mintz, a freelance writer and editor. His e-mail address is slmintz@mac.com.

 

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