How a Workout Specialist Operates
A company on the brink of bankruptcy generally has three options: file for formal reorganization under chapter 11 of the Bankruptcy Act, file for liquidation under chapter 7 or seek an informal reorganization. In many cases, informal reorganization is more attractive to management, stockholders and creditors because there is a better chance the company will recover; also, the informal procedure generally is less expensive. In an informal reorganization, management often turns for help to an outside consultant, called a workout specialist, whose initial goal is to try to turn the business around. Failing that, the consultant helps the business through either the chapter 11 reorganization or liquidation. THE PRICE TAG Workout consultants come with different experience and fee schedules. Some specialize in large companies, charging six- or even seven-figure retainers. Others focus only on small companies and charges as little as $125 per hour. In some cases the company in crisis hires the workout consultant; other times creditors form a committee to retain one. While some workout consultants specialize in a specific industry, most are generalists. Many accounting firms have workout divisions, and in recent years the field has become quite lucrative. Industry CPAs should know how workout consultants operate because professional accounting help always is required as the company crisis unfolds. A workout's success often depends on convincing the company's creditors to cooperate by not forcing the company into bankruptcy immediately. They generally are told bankruptcy could mean they'll receive little or nothing on their claims. The aim, of course, is to buy time--to give the business an opportunity to raise some cash and get its operations on a better financial footing. TURNAROUND STEPS Workout specialists usually take the following steps when they are called in a crisis: 1. The workout consultant conducts a fast study of the client. Since creditors are anxiously demanding their money, the consultant must devise remedial action quickly. Part of the strategy includes an assessment of the business's viability. The critical questions are: Can the company succeed in its present business if it is turned around? If not, is management capable of running another company that could be acquired if cash is located? 2. In the meantime, the consultant tries to negotiate "stand-still agreements" with principal lenders and suppliers. Such agreements usually last for up to 90 days. The parties agree to allow the company that time to begin solving its problems and find cash to pay some immediate debts. …