Chapter 11

CRISIS AND ALTERNATIVES

 

As well as the economy being cyclical; the businesses also display variations of this one type. From the Biblical times, it is spoken to us of bonanzas and the crises. The famous dream of seven fat cows and the seven skinny ones interpreted by Jose talk exactly about these phenomena. In other Biblical passages, situations are also described by people who cannot pay and look for solutions.
If a possible crisis is inherent to the enterprise activity, corresponds to the students of the subject the development of the mechanisms to anticipate them and in case that they appear, the search of the adapted processing, maintaining as a premise the objective anticipated to save the company on behalf of the community. 

1. DIAGNOSIS

The first thing we must do in a crisis situation is to inform us about the causes that originated it. This analysis must be dynamic and interactive looking for weaknesses, strengths, threats, and opportunities.

Among others we must analyze:

• The general evolution of the company
• Organizational structure (Style of direction)
• Marketing
• Productive process and costs
• Financial statements
• Systems of communication
• Human resources (organizational culture)
• General surroundings. 

If the analyst does not have at a certain moment, but the balance of a company, and suspects something, must be reviewed the EBITDA and the indicators of cover. These indicate the capacity of the company to cover the interests and the amortizations of the capital.

If the previous indexes are not satisfactory (to remember financial analysis - limitations) we must continue to observe the indebtedness indicators, which, combined with the previous ones allow us to predict with a good degree of certainty, the risk level. Following in order, we will analyze the index of value generation and the reasons for liquidity, activity, and yield. With this accumulation of tests, we have a good departure point, although, with its own limitations, already sufficiently analyzed in previous documents.

We must remember very specially that the financial statements correspond to the past and indeed they represent photography at a moment; our decision aims at the future.

Locating to us in any position in relation to the company (administrators, creditors, government, bankers, employees) we must proceed with greater discretion and the maximum prudence. The bad rumors or the simple gadgets aggravate the situation in damage to many people and the economy in general.

The following step consists of preparing a cash flow, indicating maximum financial general and very especially in inflationary economies. When the projection of the cash flow satisfies absolutely all the doubts that can be displayed (excellent note) we have the true diagnosis of the situation of the company and the base to recommend actions to follow, always beginning by the analysis of the point of financial equilibrium; which does separating expenses alive (those that they imply exit of cash), of the extinguished expenses (expenditure already made), that combined with the cash income indicate to us the level to what it can operate the company/signature without running over it, neither the creditors nor the government.

Based on the previous analyses, we found that the company is viable we must take care of the preparation of a meeting with the interested party to study the alternatives jointly and to look for a PROMOTER who facilitates a solution on behalf of all, therefore some sacrifices must come. 

2. BASIC PRINCIPLE: THE GOOD FAITH

It must not have reasons for preoccupation different from the specific problem. If it were acted of bad faith, it will be difficult to have the value to give the face and to face the situation. For that reason, it is so common that in bankruptcies the owners disappear.

The success of the manager or the PROMOTER according to the case, of the company at issue consists of finding an agreed formula. To him it corresponds to processing a range of possible alternatives and to make the corresponding sustainability to make the decision in-group, being able to frame in one of the following parameters:

a. Extension of the term with or without interests: taking as base the initial projection of the cash flow (the excellent note), that is to say, that satisfies all the doubts that the affected ones can display and use the spreadsheet where simulations with probable alternatives. We will choose the one that is more reconciled to the particular situation.

b. Reduction of the debt and extension of the term: it proceeds in an equal form that the previous one but with proportions of the debt (95%, 90%, 80%, etc.).

c. Reorganization of administrative type: it is probable that between the creditors a formula arises by means of which they take the direction from the organization (as advisors) and based on their decisions define the mode of payment.

d. Special agreements: include any possibility that arises to save the company on behalf of the majorities, because generally, it is very difficult to obtain a consensus. Among others, they appear: capitalization passive, risk bond conversion, giving of new resources, etc.

Exhausting the internal mechanisms the projection to the outside of the company is important. Applying the techniques of the document on an estimate of companies, we proceed to calculate a price that serves as it basis of a rescue decision, like could be a sale so that another company that is in an advantageous position absorbs it; a merger; a split or the secularization of some assets, etc., topics explained in other documents.

In this case, the industrial organizations come into play the most important role, the state organizations (if they are acting in good faith), the investment banks, and the fiduciary organizations.

Who is studying the rescue measures cannot lose sight, for no reason, of the concept of a company in good working order.

Any successful formula, no matter how precarious it may seem, the company must maintain it in operation. This way assets are preserved, that can have of a considerable value as the case of the Good Will, the patents, the Know-How, premiums of the premises, the telephone lines, the programs of systematization, the assets deferred, and in general, that which the lawyers call the hidden reserves.

Special mention requires the consideration of the human resource, definitively most valuable the company, even though actually it is treated with great scorn.

In a conjuncture of this type, the people who work in the institution must show their spirit of sacrifice for the company with acts that demonstrate clearly their spirit of contribution. Among others, proposed as it resigns temporarily to wage increases, capitalization of suspensions, voluntary retirements, which they can contribute to preserving the good spirit that is required in situations of this type, they will be valuable as quantitative as qualitatively speaking.

Greater responsibility is still incumbent to the state, in some cases responsible direct, times by action, and others by default. Generally, the economic measures aim at a plan of development that looks for the well-being of the community but they can affect seriously some companies and individuals.

The state in its constitutional obligation to protect the work must be careful when selecting the people to those who are to especially entrust companies in crisis (directors or advisers) especially in relation to his moral rectitude, and his executive talent.

For the processing of the different alternatives, it has come to the maximum quantifying them as possible in terms of cash flows and integrating them into the situation that served them to begin with. It is taken the basic cash flow for the initial exposition and the different possibilities are analyzed like independent projects. Later, they integrate into a common flow (the initial flow with each one of the possible alternatives, and they are evaluated based on the methods already known: TIR, VPN, Index of Yield, or Period of Reimbursement).

In addition, with each one, they can be simulated in the spreadsheet, different scenarios that have real applications or that are viable for the people who are to execute them, until they find the alternative that allows anticipating the salvation of the company.

The plan describes the necessary changes so that the company is reorganized and becomes viable. It must contain specific actions to undertake in the different areas and requires interdisciplinary equipment that offers sufficient impulse to break the resistance to the change.

If we did not find the exit by any of the raised previous possibilities, it means that we didn't find a stage of solutions (reorganizations) and entered the failure. It corresponds to diminishing the damage for all the parties respecting the legislation, which is due to consulting with experts in the matter to avoid legal problems (we remember that the approach to this subject is strictly financial).

In Colombia, the different alternatives were: Concordat and Liquidation, according to Law 222/95. The concordat, intended the conservation and recovery of the company as a unit of economic exploitation and generating source of work, when it is possible, as well as the adapted protection of the credit. Law 550 of disc/99, which suspended the concordat by five years. 

3. GENERAL CONSIDERATIONS

a. It is required high responsibility of the industrialist so that the adjustment formula is viable.

b. The proceedings must be very agile to avoid the accumulation of losses based on the time that it takes.

c. It is due to respect the right of defense on the part of the affected ones and to observe the presumption of the good faith, that it’s mentioned previously.

d. The elimination of unnecessary proceedings prevails so that the decisions are taken with the quickness that the circumstances demand (the money’s worth based on the time, including holidays).

e. To remember that is an economic problem and social one that generally affects many kinds of people.

The promoter acts as a coordinating advisor by specialists in enterprise management and he must oversee that the formula that has been agreed upon in the legal forms. Also, he must exert control and avoid that people of doubtful moral values taking advantage of the circumstances to their own benefit (very frequent case with the approval of the authorities).

The Chamber of Commerce must name able professionals or experts and in addition to watching the activity of the company; the comptroller is an ally of justice, reports to the judge, and the provisional meeting of creditors. They analyze and confirm the viability of the displayed plan and they are committed to its execution. 

4. PROVISIONAL MEETING OF CREDITORS

The probability of saving the company depends on the members of the meeting. Representatives must compose it: the creditors, of the official organizations, the workers, the financial organizations, and the company at issue. They are named in the act of conciliation of the request of the Concordat. They must accept in writing with a maximum term of five (5) days.

 

5. PROCESSING OF THE LABOR CREDITS IN THE CONCORDAT

The legislation establishes an order of priorities that is to say:

a. Judicial claims (retired officers).

b. The workers of the company at the moment of signing the agreement enjoy the privileges granted by the labor legislation. The representative of the workers must take care that these credits are respected, but logically it is a commitment of all the members of the meeting.

In addition, the government must think about other types of alternatives as they could be:

a. Accept the concordat, to freeze all types of obligations with the DIAN, in the opinion of the author, special organization in obstructing the recovery processes.

b. To name for the concordat Rios processes to industrialists of recognized trajectory who commit themselves to look for the rescue of the company and offers a percentage to them of the shares of stock at special prices at the moment of assuming the position to stimulate them to work in benefit of the affected parties.

c. To establish a chronograph with reasonable terms but the strictly necessary thing to make agile the process as they require circumstances of this type.

d. To exonerate the companies in crises of all type of assessment, in the measurement that demonstrate fulfillment of goals previously established as far as:

• Maintenance of work
• Objectives of value generation
• Report of special information that facilitates the control

 

6. LIQUIDATIONS

In this case, if the situation is dramatic because the liquidator acts in an independent form. The Experience demonstrates that they finish at a "party". They gain monthly fees (for that reason they expand so much the process); they name advisors and they will have the assets of the organization in damage to the interested parties.

The recommendable thing would be the appointment of a representative liquidator meeting of the affected parties (Government, creditors, investors, workers, economists if it is the case) so that the direction and control of the liquidator are in charge of looking to diminish the negative effects within the particular circumstances of the organization in liquidation, with percentage fees of the value that is obtained in the liquidation.

Also, it must be prohibited to liquidator and relatives the nearest ones, the acquisition of assets object of the process, and regulate the sales through sufficiently transparent mechanisms like the anvil.