Navigating distressed situations

Imagine a ship sailing through turbulent waters, facing unexpected storms and challenges. This is often the reality for companies navigating distressed situations and in the current environment, that could be influenced by the US tariff turmoil and trade war. The key to survival lies in spotting early warning signs of distress and taking proactive measures before these challenges escalate into crises.

Companies can identify early warning signs of financial and operational distress by monitoring the overall corporate health of their business through a comprehensive framework which should include assessments of: 

1. Business health and profitability (revenue, EBITDA trajectory)  
2. Balance sheet strength (liquidity, working capital support and leverage) and 
3. Stakeholder alignment. 

For instance, indicators that a company may be facing distress include consistent declines in revenue or profit margins, increasing leverage on the balance sheet, or reducing working capital reserves. Furthermore, qualitative metrics such as senior management departures, employee turnover, and customer attrition can also offer valuable insights into underlying issues.

The first stage in a turnaround effort is stabilization. It involves understanding the liquidity runway and engaging stakeholders to level set expectations. This process provides the company with breathing room to implement additional plans and initiatives.  

A thorough review of the company is essential to formulate a detailed turnaround plan. This plan may include margin improvement initiatives, cost reductions, and non-core divestitures. Additionally, it is important to understand how the plan will be implemented including the liquidity required and whether a formal restructuring will be needed. Depending on the situation, a court-supervised process can help accelerate the restructuring, while, in other circumstances, an informal process would be more beneficial. 

Engaging with stakeholders early is crucial in developing and finalizing any turnaround plan, particularly if they are affected by the restructuring or required to provide relief or accommodations. Key stakeholders may include the board of directors, shareholders, lenders, regulators, and other significant entities.

To successfully navigate a turnaround, companies should focus on several key actions:

1. Monitor key metrics: Regularly track financial and qualitative metrics, using data analytics and AI, to spot early warning signs related to the company’s corporate health.

2. Engage stakeholders: Communicate openly with lenders, shareholders, and other stakeholders to align interests and develop a turnaround plan.

3. Develop a comprehensive turnaround plan: Conduct a thorough review of the company's operations and formulate a detailed plan that includes liquidity forecasts, margin improvement initiatives, and cost reductions. Make sure that clear implementation steps are outlined and secure the necessary funding to support a successful turnaround.

4. Stay nimble and adapt: Be prepared to pivot and make trade-offs as the situation evolves.

While distressed situations are inevitable in the business world, proactive measures and independent guidance can help companies navigate these challenges and emerge stronger. By identifying early warning signs, involving stakeholders, and creating thorough turnaround plans, business leaders can guide their companies towards recovery and long-term sustainability.

KPMG in Canada specialists offer robust support to businesses in distressed situations. Our cross-functional deal advisory team and turnaround and restructuring professionals provide tailored solutions to address each company's unique challenges, and can help them develop effective turnaround plans, engage stakeholders, and navigate distressed situations with confidence.