A Struggling Company Without Enough Cash
JoeWoodman bought a small,struggling computer company.After several
difficult years, revenues started to grow, and it seemed that profits were
growing as well, at least according to the financial statements. In reality,
though, the business did not have enough cash to function.
The company’s key stakeholders, such as the bank, vendors, and inves-
tors, were applying pressure on Joe to improve earnings and cash flow.
They threatened to take over the business if major changes were not
made. About the same time, making matters worse, Joe was notified that
several contracts, constituting about 25% of his top-line revenues, would
be lost to the competition.
Joe responded by laying off employees, freezing wages, and closing
several marginal operations, but these efforts were not enough. Joe was
still badly in need of more cash and professional management.To remain
viable, he had three options:
He could negotiate a “capital for control” type of exchange with the
investor and the banks. If he did this, the banks could help recruit
new talent and offer interim financing to support the company while
restructuring occurred. On the downside, with this option his status
in the organization would change significantly: Instead of being the
owner, Joe would become more of a senior manager.
Joe could maintain control and hire turnaround management,
explaining to new managers that the company was in a critical
turnaround phase and that the organization’s future depended on
their ability to generate credibility and positive performance within
a year. He would have to disclose the wage freezes of the past
2 years and explain that he could not initially offer competitive
salaries or certain traditional benefits. If he took this option, Joe
would have difficulty recruiting skilled managers because they
would not want to come into a situation with failing operations, no
operating cash, and the prospects of a dramatically dwindling rev-
enue base. If it succeeded, this option would allow Joe to keep
control and save his reputation.
Joe could remain in control and hire turnaround management with-
out fully explaining the serious situation. He might say that the
company is one of the fastest-growing companies in the industry,
and that it just completed an operational turnaround, had regained