How restructuring consulting firms help clients in financial distress

08 June 2021 Consultancy.eu 4 min. read
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Consulting and advisory firms, with their expertise in the varied aspects of business continuity, restructuring, capital advisory and transformation, play a key role in helping companies dealing with and coming out of financial distress.

The restructuring, turnaround and insolvency segment is currently one of the hottest domains within the consulting industry. With the sizeable global economic impact of the pandemic still unfolding and governments winding down their Covid-19 support schemes, the number of companies coming in bad waters is on the rise. 

While the pandemic has affected all sectors across the globe, some are feeling more heat than others, with retail, tourism & hospitality and aviation taking the largest hit. For companies facing a worrying outlook, or an outright crisis, calling in consultants to turn the tide is a potential step forward. 

Signs of a distressed situation

According to a framework developed by Acuity Knowledge Partners, there are broadly speaking four areas of financial distress when consultants are typically called upon. The first is restructuring – in this phase, consultants are installed to help the management team take swift action to safeguard business continuity and growth prospects. If done effectively and timely, companies can stay in business.

In the case companies are financially squeezed and seriously struggle to meet financial obligations to creditors (this may be due to high fixed costs, illiquid assets or revenue sensitivity to economic downturns), then consultants are flown in to support a turnaround. Here, crisis management plans are put in place swiftly, and rescue financing becomes integral to the restructuring effort.

Common restructuring and turnaround services offered by consultancies include:

  • Diagnosing the problem: Identifying drivers for the crisis, stage and severity of crisis
  • Stabilising operations: Managing short-term liquidity and working capital concerns
  • Cost efficiency and austerity strategies: Evaluating business needs for cost-cutting measures; designing and implementing austerity plans
  • Procurement cost reduction: Analysed contracted spend and redesigning and renegotiating contracts
  • Business model innovation: Rethinking operating and core business models, value creation and enhancement
  • Divesture strategies: Offloading non-performing business units, distressed segments, portfolios, etc.
  • Organisational effectiveness: Streamlining resources; revamping processes and business segments; interim C-level deployment
  • Change management: Developing change implementation plans to ensure minimal people disruption 

When matters are worse, with companies facing a potential shut-down or the need to apply for (voluntary) administration, assistance is required in developing an insolvency plan and overseeing the administration. Consultants are enlisted to support this process, or appointed to the role of administrator by courts, creditors or other stakeholders with the task of (as much as possible) safeguarding shareholder value. 

CAPABILITIES/EXPERTISE OF CONSULTING AND ADVISORY FIRMS IN THE DISTRESSED SPACE

As part of the restructuring, turnaround or insolvency process, consulting firms can play a role in asset recovery. This includes supporting the divestment of non-viable businesses/portfolios and post-transaction business stabilisation, and with delivering value creation on remaining assets. 

Meanwhile, at the other side of the table, M&A consultants play an instrumental role in the dealmaking process, helping financially healthy companies (or private equity) with snapping up reeling businesses or assets. Prospective distressed-asset buyers aim for higher-return targets by acquiring distressed assets with significant upside at discounted prices.

According to Acuity Knowledge Partners, consulting firms active in the financial distress landscape are facing buoyed demand. “With deteriorating markets, the role and level of engagement of these consulting firms will increase and become more prominent. Turnaround and restructuring firms could see a spike in their engagements across strategic, operational, financial, technical and legal work in the remainder of the year.”