Financial Strategies in a Challenging Economy

Nearly every industry feels stressed from current economic conditions but none has suffered more than construction. The federal stimulus plan was expected to offset declines in new construction but the projects funded have been slow to come to fruition. As a result, construction and construction related companies that enjoyed an extended period of significant capital expenditures now struggle with high debt payments while revenues, profits and cash flow continue to decrease. Compared to 2008, bankruptcy filings for construction companies increased by over 100%.

While construction-related business owners face numerous challenges, there are resources available for capital and debt relief. The key is to proactively pursue multiple financial strategies that benefit both company and owner. Options include:

  • Raising capital
  • Sale to third party
  • Restructuring through bankruptcy
  • Restructure / renegotiate debt with lenders
  • Equipment sales

Raising Capital

Private equity groups are actively seeking companies in sectors with strong investment potential such as power and infrastructure and have raised an estimated $400 billion in investable capital. Investors want healthy companies with strong management teams that need equity to fund future growth and shore up balance sheets. Currently, growth equity will be expensive in terms of the percentage ownership that must be sold but a cash infusion could offset potential future financial issues as well as position the company for growth once conditions rebound. Owners may be forced to sell preferred equity and/or a majority stakes to investors, depending on the needs and current performance of the company.

Sale to Third Party

Third party sales might be the best alternative for financially challenged companies. They alleviate debt issues, provide some liquidity and remove the owner from any personal guarantees. While this resolves many issues, it will not provide the personal liquidity owners desire due to the lower valuations presently placed on companies. With the significant debt levels that some businesses maintain, receiving substantial liquidity will be challenging but this might be the best alternative even though the cash at close will be limited. Transactions could be structured with seller notes or some form of an earn out.

Restructuring Through Bankruptcy

Bankruptcy is the most difficult option from both personal and professional standpoints. Creditors overwhelm owners as the company falls behind in debt payments and payables. Asset sales might be contemplated, but the income might not cover the outstanding liabilities. Ideally a pre-packaged bankruptcy could be filed, which would include a new investor to fund the surviving entity. This allows the company to advance through bankruptcy in an orderly manner. Without a new investor or lender, the company must sell assets and use the proceeds to satisfy the creditors.

Negotiate with Lenders

Companies displaying strong long-term prospects are in a unique position. To offer short-term relief lenders may be willing to renegotiate loan terms. Lenders understand the difficulties businesses face and realize that traditional solutions, such as calling loans, seizing assets or going after personal guarantees, might not be the most lucrative solution. If lenders determine the company can generate sufficient cash flow to repay the loans, they are usually willing to help. Debt restructuring will create some additional near-term cash flow, but this might not be the panacea needed to keep the company viable. Eventually the debt payments will increase but reduced short-term payments could supply the cushion needed to find a long-term solution such as an acquirer or additional capital.

Sale of Equipment

There is still a market for used equipment but demand had diminished. Plus, once equipment is sold, future revenue streams are gone, leaving the business in a weaker position to service customers. Unless there is substantial equity in the equipment, cash flow will be limited. If the company is unable to build large cash reserves through this process and work continues to be inadequate, the company will face diminished assets, revenue capabilities and prospects.

Business owners must focus on outlasting the downturn and proactively finding solutions. Before undertaking any of these initiatives, consult financial and legal advisors and evaluate what’s best for the long-term viability of the company.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Rosendahl

Investment Banking
New York Office

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