Recommendations for Chapter 11 companies that need to raise capital.
Many troubled companies want -- and need -- to raise new funds. For those unlucky enough to be in Chapter 11, here are some recommendations from Michael Busch, a turnaround specialist at the Wharton Capital Group, in Chicago:
Stabilize. "You'll never persuade an investor to give you new funds as long as your company keeps hemorrhagring losses with what you've got," he stresses. Consider the case of a $4-million Ohio-based pharmacy that, among other problems, had written about $150,000 worth of bad checks. "We had to take the company into Chapter 11 to restore credibility and figure out how to operate again within cash-flow realities," Busch says. The short-term fix included cashing in outside investments that were draining valuable funds. "We've been able to show creditors that the company could survive month to month profitably without a new infusion of cash."
The pharmacy's creditors have turned out to be a source of new capital, too. They have an incentive to see the business survive; now that the pharmacy is back on its feet, one supplier has earned in one year about $2.5 million worth of business, all paid cash on delivery.
Draw up a strategic plan. Once you diagnose the company's "illness," you have to find a cure and avoid long-term complications. For Northern Rebuilders, a $4-million auto-engine manufacturer in Escanaba, Mich., that Busch advised, labor costs were an insurmountable budget buster. During Chapter 11 proceedings, the company won wage and benefits concessions of about $500,000, which meant its business plan could finally hint at profitability without layoffs. "That's helped us raise about $140,000 from an outside investment group and an additional $250,000 in state and local bank funds," Busch reports.