Each small business has its own unique set of challenges and circumstances, but bankruptcy is a fear for all, and a harsh reality faced by many. To survive, companies need a steady stream of revenue, and they need to turn a profit. A lack of profitability can be attributed to various underlying factors or external issues beyond their control, but one way or another, without profits, companies are often forced to file for bankruptcy.
However, this isn’t always a bad thing—in fact, it can serve as an opportunity for small businesses to restructure and learn from their mistakes. Entrepreneur and energy expert Pavao Vujnovac shares below his experience of saving companies from the brink.
A Company on the Brink of Bankruptcy
In our experience, there are two basic reasons for bankruptcy:
a) an unsuccessful or flawed business model, or
b) a lack of liquidity, even when the business model is good.
Either (or both) of these factors will contribute to a company’s inability to generate sufficient revenue and remain profitable. It is essential for companies to identify the root cause of their financial distress, as this will help determine the most effective course of action to save the business.
But the first question to ask is, how do we know if we can save a company? Well, this is really two questions, although they are intrinsically linked: is it possible to save the company, and is the company worth saving?
If the business model is solid, and insolvency is the reason for bankruptcy, it is always possible to help a company. In these cases, we believe that a company is worth saving if it makes a positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), but there has been a disruption in liquidity, the structure of liabilities, and receivables. In such cases, the company will need financial restructuring, which may involve renegotiating payment terms with creditors, cutting costs, and identifying new revenue streams.
It’s important to remember that the only real difference between bankruptcy and non-bankruptcy is the due date of any payment obligations: If the maturity date changes, there is always a possibility the company can be restructured in time to save it.
However, if the business model is not solid, and that is the reason why the company is in trouble, then there is usually not much room for course correction, and it’s nearly impossible to save the company from bankruptcy. In these cases, it might be best to leave them, as liquidation may be the most appropriate solution.
Providing a Lifeline
We are willing to invest in companies in trouble if we see that it is possible to restructure them and increase their value after restructuring. An additional plus point, of course, is if there are synergistic effects with the rest of our group. By helping companies in distress, we can potentially unlock untapped value and create new opportunities for growth, benefiting not only the company in question but also our own investment portfolio.
There are several things we can do to help a company on the verge of bankruptcy. First, and most urgently, we need to ensure additional liquidity for the company—which may involve securing new financing, either through loans or investments, or tapping into existing credit. We then take control over procurement and sales, optimizing these processes to maximize revenue and minimize expenses. It’s also important to analyze the structure of OPEX (operating expenses) and implement cost-cutting measures where possible, without sacrificing the company’s core functions or growth potential.
Additionally, when trying to prevent bankruptcy, it is absolutely crucial to consider the full spectrum of stakeholders in the business, such as customers, suppliers, and employees. One of the most important tools here is transparent and timely communication—both within the company and with all external interested parties.
By understanding the concerns and expectations of these stakeholders, we can develop a comprehensive plan that addresses their needs while also stabilizing the company’s financial position. A company which appears to be failing can seem toxic, so collaboration is vital throughout this period to ensure that these partners do not lose faith in the company.
Once a company has overcome the immediate threat of bankruptcy, we need to ensure that it improves and grows. Again, there are several steps we would take in working towards this goal. First, it’s important to regularly monitor the company’s financial health and key performance indicators, making adjustments as needed to maintain a healthy balance sheet.
In the medium term, things will need to change so that the company doesn’t end up in the same place again. For instance, we would strive to improve and adapt the company’s business model, taking into account market trends and changes in the competitive landscape. We also want to encourage a culture of innovation and continuous improvement within the company, allowing for the development and implementation of new strategies and tactics.
Of course, there are no guarantees that a company will not end up in bankruptcy again further down the line—market circumstances are constantly changing, and companies will be faced with unexpected challenges throughout their existence. However, there are certain things we can do to make companies more resilient, meaning future financial distress is less likely.
Companies must be ready to adapt to ensure their long-term survival, so it’s important to develop agility in management, allowing the company to quickly respond to new challenges and opportunities. This culture of quick decision-making and adaptability should run throughout the firm, ensuring that the company is prepared for any changes in the market environment. And of course, the company needs to regularly review and update its business plan and financial projections, ensuring that they are aligned with current market conditions as well as the company’s long-term goals.
A rewarding endeavor
It’s seldom easy, but in our experience, helping a company navigate the complexities of bankruptcy can be a truly rewarding endeavor if the right conditions are met. If a company has a solid business model and faces financial difficulties due to temporary disruptions or poor management practices, there is often significant potential for restructuring and growth. By carefully assessing each situation and implementing targeted interventions, we can create long-term value and help companies overcome the challenges of bankruptcy—emerging stronger and more resilient than before!
Author: Pavao Vujnovac is the owner and President of the Management Board of ENNA and PPD, two of the fastest growing companies in Croatia.