Insights Special Situations
Preserving Value When Financial Stress Appears
When financial pressure begins to affect a business, timing matters. The objective in the early period is not to resolve everything at once. It is to avoid closing off the routes that will be needed later.
Optionality is the asset under threat
Financial stress rarely destroys value in a single event. It erodes it through a sequence of decisions taken under pressure, each of which is defensible in isolation and collectively removes the alternatives.
The most valuable thing a business has in the early stage of stress is the range of routes still open to it. Preserving that range is a legitimate objective in its own right.
Two objectives, in order
The first objective is to understand the financial position clearly — liquidity, obligations, assets, operating performance and stakeholder positions, assessed honestly rather than optimistically.
The second is to identify realistic routes that preserve operating value and stakeholder optionality. Realistic is the operative word: a plan that requires a recovery no one has evidence for is not a plan.
What tends to preserve value
- Establishing an accurate short-term liquidity view early, and updating it frequently
- Engaging stakeholders before a default rather than explaining one afterwards
- Protecting the operating core — the people, customers and capabilities the recovery depends on
- Separating the businesses or assets that are viable from those that are consuming cash
- Keeping records and decision-making documented as conditions deteriorate
- Assessing strategic alternatives, including a sale, while they can still be run as a process
The cost of waiting
Delay is rarely neutral. As liquidity tightens, the range of available solutions narrows towards the ones that are quickest rather than the ones that recover the most value.
A strategic sale conducted early, with time to run a process, generally produces a different outcome from a forced sale conducted late.
