I was speaking recently to MBA students at the University of Minnesota's Carlson School of Management about financing distressed companies. A student asked a simple question that's been on my mind ever since.

After I had talked for an hour about the nuances of working with distressed or bankrupt companies, and had given examples of the difficulties and the hard work and long hours it takes to save these dying businesses, a student raised his hand and asked, "Why?"

He meant, "Why do it?" You see, I had told them about working through the wee hours of the morning on the eve of Christmas Eve with one particular high-profile local company and several attorneys, lenders, and investors to work out a restructuring agreement, a legal document that allows the restructuring of the company's debt and can keep a distressed business from shutting its doors for good. Apparently, this kind of work wasn't part of the student's glamorous vision of his future as an executive. He wanted to know why anyone would go to such lengths to save a company that was in a death spiral. Saving it appeared to him to be a lot of work that gave little in return.

What's at Stake

My answer wasn't nearly as short as his question. I spoke for quite a while about reasons for saving a company, and how to decide when it's worth it to go through the process. This is what I said:

First, think about the many customers who depend on this company for its products and services who would have to find another provider or adapt to getting along without what the company provides.

Next, consider the almost 400 employees who didn't do anything to cause this company's failure, but who would have lost their jobs one winter Friday. And that's not even counting their families and dependents-children in college or elderly parents who depend on their families for financial support, and who would have been affected by unemployment.

Third, contemplate the hundreds of vendors with which this company does business. Many of them are sole-source suppliers that would probably go under in turn, affecting their employees and vendors as well.

Fourth, think about the numerous trade creditors owed hundreds of thousands of dollars that wouldn't get paid, causing many of them to downsize or close their doors, affecting even more employees. And what about the company's lenders? Take into account how their businesses would have been affected by unpaid loans.

Next, I said, ponder the impact on the community and government. When a company goes out of business, a corporate taxpayer is lost and employees as taxpayers are lost. Many of them might have to go on unemployment and sign up for state-offered medical insurance, which places even more costs on the government.

Finally, what about the property owner who would have had an unprofitable, empty building? When you bear in mind all that's at stake, I said, staying up until 4:30 a.m. seems like a small price to pay to fight to keep a company alive.

Should It Live or Die?

Before anyone stayed up until the wee hours to work on a restructuring agreement, however, the decision had been made that the company still had a pulse and was worth reviving. To make this difficult decision, we had conducted a quick yet thorough analysis along these lines:

1)  Determine how much cash and cash flow the company can produce on a predictable basis "as is." Many managers run their companies by profit-and-loss statements and balance sheets, but troubled companies need to track cash flow. The very first step is to prepare an accurate cash flow statement, projecting daily cash available for the next few weeks, weekly cash available for the next few months, then monthly for the next year. This exercise gives an accurate picture of the scope of the crisis and the company's ability to meet its obligations.

2)  With the cash flows understood, decide what impact there would be on cash by making changes in marketing, markets, sales, cash management, operations, et cetera. The projected incremental cash impact of these changes, combined with the "as is" cash flow, will be enough, it's hoped, to both cover operating obligations and satisfy outstanding debt.

3)  If changes won't adequately improve cash flow, restructure the company's debt to be paid off over a longer period or under different terms and conditions.

4)  If these steps will allow the company to meet its operating requirements and pay off its debts over a reasonable amount of time, then prepare a detailed "renewal plan" to present to lenders, trade creditors, and lessors.

Stakeholder Support

For a renewal plan to gain the support of all stakeholders, it's necessary to assess damage to those relationships to determine if irreparable harm has been done.

Customers – What impact did the company's troubles have on its customers, and how much damage has been done in the marketplace? Has the franchise been harmed beyond repair, or will customers remain loyal? If customers will stay with the company, it has a good probability of surviving.

Vendors and Suppliers – When a company is in crisis mode, it usually has treated these partners so badly that the relationships cannot be repaired.  If these other businesses are so critical to the company's operations that they will be difficult to replace, some arrangement must be reached whereby they agree to a new payment schedule for outstanding debt and continue to supply the company under previous terms and conditions.

Lenders – How cooperative are they? Will they agree to stand down while the company repairs itself and implements proposed changes? Will they waive or work outside of the existing loan covenants? Will they agree to forebear their legal rights while the company seeks new financing or conducts a process leading to a sale or merger? Will lenders agree to a restructuring of their loans and attendant terms and conditions? The health of the relationship with lenders is a critical part of a successful turnaround.

Employees – Do employees trust the management team or have they lost confidence in its ability to lead? Will they execute the renewal plan? Will key employees stay? If their salaries and benefits are cut back, will they accept the reductions? Corporate renewals require hard work and sacrifice. A renewal plan will not take hold unless employees and management join together to make it happen.

Community – What is the community's commitment to this company? If local government is willing to provide financing, such as a bond issuance or tax-exempt financing, a company's chances of survival are greater. Many communities recognize that it is better to give some tax incentives or relief in order to retain the company and keep citizens employed and paying taxes in their community.

Unnoticed Signs

Obviously, it's easier to turn a company around before the lookout screams, "Iceberg ahead!" By then, the momentum is difficult to break. My advice, I told the Carlson School students, is to always be on the lookout for early warning signs of trouble.

Usually there are several. Some are obvious, some more subtle. Negative operating cash flow and or decreasing sales and profits due to organizational or strategic issues are easy to see. Other signs tend to get swept under the rug: declining accounts receivable; increasing days out for accounts payable; or inventory that is increasing, obsolete, or missing.

Only the occasional brave person will point out that a company is lacking in short- or long-term planning, or that the board of directors is asleep at the wheel. When financial statements are delayed and management lacks sufficient information to make decisions, that's also a warning sign of trouble, but one that tends to be neglected.

I took a lot of time to answer the question, "Why?" and even went into answering the question "How?" But I didn't apologize for my long answer. I wanted those MBA students to see that saving troubled companies takes a lot of work, but there are innocent stakeholders who stand to lose a lot if someone doesn't intervene.

I also wanted students to know that the calling to save dying businesses, like the work of a triage doctor, offers rewards beyond measure to the heart and soul, and it's a duty worthy of their consideration.