But there are good bankruptcies and bad bankruptcies, or rather companies that should consider filing and companies that would not be improved by filing. What's the difference? According to a study completed early this year by University of Utah researchers based on the study of over 500 actual bankruptcies, telling the difference is not hard.
Good bankruptcies are those that can rehabilitate a company by removing leverage from their balance sheet. In other words, if the company would be profitable without the demands of servicing debt, removing that debt can make the company whole again. The researchers called these companies "financially distressed." By contrast, a company that would still be losing money even without the leverage is still a loser, and a fundamental revision of its operating model is needed before removing debt will restore its viability. These companies were labelled "economically distressed." Not surprisingly, the study found that economically distressed companies lose about half of their assets in the bankruptcy process, are three times more likely to file again within three years and six times more likely to liquidate. Speaks volumes about cleaning up the shop before you clean up the debt. Also about hope for companies that are sound but deeply in debt.
Our own statistics tell us the highest bankruptcy statistics are yet to come for this recession, with more companies failing as the economy recovers and their competitors use dry powder to steal market share. It's safe to say those historically valid statistics are populated with companies the Utah researchers would label "economically distressed."
Have you taken a look around your company lately? Do you see dry powder or empty guns?
As always, your comments are welcome.