Understanding the role of CRO
January 2013 | SPECIAL REPORT: GLOBAL RESTRUCTURING & INSOLVENCY
Financier Worldwide Magazine
In our experience, there is no role – not investor, not founder, not CEO, and not consultant – that brings with it a sense of urgency and authority comparable to that which comes naturally with the title of Chief Restructuring Officer. Although temporary, it is an unquestionably powerful role.
The Chief Restructuring Officer title is relatively new, though the problem it seeks to address is old. Following a wholesale revision of the US bankruptcy code in 1978, the modern turnaround and restructuring industry was born. From the beginning, the industry focused on guiding companies through financial distress, whether in a court-sanctioned process or out-of-court.
Over time, turnaround and restructuring professionals found it necessary to take on considerable management duties in the course of saving a company. Many times these duties were clearly those of others in the executive team (either temporarily sharing power and authority or fired). In these cases financial advisers adopted interim management roles, serving as interim CFO (very frequent), interim COO, and occasionally interim CEO. However, some cases would arise in which the management team was complete, and yet the situation called for a financial adviser to assume a leadership role. Out of this need to formalise a C-level role where none normally exists, the Chief Restructuring Officer role was born.
Put simply, the position can be explained in the following way: A distressed company is a company in crisis. The interim CRO’s job is to come in and manage the crisis, so that management can get back to running the company. When the crisis is gone, the CRO leaves.
In the spring of 2012 the principal of a boutique advisory firm was appointed CRO of a troubled $17m home remodelling company based in the Chicago metro area. The company had successfully deployed a multi-channel marketing strategy to drive substantial sales growth from 2009 through 2011. Unfortunately, weak accounting and finance controls prevented the company from ensuring that this growth was profitable, or that the company’s capital structure could sustain it. Sadly, the growth was achieved at the cost of profitability, and the company had a woefully inadequate capital structure.
Immediately upon being retained the CRO: (i) completed a historical financial analysis in order to understand changes to the company’s financial health over time; (ii) developed a 13-week cash flow forecast in order to have a workable tactical tool to manage short-term liquidity; (iii) initiated conversations with key trade creditors regarding the establishment of long-term (averaging 2-3 years) payment plans; and (iv) assumed the role of liaison with the investment banking firm managing the capital raise process, which included coordinating due diligence requests with prospective acquirers.
Within less than two weeks, the key stakeholders of the company understood that the CRO, while new to this particular situation, was the main point of contact for the restructuring underway.
Managing a company through a distressed situation requires a combination of specialised skill and experience that few management teams possess. Due to this, and the high stakes involved in a distressed situation, capital providers increasingly expect that when a financial adviser is brought in to guide a company through a restructuring, a CRO will be appointed. Appointing a CRO is hence both an acknowledgement of the unique challenges inherent in corporate distress, and a concession to the ill-will that often arises between capital providers and incumbent management in distressed situations. Because the CRO role both empowers a skilled outsider and calms key stakeholders, the role is often crucial to the successful resolution of severely distressed situations.
David Johnson is a partner at ACM Partners. He can be contacted on +1 (312) 505 7238 or by email: firstname.lastname@example.org.
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