Last updated on Jul 26, 2024

You're considering a partnership with a company in turmoil. How do you assess the financial risks involved?

When you're considering a partnership with a company facing difficulties, it's crucial to carefully evaluate the financial risks. This involves a thorough analysis of their financial health, potential liabilities, and the implications for your own business. The ability to navigate this process can mean the difference between a strategic alliance and a costly mistake. By understanding the key areas to scrutinize, you can make an informed decision that aligns with your corporate finance goals.

1 Financial Health

Assessing the financial health of a potential partner is fundamental. You should examine their balance sheet, income statement, and cash flow statement. Look for red flags like high levels of debt, poor cash flow, or significant declines in revenue. Analyze their working capital to understand their short-term financial stability. If they're struggling to cover current liabilities with current assets, it could indicate deeper financial issues that might affect the partnership's viability.

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Phil Rossiter Jr., MBA

VP of Business Development ► 30+ years of maximizing upstream oil and gas asset value and directing best-in-class post-drilling operations
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Absolutely! Balance sheet, income statement, and statement of cash flow are imperative (as well as comparison to true peers). Preferably at least three to five years of data for each. Perform a DuPont analysis on all of them and compare their performance with one another. Visual tools really help

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Anita Pickersgill

MCICM-Credit Control/Debt Recovery 💖✔Keeping cash flowing** award winning ***Credit Processes** Dispute Resolution & Debt Recovery**** Speaker **
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Establish whether by partner they actually mean investor, filling the gap that they cannot fill with normal commercial funding. Can the projected turnover measured against costs deliver enough of a margin to return your investment in the timescale you envisaged? What are the Debtor days and creditor days - HMRC position - Liquidity Are the Sales Projections realistic if they have fallen why do you need to invest in such things the website, social media and marketing

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2 Debt Analysis

Understanding the debt profile of a company in turmoil is essential. Evaluate their debt-to-equity ratio to gauge how much risk they're taking on. A high ratio could mean they're over-leveraged, which is a risk if earnings don't meet expectations. Review the terms of their debt, including interest rates and maturity dates. If they have a significant amount of debt maturing soon, they may face liquidity issues that could impact your partnership.

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3 Revenue Streams

Investigate the diversity and stability of the company's revenue streams. A company reliant on a single product or a few major customers is more vulnerable to market fluctuations. Scrutinize their sales forecasts and the assumptions behind them. If their projections seem overly optimistic without a solid rationale, it may be a sign of desperation rather than a realistic outlook, which could pose a risk to your investment.

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Anita Pickersgill

MCICM-Credit Control/Debt Recovery 💖✔Keeping cash flowing** award winning ***Credit Processes** Dispute Resolution & Debt Recovery**** Speaker **
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Eyes wide open most businesses in a distressed position have either an issue with sales or cash flow, usually a poor process underpins both. Too many eggs in one basket, is there target market where they are actually marketing to or elsewhere. How is lead conversions and then customer service and delivery. Do they need to Pivot and diversify or just improve on what they already do

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4 Legal Liabilities

Legal liabilities can have a significant impact on a company's financial stability. Inquire about any ongoing or potential litigation, regulatory fines, or compliance issues. These can lead to unexpected expenses and damage the company's reputation. Ensure they have adequate provisions for such liabilities on their balance sheet. If not, these could become your liabilities post-partnership and affect your bottom line.

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5 Strategic Fit

Beyond the numbers, consider how the partnership aligns with your strategic objectives. Does the company's turmoil present an opportunity for synergy, or does it pose too great a risk to your brand and operations? Evaluate whether their business model complements yours and if their market position is advantageous. A strategic fit can sometimes offset financial risks if the long-term benefits to your company are clear and compelling.

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6 Exit Strategy

Finally, plan an exit strategy before entering the partnership. Determine the conditions under which you would withdraw from the agreement and how you would disentangle your operations and finances. This might involve setting specific performance metrics or timeframes. Having a clear exit plan can protect your company from prolonged exposure to financial risks if the partnership doesn't work out as planned.

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Phil Rossiter Jr., MBA

VP of Business Development ► 30+ years of maximizing upstream oil and gas asset value and directing best-in-class post-drilling operations
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Obviously, if one is considering entering a partnership you need good legal representation. On both sides. Don’t just sign a deal without understanding the details. Hash out the concerns prior to entering into the partnership. Put some teeth in it to protect your best interests. I actually have personally been here and have the learnings (both self inflicted and just in a bad contractual obligation)

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Phil Rossiter Jr., MBA

VP of Business Development ► 30+ years of maximizing upstream oil and gas asset value and directing best-in-class post-drilling operations
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Beginning with the end in mind! Understanding the common goal. This is what we do or create. Know your potential competitors. And collectively determine the best path to stay ahead of your competitors. Continuously learn and share ideas on how to improve (every voice heard - not just the powers that be). Move forward with the best practices discovered and shed the worst practices uncovered.

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You're considering a partnership with a company in turmoil. How do you assess the financial risks involved?

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1 Financial Health

2 Debt Analysis

3 Revenue Streams

4 Legal Liabilities

5 Strategic Fit

6 Exit Strategy

7 Here’s what else to consider

Corporate Finance

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