Why Companies Fail: Strategies for Detecting, Avoiding, and Profiting from Bankruptcy Why Companies Fail: Strategies for Detecting, Avoiding, and Profiting from Bankruptcy
By Harlan D. Platt
1999/01 - Beard Books
1893122050 - Paperback - Reprint -  169 pp.

A revealing presentation of the causes of business failure and the strategies for avoiding bankruptcy and liquidation.

Publisher Comments

Category: Bankruptcy & Restructuring

This title is part of the Vulture Investing list.

Of Interest:

Bankruptcy & Distressed Restructurings: Analytical Issues and Investment Opportunities

Bankruptcy Investing: How to Profit from Distressed Companies

Distressed Investment Banking: To the Abyss and Back 

Distressed Securities: Analyzing and Evaluating Market Potential and Investment Risk

Logic and Limits of Bankruptcy Law

The Executive Guide to Corporate Bankruptcy

This revealing book is a straightforward presentation of the causes of business failure and the strategies for steering a troubled company away from the threat of bankruptcy and liquidation. Five major financial traps that can lead to failure are identified, and each trap is illustrated with actual cases of well-known companies. Distressed companies are offered hope with examples of asset, liability, and corporate maneuvers that can help guide failing businesses to firmer ground.

From the back cover blurb:

A business fails every hour of every day in the United States. Why? What kinds of problems have these businesses run into? And what steps can corporate executives and managers take to avoid the same fate for their own companies?

Why Companies Fail answers these questions and more, in a straightforward presentation of the causes of business failure and the strategies for steering a troubled company away from the threat of bankruptcy and liquidation. Author Harlan D. Platt identifies five major financial traps that can lead to failure, and illustrates each trap with actual cases of well-known companies, including Wickes, W.T. Grant and Braniff. Dr. Platt offers distressed companies hope, too, with examples of asset, liability and corporate maneuvers that can help guide failing businesses to firmer ground.

Review by Regina Engel 

Originally published in 1985, Why Companies Fail remains a useful, simple guide for the average businessperson to identify and avoid the traps that lead to bankruptcy. Noting that libraries are full of books containing prescriptions for financial success, the author chooses to focus on failure so that it can be avoided and the number of bankruptcies reduced. He also feels the book fills a gap in the education of students and business people who are not otherwise instructed in how to manage a company on the brink of failure. To aid in understanding his analysis, he classifies businesses into four categories depending on the strength or weakness of their product and their financial condition, calling them eagles, tortoises, condors, and dinosaurs. As he explains, "[e]agles have healthy products and finances, tortoises have weak products, condors have weak finances, and dinosaurs have weak products and finances," Condors and dinosaurs are the primary focus of the book, since financial issues lend themselves more to generalization.

The five chapters that are the heart of the book set out the specific financial reasons for business failure, any or all of which could precipitate the bankruptcy. Each contains actual cases of companies to illustrate the type of problem. Problems in a company's cash-flow cycle are discussed in Chapter 3. The author opines that mismanagement in this area is probably the largest single cause of failure, but maintains that staying on top of the problem can be accomplished with a good spreadsheet program and that with the proper information "every worthy business" should be able to obtain the funds it needs. In Chapter 4 the topic is how to avoid "getting buried under current assets." The advice here is to monitor both inventories and accounts receivable by comparing their size to the company's investment in total assets and to analyze carefully when that ratio rises whether that is the desired goal. In Chapter 5, entitled "Getting Squeezed by Equipment," the author can only warn of the risks involved in investing in long-term assets. He concludes: "Unfortunately, there are no fail-safe methods for choosing the right amount of fixed assets since the optimal quantity depends an the unknown level of future sales." Chapter 6 deals with a company's debt-to-equity ratio, emphasizing that a major disadvantage to debt financing is that it limits alternatives, and a firm so burdened is allowed fewer mistakes than one with sizable net worth. In Chapter 7, entitled "Getting Pinched by Short-Term Debt;" the author describes the trap where management decides to speculate on lower future interest rates and is wrong.

Chapter 8 sets forth methods of detecting bankruptcies to enable the reader to identify the condors, and Chapter 9 aids failing companies by an examination of how other companies in similar situations have extricated themselves. Chapter 10 contains advice on investing in bankrupt companies. Following a concluding chapter summarizing his concepts, the author includes two appendices, one setting forth tables of failure rates, which, of course, does not include what has happened in the last fourteen years, and the second providing basic accounting for nonfinancial readers. A glossary is also included for those whose background in the field is limited.

From A. Tavakoli - Choice 

The book is written for those who may not be trained in finance or accounting but who need to understand the obstacles responsible for most business failures. Recommended for both the general and academic reader, community college level and above.

From Debra Ann Hatten - The Christian Science Monitor (Eastern edition) 

This book, written for the nonfinancial reader, records conventional reasons for business failure: cash-flow problems, taking on too much debt, and starting out with too little capital. But it continues where other books may stop, pointing out to those who are nearly bankrupt how to avoid bankruptcy. It describes reorganization techniques that have pulled companies out of the holein recent years--such as refocusing market niches and converting debt into stock. The book uses minicases to illustrate these methods. The author also gives potential investors a score card to select potential turnaround companies when picking up the high-risk, high-yield bonds (not stocks) of near-bankrupt or bankrupt companies.

Harlan D. Platt is Professor of Finance in the College of Business Administration at Northeastern University. He is the author of two other books, The First Junk Bond an Principles of Corporate Renewal, and has published over 35 academic articles. Professor Platt is also the faculty dean of the Turnaround Management Association, where he created and administers its certification program. He serves on the board of directors of Prospect Street High Income Portfolio, Inc., listed on the NYSE, and VSI Enterprises, Inc. on the NASDAQ, and is president of 911RISK, Inc. a firm specializing in developing analytical models that predict corporate distress.

Other Beard Books by Harlan D. Platt

Figures xi
Tables xii
Preface and Acknowledgments xvii
1. Challenging the Propensity to Fail 1
Characterizing Business 2
Characterizing Failure 6
The Route away from Failure 9
2. Financial Reasons for Failure 13
3. Getting Caught in the Cash-Flow Cycle 17
Charter 20
Lionel 21
4.  Getting Buried under Current Assets 29
Bowmar Instruments: Too Many Current Assets 31
W.T. Grant: Too Many and Then Too Few Current Assets 34
5.  Getting Squeezed by Equipment 37
Braniff Airways 43
International Harvester 44
6. Getting Lost with Too Little Capital 51
Comparing High Debt to High Equity 53
Comparing Debt Levels across Firms 56
Deciding When There Is Too Much Debt 57
Dome Petroleum: Waiting Too Long to Sell Stock 59
Computer Devices: The Case of David against Goliath 62
7.  Getting Pinched by Short-Term Debt 69
Interest for Risk: The Yield Curve 69
Ten Steps to Bankruptcy 72
Wickes 73
8. Detecting Future Bankruptcies 81
Using Common Sense 82
Detecting Failures with Financial Ratios 84
Statistical Methods 88
9. Strategies for the Near-Bankrupt 93
Strategies That Might Help 94
Asset Maneuvers: Storage Technology, Pan American Airways, Crompton 95
Liability Maneuvers: Mattel, Chrysler, Sonoma Vineyards, Astro Drilling, Holywell 97
Company Maneuvers: Eagle Computer, Farah Manufacturing, Frontier Airlines, Wien Airlines, Data Terminal Systems 102
10. Investing in Bankrupt Companies 107
Three Rules for Bankruptcy Investing 107
Using Portfolios 110
Choosing Which Bankrupts to Buy 110
11.  Conclusion 115
The Lessons of Bankruptcy 115
The Strategic Use of Bankruptcy 116
Appendix A: The Failure of Record 119
Appendix B: Basic Accounting for Nonfinancial Readers 129
Notes 137
Glossary 139
Bibliography 141
Index 143
About the Author 149
1-1. Classifying Companies Based on Product and Financial Well-Being 3
3-1. Balancing the Cash-Flow Cycle 19
3-2. Profits and Losses for a Seasonal Business 23
4-1. Asset Mix 31
5-1. Comparison of High- and Low-Fixed-Cost Companies 39
5-2. International Harvester's Capital Spending per Share of Common Stock 46
7-1. Typical Yield Curve 70
7-2. Determination of Interest Rates by Market Forces 71
7-3. Perverse Yield Curve 72
1-1. Categories of Business Failure 6
1-2. Texas International's 1983 Balance Sheet 9
1-3. Outcomes of Financial Failure 11
1-4. Priority of Bankruptcy Claims 12
3-1. Typical Cash-Flow Cycle 18
3-2. Changing Cash Flows with Four Managerial Choices 18
3-3. Lionel's Quarterly Income Statement since Filing Chapter 11 25
3-4. Lionel's Second Amended Reorganization Plan 26
4-1. Profitability and Risk Potential of Current and Fixed Assets 30
4-2. Bowmar Instruments' Annual Sales and Inventory 33
4-3. W.T. Grant's Sales and Income, Year Ending January 31 35
4-4. W.T. Grant's Credit Data, Year Ending January 31 36
5-1. Calculating the Cost of Increasing Output 40
5-2. Calculating Break-Even Output by Using Contribution Margin and Cost 40
5-3. Operating Profit/Loss 41
5-4. International Harvester's Financial Data, 1975-1983 47
5-5. International Harvester's Profit Margin 48
5-6. International Harvester's Debt Restructuring Plan, December 15, 1983 49
6-1. Methods for Raising Equity Funds 52
6-2. Methods for Obtaining Debt Funds 53
6-3. Balance Sheet for a Company Needing $1 Million 54
6-4. Income Statement of a Firm Needing $1 Million 55
6-5. Calculating Financial Leverage: Going from $625,000 to $750,000 in Revenue 56
6-6. Measures of Indebtedness 57
6-7. Dome Petroleum Data 60
6-8. Dome Petroleum: Debt Affordability Measure 61
6-9. Computer Devices' Financial Summary 62
6-10. Computer Devices' Quarterly Profits and Equity, 1982 and 1983 64
7-1. Wickes and Gambles-Skogmo: Profit Margin Comparison 75
7-2. Analysis of the Gambles-Skogmo Acquisition 75
7-3. Wickes's Short-Term Debt, Year Ending January 31 76
7-4. Wickes's Income Statement, as of January 30 77
7-5. Wicke's Debt 77
7-6. Wicke's Reorganization Plan 78
8-1. Commonsense Bankruptcy Detectors 83
8-2. Optimistic Interpretations of Bankruptcy Signs 84
8-3. Types of Financial Ratios 85
8-4.  Bankruptcy-Detecting Financial Ratios 86
8-5. Changes in Financial Ratios Indicating Worsening Financial Condition 86
8-6. Altman's Discriminating Ratios 90
8-7. Altman, Haldeman, and Narayanan's Financial Indicators 90
8-8. Pantalone and Platt's Key Savings and Loan Failure Indicators 91
9-1. Using Assets in a Crisis 95
9-2. Using Equity or Liabilities in a Crisis 98
9-3. Refocusing the Company in Times of Crisis 103
10-1. Returns from Bankrupt Stocks 108
10-2. Returns from Bankrupt Bonds 109
10-3. Characteristics of Good Bankrupt Companies 111
A-1. Failures since 1925 120
A-2. Average Failure Rates by Decade 123
A-3. Number of Firms in 1950 and 1980 by Industry 123
A-4. Average Failure Rate by Industry 124
A-5. Variance of Industry Failure Rates 126
A-6. Why 16,794 Businesses Failed in 1981 127
A-7. Causes of Most Failures 127
B-1. Prime Computer's 1983 Income Statement 130
B-2. Prime Computer's 1983 Balance Sheet 133
B-3.  Balance Sheet Terms 134

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