Text commented by Luís Felício - Executive Director of Galeazzi & Associados

Stage #1

The issus leading to bankrupcty (judicial rehabilitation) dont happen sunddenly. It's a process that can take 3 years or more. It begins with recurrent negative results, executive/owner lethargy, conflicts among partners, and an inability to face problems and take the actions that can actually solve the issue.

This phase concludes with significant cash flow problems, a lack of credit lines, the absence of additional guarantees/endorsements, titles in notary, and delays in payments to suppliers. It is also characterized by the lack of rationality among managers/partners, believing in plans that never materialize. No one enters JR because they want to!

Stage #2

It's time to hire specialized lawyers and a consulting firm to assist with the bankrupcy process. All of this adds new costs, in addition to the cost of the judicial administrator and experts.

At this point, many entrepreneurs still believe that simply hiring the advisory team will magically restructure the debt, forgetting that they have provided endorsements, have various assets with fiduciary alienation, and the company continues not generating cash.

Here, we have two types of entrepreneurs:

a) those who insist that it's only about negotiating the debt and the problem is solved, even if the company isn't generating cash. This company will go bankrupt.

b) those who face reality and accept that a turnaround must be done in the company. After all, at the end of the day, it's the cash generation that will pay off the debt. If creditors see signs that this will happen, the turnaround work becomes easier. This company has a great chance of surviving and continuing operations.

Stage #3

Approved plan. Is the problem over? No! If the company did not undergo a turnaround and cash generation is lower than the new negotiated debt cost, they go back to Stage #1.

This company will be liquidated. On the other hand, if the turnaround is underway, and the company doesn't lose control, it has many chances of surviving in the long term. A common change encountered is the replacement of executives along this path. It is very difficult to change the way of thinking and acting. People tend to look to the past and cling to beliefs that led to the problem.