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How can I help my company get out of debt?

I worked for a privately held company which is a subsidiary of a foreign company. Currently on the balance sheet there is a bug liability on the books (due to the parent) which is currently hurting the company. I need to figure out how to help my company either eliminate this debt from the books or make more money to pay it off and reduce this balance over time. We have looked into all out costs and cut down considerably. I thought about investments, but we do not have a dime we can lose and investments are risky.


Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Make it a non-cash distribution to shareholders. The shareholders will have to pick it as income. There will be tax consequences for doing so, but it is the quickest and best, in my opinion, way to get rid of the debt and free up capital long-term. However, it is unlikely the shareholders will go for that option.

Another alternative is to write it off. This is not a good option though, especially if the debt is that big, it will reduce current year earnings, and depending on how big it is retained earnings would suffer. But a one time hit to the income statement and equity may be the best option to increase capital going forward.

Check with your company's auditor and banks to see which option is potentially best, worst, and the implications.

These are just a few items I can think of. Not all I am sure. I am interested to hear what others have to say about this.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

The questioner suggests that the subsidiary owes the parent. If the parent foregives the debt, the local company will have an increase in taxable income.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Robert - You have point. I was thinking of a hit to the retained earnings from the parent company's books. The company I work for is consolidated with multiple intercompany dealings. When I think of solutions I tend to think of how it will impact the parent company. It is the nature of what I have been exposed to.

Could it be beneficial to have the parent write it off and deduct it for tax purposes, while the subsidiary picks up the revenue portion? Depending on the respective country's tax rate and tax structure the foreign tax credit could work to the companies' advantage in the U.S.

Am I thinking of this correctly? Honestly, not a snark comment, I need a better understanding.

Cynthia (Helfert) de Hoog
Title: Assistant Financial Controller
Company: Microlease
(Assistant Financial Controller, Microlease) |

Cash management will be key to paying down debt. Look at your DSO and manarge that number down with quicker collections, push out payments for payables as long as you can. Institute tight restrictions on new asset purchases if you don't already have them in place. Seriously review the ROI on all new asset purchases, which will also help cash flow. Review your incentive plan for the sales force. Is it adequate or can you find new ways to drive sales up, which will help increase revenues first, and increase cash upon collection. These are some of the internal things you can drive. Externally, talk with your banking representative to see what they might be able to do for your company. Then speak with other banks and shop your business for best options.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I am sure you will hear many approaches to this post, i.e. all legal under GAAP. But my response will be old-school -

• Make sure the debt is priced appropriately. Without knowing the details, legacy debt may be priced at a rate that is too high in the current market. Consider refinancing.
• Make sure the debt term is correct. Extend the term as long as possible. You will pay more in interest over time, but you will have breathing room.
• Renegotiate with creditors.
• Be careful not to cut your costs to the point that you do not invest in your business, constraining profits that you need to pay off your debt. It can be a circular trap.

For a company, there is nothing more important than your brand and your credit rating.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

I like all the ideas given so far, but keys add using your position to add value by adding revenues.

Information is power, shared information even more; so help the other departments make money.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Let me make sure I understand: the subsidiary (your firm) owes money to the parent. That suggests the issue isn't cash, since the parent is allowing the subsidiary to hold on to excess cash. Is the problem with the subsidiary's banks? Does the intercompany debt put pressure on loan covenants?

Assuming that's where the problem lies, I see two approaches:

1. Renegotiate covenants with the bank and exclude all intercompany balance sheet items from any ratio calculations.

2. Use consolidated financials to measure against covenants.

If it's something else, I'd be interested in having a better idea what the problem is.

Tangentially, what's causing the debt? Does the subsidiary manufacture goods or is the subsidiary a sales and marketing service center? If the former, are the transfer prices for flow of inventory appropriate? Are they internally developed? Has any third party (auditors/IRS/etc.) tested the methodology behind the pricing schemes?

If the latter, what sort of cross country agreements are in place? Are they based on commission arrangements? Where are sales billed, locally or at the parent? If locally, that would suggest margins lower than the subsidiary needs to be viable, which would suggest transfer pricing issues.

Juicy! :7)

Vernese Joseph
Title: Controller
Company: COEX Corporation
(Controller, COEX Corporation) |

My firm the subsidiary owes money to the parent company who is currently not doing too well at the moment. The parent company makes up approximately 93% of my company’s liabilities. We don’t have any other large liabilities on the books besides the mortgage.
The debt was created over time. My company purchases all its materials from the Parent company which is how the majority of the debt was created. At a point in time, my company was not doing well financially and stopped paying the Parent company.
We didn’t meet out loan covenants as this intercompany debt has put pressure on the loan covenants.
We pay a lower price for the materials than other customers of the Parent company, so price is negotiated between the Parent and Subsidiary. We are invoice by the Parent company in U.S. dollars so we do not have a transfer price issue.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Here's what I'm hearing from this:

1. Pricing from the parent is favorable, yet the subsidiary's cash flow remains insufficient to pay for inventory purchases from the parent.

2. Transfer pricing analysis may not have been undertaken.

2a. TP is really a tax issue since it provides a potential mechanism for optimizing worldwide taxes. Charge artificially high TP to subsidiaries in high tax locations and artificially low TP to subsidiaries in low tax locations. Tax treaties address this and most tax authorities see this as a prime area for tax audits. The denominating currency is irrelevant to the tax authorities.

There is another approach that hasn't been mentioned: convert the debt to some form of equity. That ought to address the issue with covenants. But then you open up the possibility of having to declare a one-time gain in the US, offset by a one-time loss at the parent. You would want to engage a tax expert to ensure you're doing everything with eyes wide open to demands of the tax code. You'd also want to make sure your bank accepts that as a solution to the covenant violations.

Other than that, it sounds like your company is in a position where it can't save it's way out of the problem. Rather, it must sell its way out.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Debt to the parent may an aspect of consolidated enterprise funding management. If you are part of the parent's consolidated income tax return, the parent has the option of converting the investment into a capital infusion, a topic you may wish to discuss with them. Your choices may be limited to enterprise wide financing policies.


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