Corporate crises rarely appear overnight. Those who recognise the warning signs can take timely countermeasures and save the company.
Understanding Crisis as a Process
A corporate crisis is not a sudden event but a process that can develop over months and years. Business research distinguishes various crisis stages that build upon one another. The earlier a crisis is identified, the more options for action remain available.
The Crisis Model according to IDW S6
The Institut der Wirtschaftsprüfer (IDW) developed a widely recognised model for describing corporate crises in its Standard S6. It distinguishes the following crisis stages:
1. Stakeholder Crisis
The first stage is the stakeholder crisis. Here, conflicts arise between the company's interest groups: shareholders dispute the strategic direction, key personnel leave the company, or relationships with important business partners deteriorate.
Warning signs:
- Increasing conflicts at shareholder level
- Frequent changes in management
- Loss of key employees
- Deterioration of corporate culture
2. Strategy Crisis
In a strategy crisis, the company loses its competitiveness. The business model is no longer future-proof, market share is lost, and innovation stalls.
Warning signs:
- Declining market share
- Outdated products or services
- Lack of innovation capability
- Growing competitive pressure without adequate response
3. Product and Sales Crisis
Strategic deficiencies translate into falling revenues. Customers migrate, order backlogs decline, and the company cannot maintain its market position.
Warning signs:
- Declining revenues over several quarters
- Decreasing order intake
- Rising customer complaints
- Loss of key customers
4. Earnings Crisis
Revenues are no longer sufficient to cover costs. The company incurs losses, and the equity base shrinks.
Warning signs:
- Declining profit margins
- Operating losses
- Eroding equity ratio
- Increasing dependence on external financing
5. Liquidity Crisis
In a liquidity crisis, the company can no longer meet its due obligations on time. The risk of insolvency is acute.
Warning signs:
- Payment delays to suppliers
- Full utilisation of all credit lines
- Frequent account blocks
- Demand letters and enforcement measures
- Wage arrears
Quantitative Early Warning Indicators
In addition to qualitative warning signs, there are measurable indicators that point to a crisis:
- Equity ratio below 20 per cent: Dangerous dependence on external capital
- Dynamic debt ratio exceeding 5 years: Repaying debt from cash flow takes too long
- EBITDA margin below the industry average: Operational profitability is below par
- Days sales outstanding rising: Customers pay more slowly, which may indicate their own problems or dissatisfaction
- Days payable outstanding rising: The company itself pays invoices increasingly late
Obligation to Establish Early Crisis Detection
Since the entry into force of the StaRUG on 1 January 2021, directors of limited liability entities are legally obliged under § 1 StaRUG to establish a system for early crisis detection. This obligation encompasses:
- Ongoing monitoring of developments that threaten the company's existence
- Taking appropriate countermeasures upon identifying risks
- Informing supervisory bodies (supervisory board, advisory board)
Breach of this obligation may give rise to personal liability of the directors.
Options for Action by Crisis Stage
Early Crisis Stages (Stakeholder and Strategy Crisis)
- Strategic realignment
- Organisational development and change management
- Mediation in shareholder disputes
- Personnel development and succession planning
Mid-Stage Crises (Product/Sales and Earnings Crisis)
- Operational restructuring
- Cost and performance improvement programmes
- Portfolio rationalisation
- Renegotiation of contracts
Late Crisis Stages (Liquidity Crisis)
- Restructuring under the StaRUG
- Debtor-in-possession insolvency proceedings
- Protective shield proceedings
- Standard insolvency proceedings with an insolvency plan
Conclusion
Early recognition of crisis signals is critical for the company's survival. The sooner action is taken, the more options are available and the lower the cost of restructuring. Directors should establish a structured early warning system and seek professional advice at the first signs of trouble.
