Where does turnaround and restructuring fit in the Australian business environment?
All businesses face challenges, even great ones. Despite your best efforts as a director to maintain your company’s prosperity some challenges can be too much to overcome on your own.
In Australia, turnaround and restructuring engagements are a relatively new concept, particularly for small to medium businesses. They’re aimed at rescuing a business and avoiding liquidation. If this is not possible, a turnaround or restructuring aims to provide better outcomes for the company, its creditors and directors.
In the past, when otherwise good businesses have experienced financial difficulty they have had limited help and options. For a long time the available choices were just voluntary administration or liquidation. While voluntary administration is intended to help businesses overcome their financial difficulties, the high costs, reputational damage and business disruption often meant imminent closure anyway.
In recent years phoenix activity has risen popularity due to the lack of business rescue options. Involving the sale or transfer of assets from a troubled company to a new company, it’s presented as cheap by advisers who promote doing a phoenix. However, it brings its own problems for directors – questions around legality, potential law suits and ASIC prosecution, business disruption and damage to the reputation and relationships of a business and its director. Failure often follows a phoenix.
A turnaround or restructuring engagement lifts the bonnet on your business and tinkers with it to get it running smoothly again. And there’s no better time to consider a turnaround for your business as new Government ‘safe harbour’ measures provide even greater support for directors looking to turnaround their business.
What’s involved in turnaround and restructuring engagements?
Restructuring involves a review of the current capital (debt and equity) structure of a business, and making adjustments if necessary. Businesses often start out with a small loan or overdraft, which may grow over time.
When loans reach maturity or a business outgrows its existing finance arrangements, it can face cashflow or solvency issues. Inappropriate types of funding can be used such as credit cards or letting ATO debts grow. Speaking to the existing bank is the first step. If they aren’t able to meet the financing needs of a business, there are many types of business funding and finance to suit the different needs of business. Determining the right capital structure, seeking out a bank or financier and finalising the deal generally encompass a restructuring engagement. Getting the capital structure right, means a director can get on with the best use of their time, running their business.
Turnaround is a broader engagement, focussing primarily on the strategic, financial and operational management of a struggling but viable business to return it to profitability. Often directors know what’s going wrong with their business but struggle to make the necessary changes. The stages of a turnaround can include some or all of the following:
|Stage||Steps which may be involved|
|1. Crisis stabilisation
|· Managing cash
· Short term financing
· Cost reductions
|2. Leadership commitment
|· Understanding perceived causes of problems
· Committing to the turnaround process
· Making any necessary changes to management structure
|3. Stakeholder management
|· Communicating the company’s situation and gaining support from stakeholders, primarily banks and financiers, employees and creditors|
|4. Reviewing business strategy
|· Understanding parts of the business which are performing and underperforming, core and non-core
· Refocussing the business on a strategy for success
· Selling or divesting of surplus assets or business units
· Merger or acquisition opportunities
|5. Implementing changes||· Making profitability improvements including cost-effective processes
· Operational adjustments for quality and time improvements
|6. Organisational change||· Re-establish the culture of the business for sustainable improvements
· Improved training, staff motivation and engagement programs
|7. Financial restructuring||· Adjusting or replacing existing finance arrangements
· Obtaining additional finance as appropriate
How does a business know if a turnaround is right for it?
The sophistication, time and cost of such engagements depend on the size of the business, whether it’s in crisis and the challenges it’s facing. The first questions to ask are:
- Could this business be viable in future?
- Is it worth the time and cost involved to save it?
- Can it be saved?
Most simply, a business may engage a professional advisor such as us to assist with an ATO payment arrangement, review finance arrangements, get financial accounts up-to-date and implementing some cost-control measures.
At the more complex end, a company may employ a dedicated restructuring officer to carry out a full range of changes to a business, sell or close various parts of the business and continually improve the business over a number of years until it returns to sustainable profit.
Although it can be difficult to face up to your employees and creditors, you may be surprised at the support you’ll receive from them. No one involved with your business wants to see it fail.
Can every business’s problems be fixed?
There are many reasons why Australian businesses face financial issues. Often directors feel like the problems are outside of their control. Bad debts, losing a key customer or employee, ATO debts blowing out, shareholder and director disputes or even changes in personal circumstances such as marital breakdowns. All these challenges can seem insurmountable at time. But they are common problems faced by small to medium business owners throughout Australia. They all have solutions which can be worked through.
Even though no two businesses are the same, the underlying issues that lead to financial distress and company insolvency are. The warning of business distress include:
- Trading losses in consecutive years
- Balance sheets with negative assets
- ATO recovery action including legal action, director penalty notices, garnishees
- Low working capital (current assets equal to or less than current liabilities)
- Unsecured creditor actions including statutory demands and winding-up notices
- Difficulties with secured lenders
- Landlord arrears and disputes
With timely action and the right advice for your business, you can overcome adverse circumstances, return it to profitability and stabilise your business for long-term success.
Give your business the best chance of success
To give your business the best chance of success, we recommend:
- Early action before problems worsen to crisis levels.
- Keep accurate and up-to-date accounts, increase financial monitoring and keep in regular contact with your accountant or financial adviser.
- Don’t ignore the ATO, superannuation obligations, the landlord or other creditors.
- Seek professional advice from your accountant, turnaround and restructuring professional or insolvency practitioner.
- Don’t put in your own money or more finance without fixing the causes of the problems.
How Cactus Consulting helps businesses survive and thrive
We understand that needing turnaround and restructuring advice isn’t necessarily a sign of poor management. Despite your best efforts as a company director, external market forces or changes in technology can leave you high and dry, in need of financial and strategic management solutions to quickly deal with your company’s challenges – and fast.
At Cactus Consulting, our experienced team focuses on providing detailed and tailored options, solutions and successful outcomes for our clients.
The two key objectives of our approach are to produce to achieve the survival and future profitability of your business or if not achievable, to better financial outcomes than liquidation. To achieve these key objectives, we work closely with directors, management and key stakeholders to understand your business, diagnose and prioritise the key challenges you are facing, create business and cashflow stability, act on your behalf in dealing with banks, the ATO and creditors, and work through a turnaround or restructuring plan that addresses core issues for long-term success.
Where appropriate we work with accountants and solicitors to ensure our advice is tax effective and appropriate legal documentation is used.
Why Cactus Consulting?
It can be hard to know who to turn to for help when your business experiences financial difficulty. Cactus Consulting is the one stop shop for small to medium businesses in need of debt relief, distressed business assistance and insolvency advice. We’re the first contact for accountants and lawyers when their clients require assistance beyond their usual services. Our team is comprised of experienced accountants and insolvency professionals working closely with lawyers, financiers and other professionals to provide everything you need to turnaround your business.
We recognise that while the core issues behind corporate insolvency tend to be similar, every business will take a different path to resolve the problem. That is why our service takes into account every aspect of your company’s difficulties, and why strategies are developed to your specific goals.
Don’t let your business become cactus
Getting help starts with a phone call. If you want to discuss the issues keeping you up at night and avoid liquidation, get in touch with us for a free confidential discussion.