The concept of corporate insolvency can seem far away to company directors, but having a plan in place for financial difficulties is crucial. Sometimes, it is helpful to see ongoing examples of the process to indicate how severe the consequences can be – as has occurred with the pizza company Eagle Boys in recent weeks.

Pizza chain Eagle Boys has entered voluntary administration.Pizza chain Eagle Boys has entered voluntary administration.

The end of an era

Eagle Boys has been in decline for a few years, as competition between the cheaper pizza stores heated up. A report on the pizza industry in Australia from July 21 stated that Eagle Boys only held 4.6 per cent of the market, well below direct competitors Pizza Hut and Dominos.

The struggle of maintaining success has resulted in Eagle Boys entering voluntary administration as of July 14. SV Partners was appointed as administrator to the company, and all stores owned directly by Eagle Boys Dial-A-Pizza Australia Pty Ltd (Eagle Boys) are being closed down. This impacts 13 shops and many jobs across Queensland, New South Wales and Western Australia. At this stage all franchisee stores are continuing to operate. 

High competition can put a strain on cash flow and profitability, which can lead to a business needing to consider its options early to avoid a formal insolvency appointment. But what is the likely outcome for the Eagle Boys business?

Solutions in the wings

In a media release about the administration, Eagle Boys noted that the closure of stores was "part of an ongoing review to identify cost saving restructuring measures with the aim for positive growth", with SV Partners also identifying more potential changes. Such measures can form part of a turnaround and restructuring plan to help a business streamline its operations, reduce its debt levels, improve profitability and cashflow and perhaps emerge in a new, more financially viable form.

Sometimes restructuring measures are not sufficient on their own and an insolvency appointment such as voluntary administration may be necessary. In the case of Eagle Boys, it appears that it cannot sustain its high debt levels and trade profitably against its stiff competition. The administrators are therefore looking to sell the company's business and assets, most likely to a competitor or another investor.

Eagle Boys has noted it is confident of a swift sale, with many parties already expressing interest in purchasing the company.

While a sale of the business may not mean that all of Eagle Boys' creditors are paid in full, it is likely to be the best outcome in the circumstances. The likely benefits being that franchisee stores can continue to trade and employ staff, and more money would be available for creditors than would be available if the business closes.

Managing financial difficulty as a company director is difficult, but there are always options.

Managing financial difficulty as a company director is difficult, but there are always options. Voluntary administration, turnaround and restructuring  measures or a sale of business are just a few of the options available to help avoid corporate insolvency, business closure and liquidation. Early action is key to maximising the options available to deal with your company's difficulties. You can seek assistance from your accountant, lawyer, an insolvency accountant or specialist turnaround and restructuring firm such as Cactus Consulting.

Cactus Consulting works in conjunction with you, your accountant and lawyer to provide pre-insolvency advice tailored to your situation. As you can see from the Eagle Boys example, even big businesses require specialist assistance to overcome financial challenges. There's no obligation or cost to call us and see how we can help you.

Posted on 09-08-16 in Corporate finance insights and updates.