The Rescue Options if your Company is Facing Failure

Published: January 15th, 2021

8 min read

Following reports from The Federation of Small Businesses (FSB) that 250,000 companies are at risk of closure in the next 12 months, Pauline Rigby, a partner and head of our Corporate team, looks at the restructuring options that can rescue businesses.

Restructuring is often overlooked by struggling companies until it's too late for any real fighting chance of survival. One of the reasons for this is that a company in financial distress will tend to focus on quick wins to pay salaries and balance the books.

The notion of restructuring can sound a time-consuming process that doesn't fit with keeping your head above water. Similarly, thinking about the future can be completely overwhelming for the many companies currently relying on the Government's COVID-19 support and which aren't trading because of lockdown.

Facing these challenges can make restructuring seem a complex option that's beyond the realms of possibility. This doesn't have to be the case. There's a number of restructuring options that struggling businesses can utilise to fend off failure - and time is of the essence.

Debt restructuring

The widespread impact of the pandemic has changed attitudes towards the management and repayment of debt. Creditors are increasingly pragmatic and willing to take a longer-term view of recovering money and maintaining relationships. This creates opportunities for struggling businesses to reorganise debt terms and conditions, which can deliver a noticeable impact on cashflow that benefits survival.

Essentially, the point to note here is that companies in financial distress don't have to wait for a formal insolvency process to do this. It's possible to enter into informal discussions with creditors to explore what the options are. By acting earlier and drawing on the experience of professionals such as accountants or lawyers, businesses will find there's more debt restructuring options available such as covenant waivers, trading debt for equity and renegotiating payment amounts and interest rates.

Success in this area of restructuring will be rooted in clearly agreeing revised terms that balance the requirements of a struggling business and its creditor(s).

Capital restructuring

Many failing businesses will often hold significant equity in fixed assets. In some cases, this value isn't unlocked until the company has gone into administration, when property and equipment will be sold-off to pay outstanding debts. Leveraging the value of fixed assets before this point can deliver a much-needed financial injection that supports survival.

It's possible to organise this form of restructuring to sell the full asset or retain part-ownership, to form agreements for buying-back what is sold and to trade the value of fixed assets for equity shares in the business. The possibilities will depend on a number of factors such as valuations of assets, modelling of forecasted revenue and consideration of how capital will be reinvested into the business. This form of restructuring may prove particularly effective for companies that need to retain their operational functionality and capacity, ready for when business confidence and orderbooks bounce back from the pandemic.

Company restructuring

A viable form of company restructuring for a business in financial distress could be a demerger. This can involve separating entities into different ownership structures to create distinct stand-alone companies.

Taking this approach can prove useful in protecting better performing parts of a company from other elements of the business that are more at risk of failure. Separating-off more successful parts of the company with better prospects of survival and growth can assist the reorganisation of debt, strengthen the prospects of new investment or refinancing and concentrate operational focus on the high potential parts of the company that are more likely to drive survival and growth.

Employment restructures

Making redundancies is never easy and a step that many businesses will, understandably, want to avoid. Unfortunately, though, the reality is that a business experiencing a downturn in financial performance will not have the demand to justify all salaries. Efficiencies can be realised through a leaner workforce and acting earlier to address employment structures could prove the difference between some making some redundancies and losing all jobs when the business goes into administration.

As part of an employment restructure, companies should avoid taking a salary-only view towards making savings and also consider options for reducing contracted hours and job sharing before making redundancies. This will require consultation of employment contracts. Companies should also ensure that the restructure considers any expenditure on third party suppliers and how outsourcing contributes to short-term performance. These steps could help leave the company in the strongest operational position for survival and also help avoid being left short in terms of capacity and ability when business picks-up.

Making restructuring work

Time and objectivity are key when it comes to restructuring. Dealing with a failing business and trying to fight-off administration is a tough task and, when business owners and senior leaders are in the thick of it, it can be easy to be blindsided by what the available rescue options are. Taking the time to step back and seeking an external expert view, from various perspectives from financiers, accountants or lawyers can boost chances of survival, rather than leaving it until it's too late to turn things around.

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