Business Turnaround Options for Financially Distressed Companies

Business turnaround

Financially distressed companies look to professionals to assess business turnaround options. Many factors affect the financial health of a business. Sometimes, even successful businesses take a turn for the worst because of unprecedented events, such as a global health crisis. Other times, even those we thought are “too big to fail” do buckle. This being said, whether you are a small business or a billion-dollar company, once your business is experiencing a combination of the 14 indicators of insolvency, it is time to call in the professionals and have them take a look into strategies that will turnaround your business. There are two types of turnaround options for companies: informal and formal. Let us look at each of them and weigh their pros and cons.

Business turnaround

Business Turnaround Option 1: Informal Workouts 

Informal workouts are business turnaround strategies conducted outside of court proceedings. These strategies include business improvement and measurement and divestment and rationalization. In a way, informal workouts are the business prerogatives you undertake to prevent a financial collapse or to prevent your company from going to court, which can be costly.

Business improvement measures include providing advice to reduce losses and increase profits by reviewing the company’s solvency. This strategy also involves reviewing the competitive strength and weaknesses of the company to aid in the crafting of a business plan that focuses on costings, profit centers, information systems. Besides, this strategy involves a review of loans and lender relations, to help directors decide whether to pursue refinancing or alternative financings.

Divestment and rationalization include, the sale of non-core business units or closure of non-performing business units, streamlining of complex group structures, and achieve cost savings by elimination of compliance returns and decreasing administration costs. For small businesses, the goal of divestment and rationalization is to improve cash flow. One of the ways to do this is to license out equipment or intellectual property. Some businesses also opt to sell assets and lease them back to save costs. 

Business Turnaround Option 2: Formal Workouts 

Formal workouts are business turnaround strategies conducted in line with a court proceeding. These options include: 

  • Voluntary administrations/Deed of company arrangements 
  • Creditors’ voluntary liquidations 
  • Members voluntary liquidation and deregistration 
  • Receiverships/controllerships 
  • Court liquidations

Voluntary Administrations/Deed of Company Arrangements 

Voluntary administration is one business turnaround option to save an insolvent company. Directors of the company appoint an independent administrator that takes control of the company, investigates the company’s financial circumstances, and makes recommendations for the company’s future. The voluntary administrator should be a registered liquidator monitored by the Australian Securities & Investment Commission. Voluntary administration is beneficial because it maximizes the return to creditors. After all, creditors are prevented from disposing of any asset.  

Creditors Voluntary Liquidations 

This workout strategy as a business turnaround option is based on the decision of a creditor or creditors to wind up the affairs of the insolvent company. A liquidator will take control of the company and proceeds with the liquidation of the company. One of the benefits of a creditors voluntary liquidation is directors can relieve themselves of the legal consequences of operating an insolvent company. Creditors may also recover some of their losses through a managed asset program. 

Members’ Voluntary Liquidation and Deregistration 

The decision to pursue a member’s voluntary liquidation is internal and is not subject to outside influence. The liquidator for this type of business turnaround strategy need not be registered. Under this strategy, all liabilities are paid and there is a chance for distribution to shareholders of surplus assets and distribution could be tax-free to shareholders. Another benefit is cost savings because no further accounting, taxation, or secretarial services are required. This strategy can be used if the company has stopped trading either because of disputes between directors and partners. This strategy can also be utilised if the company is affected by family law ruling to divide assets. A company can best maximize this strategy if it is still solvent.

Receiverships/Controllerships 

In receiverships, an appointment is made by the secured lender holding a debenture mortgage over the assets of the company and a court application is filed by an interested party. This is to address any impasse brought by a dispute between directors. The receiver/controller realizes assets on behalf of the secured lender or as per court order. One of the benefits of this business turnaround strategy is that control of the company’s assets is removed from directors and lender recovers part, or all of its funds. Possible trade of the company with the result of returning the company to profitability. Receiverships are triggered when the company is having liquidity problems majorly brought by its failure to meet loan repayments or other forms of default or erosion of security.

Court Liquidations 

In court liquidations, the appointment of a liquidator is made by the federal or Supreme Courts upon the application of a creditor. The liquidator takes control of the company and investigates its affairs, realizes assets for the benefit of creditors, and reports to the Australian Securities & Investments Commission on the failure of the company. One benefit of this business turnaround strategy is that the company is placed under the control of an independent court officer and all creditors are treated equally. Internal disputes with other shareholders resulting in the company’s inability to recover a debt often trigger a formal court liquidation. Another benefit from this strategy is the ability of creditors to pursue recovery of debt from directors personally.

The Insolvency Service offers financial assessment services to avert an impending financial collapse and post-insolvency advisory services to maximize return for creditors and the business.

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